485BPOS 1 ed_041502.htm Estate Designer VUL

 

As filed with the Securities and Exchange Commission on April 15, 2002

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

Post-Effective Amendment No. 3
_________________
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)

J. NEIL MCMURDIE, ESQ. KIMBERLY J. SMITH, ESQ.
ING U.S. Financial Services ING U.S. Financial Services
1290 Broadway Retail Products Group
Denver, Colorado 80203-5699 1475 Dunwoody Drive
(303) 860-2127 West Chester, Pennsylvania 19380
(610) 425-3427
(Names and Addresses of Agents for Service)

____________________________

It is proposed that this filing will become effective:

on ____________, 2002 pursuant to paragraph (a) of Rule 485
60 days after filing pursuant to paragraph (a) of Rule 485

X

 on May 1, 2002 pursuant to paragraph (b) of Rule 485
immediately upon filing pursuant to paragraph (b) of Rule 485
this post-effective amendment designates a new effective date for a previously filed post-effective amendment

Title of securities being registered: Estate Designer variable life insurance policies.

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 Investment Options; Charges and Deductions; Surrender; Partial Withdrawals; Guaranteed Interest Division; Transfer of Account Value; Lapse; Reinstatement; Premium Payments
 
10(f) Voting Privileges; Right to Change Operations
 
10(g), (h) Right to Change Operations
 
10(i) Tax Considerations; Detailed Information about the Policy; General Policy Provisions; Guaranteed Interest Division
 
11, 12 Security Life Separate Account L1
 
13 Policy Summary; Charges and Deductions; Group or Sponsored Arrangements, or Corporate Purchasers
 
14, 15 Policy Summary; Free Look Period; General Policy Provisions; Applying for a Policy
 
16 Premium Payments; Allocation of Net Premium; 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 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; Premium Payments; 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
 
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 Investment Options; 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 Investment Options; Right to Change Operations
 
53(a) Tax Considerations
 
53(b), 54, 55 Inapplicable
 
56, 57, 58 Inapplicable
 
59 Financial Statements

Prospectus

ESTATE DESIGNER VARIABLE UNIVERSAL LIFE
A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY
issued by
Security Life of Denver Insurance Company

and
Security Life of Denver Separate Account L1

Consider carefully the policy charges, deductions, and refunds beginning on page 54 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.
 
<R>We offer other insurance products on the lives of two people which may have different fees and charges and better match your needs. Contact your agent/registered representative if you would like information about these other products.
 
Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. Your existing policy may be subject to fees or penalties upon surrender or cancellation.</R>

Your Policy

  • is a flexible premium variable joint and survivor universal life insurance policy;
  • is issued on two lives on whom insurance coverage may continue, in whole or in part, until both have died;
  • is issued by Security Life of Denver Insurance Company;
  • is guaranteed not to lapse during the first five policy years if you meet certain requirements; and
  • is returnable by you during the free look period if you are not satisfied.

Your Premium Payments

  • are flexible, so the premium amount and frequency may vary;
  • are allocated to variable investment options and the guaranteed interest division, based on your instructions;
  • are subject to specified deductions.

Your Account Value

  • <R>is the sum of your holdings in the variable investment options, the guaranteed interest division and the loan division;
  • has no guaranteed minimum value under the variable investment options. The value varies with the value of the underlying investment portfolio;</R>
  • has a minimum guaranteed rate of return under the guaranteed interest division only; and
  • is subject to specified expenses and charges.

Death Proceeds

  • are paid if the policy is in force at the death of the second of the two insured people;
  • <R>are equal to the death benefit minus any outstanding policy loans, accrued loan interest and unpaid charges incurred before the second insured person dies;
  • are calculated under your choice of options;
              * Option 1- a stated death benefit;
              * Option 2- a stated death benefit plus your account value; and
              * Option 3- a stated death benefit plus the sum of the premiums we receive minus partial withdrawals; and
  • are generally not subject to federal income tax if your policy continues to meet the federal income tax definition of life insurance.</R>

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.

<R>Date of Prospectus May 1, 2002</R>

 

 

 

ISSUED BY: Security Life of Denver Insurance Company
ING Security Life Center
1290 Broadway
Denver, CO 80203-5699
(800) 525-9852		 UNDERWRITTEN BY: ING America Equities, Inc.
1290 Broadway
Denver, CO 80203-5699
(303) 860-2000
THROUGH ITS: Security Life Separate Account L1
 
ADMINISTERED BY: <R>Customer Service Center
P.O. Box 173888
Denver, CO 80217-3888
(877) 253-5050</R>

<R>"ING Security Life," "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.</R>

 

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TABLE OF CONTENTS

<R>POLICY SUMMARY 4
      Your Policy 4
Factors to Consider Before Purchasing a Policy 4
Free Look Period 4
Premium Payments 4
Charges and Deductions 5
Guaranteed Interest Division 6
Variable Investment Options 6
Policy Values 11
Transfer of Account Value 11
Special Policy Features 11
Policy Modification, Termination and Continuation Features 12
Death Benefits 12
Tax Considerations 13
 
INFORMATION ABOUT ING SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS 15
Security Life of Denver Insurance Company 15
Security Life Separate Account L1 15
Guaranteed Interest Division 24
 
DETAILED INFORMATION ABOUT THE POLICY 25
Applying for a Policy 25
Temporary Insurance 25
Policy Issuance 26
Premium Payments 26
Premium Payments Affect Your Coverage 29
Death Benefits 29
Riders 34
Special Features 36
Persistency Refund 38
Refund of Sales Charges 39
Policy Values 39
Transfer of Account Value 41
Dollar Cost Averaging 42
Automatic Rebalancing 43
Policy Loans 43
Partial Withdrawals 44
Lapse 46
Reinstatement 47
Surrender 47
General Policy Provisions 48
      Free Look Period 48
Your Policy 48
Age 48
Ownership 49
Beneficiaries 49
Collateral Assignment 49
Incontestability 49
Misstatements of Age or Gender 49
Suicide 49
Transaction Processing 50
Notification and Claims Procedures 50
Telephone Privileges 50
Non-participation 51
Distribution of the Policies 51
Advertising Practices and Sales Literature 51
Settlement Provisions 52
Administrative Information About the Policy 52
 
CHARGES AND DEDUCTIONS 54
Premiums Deductions 54
Daily Charge 55
Monthly Charges 55
Transaction Fees 56
Group or Sponsored Arrangements, or Corporate Purchasers 57
 
TAX CONSIDERATIONS 57
Tax Status of the Company 57
Tax Status of the Policy 58
Diversification and Investor Control Requirements 58
Tax Treatment of Policy Death Benefits 59
Modified Endowment Contracts 59
Multiple Policies 59
Distributions Other than Death Benefits 59
Investment in the Policy 60
Policy Loans 60
Accelerated Death Benefit Rider 60
Continuation of Policy Beyond Age 100 60
Section 1035 Exchanges 61
Taxation of Policy Splits 61
Tax-exempt Policy Owners 61
Possible Tax Law Changes 61
Changes to Comply with the Law 61
Other 61
 
ADDITIONAL INFORMATION 63
Directors and Principal Officers 63
Regulation 64
Legal Matters 64
Legal Proceedings 64
Experts 64
Registration Statement 64
 
FINANCIAL STATEMENTS 65
 
APPENDIX A 209
 
APPENDIX B 210</R>

 

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POLICY SUMMARY

<R>This summary highlights some important points about your policy. The policy is more fully described in the other sections of this prospectus which should be read carefully before you purchase a policy.</R>

Your Policy

<R>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 it will continue under the continuation of coverage option. See Continuation of Coverage, page 38.

Factors to Consider Before Purchasing a Policy

The decision to purchase a policy should be discussed with your agent/registered representative. Make sure you understand the investment options your policy provides, its other features and benefits, its risks and the fees and expenses you will incur. Consider the following matters, among others:

  • Life Insurance Coverage - Life insurance is not a short-term investment and should be purchased only if you need life insurance coverage. You should evaluate your need for life insurance coverage before purchasing a policy.
  • Investment Risk - The value of the available variable investment options may fluctuate with the markets and interest rates. You should evaluate the policy's long-term investment potential and risks before purchasing a policy.
  • Fees and Expenses - A policy's fees and expenses reflect costs associated with its features and benefits. Before purchasing a policy, compare the value that these various features and benefits have to you, given your particular circumstances, with the fees and expenses for those features and benefits.
  • Exchanges - Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. Before purchasing a policy, determine whether your existing policy(ies) will be subject to fees or penalties upon surrender or cancellation. Also compare the fees, charges, coverage provisions and limitations, if any, of your existing policy(ies) with those of this policy.
  • Sales Compensation - We pay compensation to firms for sales of the policy. See Distribution of the Policies, page 51.</R>

Free Look Period

<R>Within limits as specified by law, you have the right to examine your policy and return it for a refund if you are not satisfied for any reason. Generally, the refund will equal all premium payments we have received or the account value, depending on state law. The policy is then void. See Free Look Period, page 48.</R>

<R>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 a premium payment for us to issue your policy. You may need to make additional payments to keep your policy in force and 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 Premium Payments Affect Your Coverage, page 26.</R>

Allocation of Net Premium

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 Premium, page 28.

 

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Charges and Deductions

All charges presented here are guaranteed unless stated otherwise.

<R>Charges and Deductions

Other Than Investment Portfolio Annual Expenses
(See Charges and Deductions, page 54)

Premium Deductions - Maximum amount deducted when each premium is received.

Charge Amount Deducted
Tax Charge
  • 2.5% of premium for state and local taxes
  • 1.5% of premium for estimated federal tax treatment of deferred acquisition costs
Sales Charge
  • 8% of premium up to policy or segment target premium in policy or segment years 1-7;
  • 4% of premium above policy or segment target premium in policy or segment year 1;
  • 1.5% of premium above policy or segment target premium in policy or segment years 2-7;
  • 1.5% of all premium received in policy or segment years 8+.

Daily Charge - Deducted daily and included in the daily unit value calculation.

Charge Amount Deducted
Mortality & Expense Risk Charge Percentage of account value invested in the variable investment options.
  • 0.002055% daily (0.75% annually)

Monthly Charges - Maximum amount deducted each month from account value.

Charge Amount Deducted
Policy Charge
  • $15 per month in policy years 1-10;
  • $9 per month in policy years 11+.
Administrative Charge
  • $0.06 per $1,000 of stated death benefit (or target death benefit, if greater) per month in policy years 1-10;
  • $0.01 per $1,000 of stated death benefit (or target death benefit, if greater) per month in policy years 11+.

Applies to first $2,500,000 of death benefit.

Cost of Insurance Charge Varies based on current cost of insurance rates for each segment and the net amount at risk. Current cost of insurance rates depend on the insured people's ages, genders, policy duration, amount of target death benefit and premium classes. Different cost of insurance rates will apply to each segment. These rates are never more than the guaranteed maximum rates shown in the policy.
Rider Charges Varies depending on the rider benefits you choose. See Riders, page 34.

 

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Transaction Fees - Maximum amount deducted on the transaction date.

Charge Amount Deducted
Partial Withdrawal Fee
  • 2% of the amount withdrawn, up to $25.
Excess Illustration Fee
  • $25 per illustration after the first each policy year.
  • We currently do not deduct this fee, but we reserve the right to deduct it in the future.</R>

Guaranteed Interest Division

The guaranteed interest division guarantees principal and is part of our general account. Amounts you direct into the guaranteed interest division are credited with interest at a fixed rate. See Guaranteed Interest Division, page 24.

<R>Variable Investment Options

The variable investment options under your policy are divisions of Security Life Separate Account L1 (the separate account), a separate account of the company. Each variable investment option invests in a corresponding mutual fund (investment portfolio). If you invest in the variable investment options, you may make or lose money depending on market conditions. You do not invest directly in or hold shares of the investment portfolios.

Investment Portfolio Fees and Expenses

The variable investment options purchase shares of the investment portfolios at net asset value. This price reflects investment management fees, 12b-1 distribution fees and other direct expenses which are set by the investment portfolio and deducted from the investment portfolio's assets as described in the following table. The fees and expenses are shown in gross amounts and net amounts after waiver or reimbursement of fees or expenses by the investment portfolio adviser.

These fees and expenses are not direct charges against a variable investment option's assets or reductions from policy values; rather, these expenses are included in computing each underlying investment 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 investment portfolios' fees and expenses, see each investment portfolio's prospectus.

We receive 12b-1 distribution fees from some investment portfolios. Additionally, each of the investment portfolios or their affiliates pays us compensation for recordkeeping, administration or other services. The amount of compensation is usually based on the aggregate assets of the investment portfolio from policies that we issue or administer. Some investment portfolios or their affiliates pay us more than others and some of the amounts we receive may be significant.

Risks Associated with Investing in the Investment Portfolios

Each investment portfolio has its own investment objective and risks. Information about the risks associated with investing in the investment portfolios is located in their separate prospectuses. Read the investment portfolio prospectuses in conjunction with this prospectus, and retain the prospectuses for future reference. See also Investment Portfolio Objectives, page 16.

An investment portfolio available through the policy may not be the same as a retail mutual fund with the same or similar name. Accordingly, the management, expenses and performance of an investment portfolio is likely to differ from a similarly named retail mutual fund.

The information in the following table was provided to us by the investment portfolios and we have not independently verified this information.

 

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Investment Portfolio Annual Expenses (As a Percentage of Portfolio Average Net Assets)

Portfolio Investment Management Fees 12b-1 Fees Other Expenses Total Portfolio Expenses Fees and Expenses Waived or Reimbursed Total Net Portfolio Expenses
AIM Variable Insurance Funds
               AIM V.I. Capital Appreciation Fund - Series I 1 0.61% N/A 0.24% 0.85% N/A 0.85%
               AIM V.I. Government Securities Fund - Series I 1, 2 0.50% N/A 0.57% 1.07% N/A 1.07%
The Alger American Fund
     Alger American Growth Portfolio 0.75% 0.00% 0.06% 0.81% N/A 0.81%
     Alger American Leveraged AllCap Portfolio 0.85% 0.00% 0.07% 0.92% N/A 0.92%
     Alger American MidCap Growth Portfolio 0.80% 0.00% 0.08% 0.88% N/A 0.88%
     Alger American Small Capitalization Portfolio 0.85% 0.00% 0.07% 0.92% N/A 0.92%
Fidelity Variable Insurance Products Fund
     Asset Manager SM Portfolio 0.53% N/A 0.11% 0.64% N/A 0.64%
     Growth Portfolio 3 0.58% N/A 0.10% 0.68% N/A 0.68%
     Index 500 Portfolio 4 0.24% N/A 0.11% 0.35% N/A 0.35%
     Money Market Portfolio 0.18% N/A 0.10% 0.28% N/A 0.28%
     Overseas Portfolio 3 0.73% N/A 0.19% 0.92% N/A 0.92%
The GCG Trust
     Fully Managed Portfolio 0.94% 0.00% 0.01% 0.95% 0.00% 0.95%
     Mid-Cap Growth Portfolio 0.88% 0.00% 0.01% 0.89% 0.00% 0.89%
ING Partners, Inc
     ING UBS Tactical Asset Allocation Portfolio - Initial Class 5 0.90% N/A 0.20% 1.10% N/A 1.10%
     ING Van Kampen Comstock Portfolio - Initial Class 5 0.60% N/A 0.35% 0.95% N/A 0.95%
ING Income Shares
     ING VP Bond Portfolio - Class R Shares 0.40% N/A 0.10% 0.50% N/A 0.50%
ING Variable Portfolios, Inc
     ING VP Index Plus LargeCap Portfolio - Class R Shares 6 0.35% N/A 0.10% 0.45% N/A 0.45%
     ING VP Index Plus MidCap Portfolio - Class R Shares 6 0.40% N/A 0.15% 0.55% N/A 0.55%
     ING VP Index Plus SmallCap Portfolio - Class R Shares 6 0.40% N/A 0.31% 0.71% 0.11% 0.60%
ING Variable Products Trust
     ING VP Growth Opportunities Portfolio - Class R Shares 7 0.75% N/A 1.07% 1.82% 0.92% 0.90%
     ING VP MagnaCap Portfolio - Class R Shares 7 0.75% N/A 1.47% 2.22% 1.32% 0.90%
     ING VP MidCap Opportunities Portfolio - Class R Shares 7 0.75% N/A 1.91% 2.66% 1.76% 0.90%
     ING VP SmallCap Opportunities Portfolio - Class R Shares 7 0.75% N/A 0.40% 1.15% 0.25% 0.90%

 

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Portfolio Investment Management Fees 12b-1 Fees Other Expenses Total Portfolio Expenses Fees and Expenses Waived or Reimbursed Total Net Portfolio Expenses
INVESCO Variable Investment Funds, Inc.
     INVESCO VIF-Core Equity Fund 8 0.75% N/A 0.34% 1.09% 0.00% 1.09%
     INVESCO VIF-Health Sciences Fund 0.75% N/A 0.31% 1.06% 0.00% 1.06%
     INVESCO VIF-High Yield Fund 8 0.60% N/A 0.42% 1.02% 0.00% 1.02%
     INVESCO VIF-Small Company Growth Fund 8, 9 0.75% N/A 0.54% 1.29% 0.04% 1.25%
     INVESCO VIF-Total Return Fund 8, 10 0.75% N/A 0.56% 1.31% 0.16% 1.15%
     INVESCO VIF-Utilities Fund 8, 11 0.60% N/A 0.77% 1.37% 0.22% 1.15%
Janus Aspen Series Service Shares 12
     Janus Aspen Aggressive Growth Portfolio 0.65% 0.25% 0.02% 0.92% N/A 0.92%
     Janus Aspen Growth Portfolio 0.65% 0.25% 0.01% 0.91% N/A 0.91%
     Janus Aspen International Growth Portfolio 0.65% 0.25% 0.06% 0.96% N/A 0.96%
     Janus Aspen Worldwide Growth Portfolio 0.65% 0.25% 0.04% 0.94% N/A 0.94%
Neuberger Berman Advisers Management Trust
     Growth Portfolio 13 0.84% N/A 0.05% 0.89% 0.00% 0.89%
     Limited Maturity Bond Portfolio 13 0.65% N/A 0.08% 0.73% 0.00% 0.73%
     Partners Portfolio 13 0.82% N/A 0.05% 0.87% N/A 0.87%
Pioneer Variable Contracts Trust
     Mid Cap Value VCT Portfolio - Class I Shares 0.65% N/A 0.14% 0.79% N/A 0.79%
     Small Cap Value VCT Portfolio - Class I Shares 14, 15 0.75% N/A 77.09% 77.84% 76.59% 1.25%
Putnam Variable Trust
     Putnam VT Growth and Income Fund - Class IB Shares 16 0.46% 0.25% 0.05% 0.76% N/A 0.76%
     Putnam VT New Opportunities Fund - Class
IB Shares 16		 0.54% 0.25% 0.05% 0.84% N/A 0.84%
     Putnam VT Small Cap Value Fund - Class IB Shares 16 0.80% 0.25% 0.14% 1.19% N/A 1.19%
     Putnam VT Voyager Fund - Class IB Shares 16 0.53% 0.25% 0.04% 0.82% N/A 0.82%
Van Eck Worldwide Insurance Trust
     Worldwide Bond Fund 1.00% N/A 0.24% 1.24% 0.05% 1.19%
     Worldwide Emerging Markets Fund 1.00% N/A 0.30% 1.30% 0.02% 1.28%
     Worldwide Hard Assets Fund 1.00% N/A 0.18% 1.18% 0.03% 1.15%
     Worldwide Real Estate Fund 1.00% N/A 0.62% 1.62% 0.12% 1.50%

____________________________

1     Compensation to the Company for administrative or recordkeeping services may be paid out of fund assets in an amount up to 0.25% annually. Any such fees paid from the AIM Funds' assets are included in the "Other Expenses" column.

2     Other Expenses includes Interest Expense of 0.28%.

 

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3     Actual annual class operating expenses were lower because a portion of the brokerage commissions that the fund paid was used to reduce the fund's expenses. In addition, through arrangements with the fund's custodian, credits realized as a result of uninvested cash balances are used to reduce a portion of the fund's custodian expenses. These offsets may be discontinued at any time.

4     The fund's manager has voluntarily agreed to reimburse the class to the extent that total operating expenses (excluding interest, taxes, certain securities lending costs, brokerage commissions and extraordinary expenses) exceed 0.28%. This arrangement can be discontinued by the fund's manager at any time. Including this reimbursement, the Management (Advisory) Fees, Other Expenses and Total Fund Annual Expenses in 2001 were 0.24%, 0.04% and 0.28%, respectively.

5     Other Expenses shown in the above table are based on estimated amounts for the current fiscal year.

6     ING Investments, LLC, the investment adviser to each Portfolio, has entered into written expense limitation agreements with each Portfolio under which it will limit expenses of the Portfolios, excluding interest, brokerage and extraordinary expenses, subject to possible reimbursement to ING Investments, LLC within three years. The amount of each Portfolio's expenses waived or reimbursed during the last fiscal year by the Portfolio's investment adviser is shown under the heading "Fees and Expenses Waived or Reimbursed" in the table above. For each Portfolio, the expense limits will continue through at least December 31, 2002.

7     ING Investments, LLC has entered into written expense limitation agreements with each Portfolio under which it will limit expenses of the Portfolio, excluding interest, taxes, brokerage and extraordinary expenses subject to possible reimbursement to ING Investments, LLC within three years. The amount of each Portfolio's expenses waived or reimbursed during the last fiscal year by ING Investments, LLC is shown under the heading "Fees and Expenses Waived or Reimbursed" in the table above. The expense limits will continue through at least October 31, 2002.

8     The Portfolios' "Other Expenses" and "Total Portfolio Expenses" were lower than the figure shown because their custodian fees were reduced under expense offset arrangements.

9     INVESCO absorbed a portion of VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.50% and 1.25%, respectively.

10     INVESCO absorbed a portion of VIF-Total Return Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.40% and 1.15%, respectively.

11     INVESCO absorbed a portion of VIF-Utilities Fund's "Other Expenses" and "Total Portfolio Expenses." After this absorption, these expenses are 0.55% and 1.15%, respectively.

12     Long-term shareholders may pay more than the economic equivalent of the maximum front-end sales charges permitted by the National Association of Securities Dealers, Inc. All expenses are shown without the effect of any expense offset arrangements.

13     Neuberger Berman Management Inc. ("NBMI") has undertaken through April 30, 2005 to reimburse certain operating expenses, excluding taxes, interest, extraordinary expenses, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of the Portfolios' average daily net asset value.

 

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14     The Total Net Fund Annual Expenses in the table above reflect the expense limitation in effect through December 31, 2002 under which Pioneer has agreed not to impose all or a portion of its management fee and if necessary, to limit other ordinary operating expenses to the extent required to reduce Class I expenses to 1.25% of the average daily net assets attributable to Class I shares; the portion of the portfolio expenses attributable to Class II shares will be reduced only to the extent such expenses are reduced for Class I shares.

15     The Portfolio commenced operations on November 8, 2001, therefore Other Expenses shown above are annualized. Including the reimbursements and waivers applied by Pioneer, the Management (Advisory) Fees, Other Expenses and Total Fund Annual Expenses for the year ended December 31, 2001 were 0.00%, 1.25%, and 1.25%, respectively.

16     Reflects an increase in 12b-1 fees payable to Putnam Investment Management, LLC ("Putnam Management"). The Trustees currently limit payments on class IB shares to 0.25% of average net assets. Actual 12b-1 fees during the most recent fiscal year were 0.22% of average net assets.</R>

 

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Policy Values

Your account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable investment option. If you have an outstanding policy loan, your account value includes the amount in the loan division. See Policy Values, page 39, and Partial Withdrawals, page 44.

<R>Your Account Value in the Variable Investment Options

Accumulation units are the way we measure value in the variable investment options. 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 Investment Options, page 40.

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 reductions for the asset-based charges under the policy and the expenses of the investment portfolios. See Determining Values in the Variable Investment Options, page 40, and How We Calculate Accumulation Unit Values, page 40.

Transfer of Account Value

You may make transfers among the variable investment options or to the guaranteed interest division. There are restrictions on transfers from the guaranteed interest division. The minimum transfer amount is $100. See Transfers of Account Value, page 41, and Policy Transaction Fees, page 56.</R>

Special Policy Features

Designated Deduction Option

You may designate one investment option from which we will take all of your monthly deductions. See Designated Deduction Option, page 36.

Riders

<R>You may add benefits to your policy by rider. In most cases, we deduct an additional monthly charge from your account value for these benefits. See Riders, page 34.</R>

Dollar Cost Averaging

Dollar cost averaging is a systematic plan of transferring account value to selected investment options. It is intended to protect your policy 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 42.

Automatic Rebalancing

Automatic rebalancing periodically reallocates your 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 43.

Loans

<R>You may take loans against your policy's net account value. We charge an annual loan interest rate of 3.75%. When you take a policy loan, we transfer an amount equal to your loan to the loan division as collateral for your loan. We credit an annual interest rate of 3% on amounts held in the loan account as collateral for your loan. See Policy Loans, page 43.</R>

Policy loans may reduce your policy's death benefit and may cause your policy to lapse.

<R>Loans may have tax consequences. See Tax Considerations, page 57.</R>

Partial Withdrawals

<R>You may withdraw part of your net account value after your first policy anniversary. You may make up to twelve partial withdrawals per policy year. Partial withdrawals may reduce your policy's death benefit and will reduce your account value. We assess a fee for each withdrawal. See Partial Withdrawals, page 44.

 

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Some policies with a high account value may qualify for a partial withdrawal before the first policy anniversary. Partial withdrawals may have tax consequences. See Partial Withdrawals, page 44 and Tax Considerations, page 57.</R>

Persistency Refund

After your tenth policy anniversary, where permitted by law, we add a persistency refund to your account value. See Persistency Refund, page 38.

Refund of Sales Charge

<R>If you surrender your policy within the first two policy years and it has not lapsed, we may refund some of the sales charge we previously deducted from your first-year premium payments. See Refund of Sales Charge, page 39.</R>

Policy Modification, Termination and Continuation Features

<R>Right to Change Policy

For 24 months after the policy date you may change your policy to a guaranteed policy, unless state law requires differently. There is no charge for this change. See Right to Change Policy, page 38.</R>

Policy Split Option

Under certain circumstances, you may split your policy into two separate life insurance policies each insuring the life of one 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 36.

Surrender

You may surrender your policy for its net cash surrender value at any time before the death of the second of the insured people. All insurance coverage ends on the date we receive your request. See Surrender, page 47.

Surrenders may have tax consequences. See Tax Considerations, page 57.

Lapse

<R>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 guaranteed not to lapse during the first five policy years if the conditions of the special continuation period have been met. See Lapse, page 46, and Special Continuation Period, page 28.</R>

Policy lapses may have tax consequences. See Tax Considerations, page 57.

Reinstatement

<R>You may reinstate your policy and its riders within five years of its lapse if you still own it and the insured people are still living and meet our underwriting requirements. You will need to provide proof of insurability and pay the required reinstatement premiums.</R>

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 47.

Continuation of Coverage

<R>If the policy is in force at the policy anniversary nearest the younger insured person's 100th birthday, the policy will automatically continue pursuant to the terms of the policy unless you surrender it or such continuation is prohibited by state law. See Continuation of Coverage, page 38.</R>

You should consult a qualified tax adviser before you allow the continuation of coverage feature to become effective.

Death Benefits

<R>After the death of the second of the two insured people, we pay death proceeds to the beneficiaries if your policy is still in force. Based on the death benefit option you have chosen and whether or not

 

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you have coverage under an adjustable term insurance rider, your policy's death benefit may vary.</R>

We generally require a minimum total 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, as long as your total death benefit is at least $500,000.

You may change your death benefit amount while your policy is in force, subject to certain restrictions. See Changes in Death Benefit Amounts, page 33.

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 58.

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 to you:

  • partial withdrawals
  • <R>loans</R>
  • surrender
  • 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 59.

In recent years, Congress has adopted new rules relating to life insurance owned by businesses. A 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.

 

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How the Policy Works

 

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INFORMATION ABOUT ING SECURITY LIFE, THE SEPARATE ACCOUNT AND THE INVESTMENT OPTIONS

Security Life of Denver Insurance Company

<R>We are 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 2001, we had over $387.3 billion of life insurance in force. As of December 31, 2001 our total assets were over $12.5 billion and capital and surplus were over $670 million measured on a statutory basis of accounting, as prescribed or permitted by the Colorado Division of Insurance.

We are a wholly owned indirect subsidiary of ING Groep N.V. ("ING"), a global financial institution active in the field of insurance, banking and asset management. ING is headquartered in Amsterdam, The Netherlands.

ING companies offer a complete line of life insurance products, including:

  • annuities
  • individual life
  • group life
  • pension products
  • market life reinsurance.

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 ING Security Life and is registered as a broker-dealer with the SEC and the National Association of Securities Dealers, Inc. ("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 insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940, as amended (the "1940 Act"). The SEC does not supervise our management of the separate account or ING Security Life.

The separate account is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We may offer other variable life insurance policies with different benefits and charges that invest in the separate account. We do not discuss these policies in this prospectus. The separate account may invest in other securities not available for the policy described in this prospectus.

We own 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.</R>

Order of Separate Account Liabilities

State law provides that we may not charge general account liabilities against separate account assets equal to its reserves and other liabilities. This means that 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.

 

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Investment Options

Investment options include the variable and the guaranteed interest divisions, but not the loan division. The separate account has several variable investment options which invest in shares of underlying investment portfolios. The investment performance of a policy depends on the performance of the investment portfolios you choose.

Investment Portfolios

<R>Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who, other than Aeltus Investment Management, Inc., Directed Services, Inc., ING Investments LLC, and ING Life Insurance and Annuity Company are not affiliated with us.</R>

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."

<R>The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code, as amended. 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.</R>

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

<R>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, but you should carefully read each investment portfolio prospectus.</R>

Certain investment portfolios offered under this policy have names, 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.

INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
AIM V.I. Capital Appreciation Fund - Series I Investment Company:
AIM Variable Insurance Funds
Investment Adviser:
A I M Advisors, Inc.		 Seeks growth of capital. Seeks to meet its objective by investing principally in common stocks of companies the portfolio managers believe are likely to benefit from new or innovative products, services or processes as well as those that have experienced above-average, long-term growth in earnings and have excellent prospects for future growth.
AIM V.I. Government Securities Fund - Series I Investment Company:
AIM Variable Insurance Funds
Investment Adviser:
A I M Advisors, Inc.		 Seeks to achieve a high level of current income consistent with reasonable concern for safety of principal. Seeks to meet its objective by investing in debt securities issued, guaranteed or otherwise backed by the United States Government.</R>

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
Alger American Growth Portfolio Investment Manager:
Fred Alger Management, Inc.		 Seeks long-term capital appreciation by focusing on growing companies that generally have broad product lines, markets, financial resources and depth of 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 Portfolio Investment Manager:
Fred Alger Management, Inc.		 Seeks long-term capital appreciation by investing, under normal circumstances, in the equity securities of companies of any size which demonstrate 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 Portfolio Investment Manager:
Fred Alger Management, Inc.		 Seeks long-term capital appreciation by focusing on midsize companies with promising growth potential. Under normal circumstances, the portfolio invests 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 Capitalization Portfolio Investment Manager:
Fred Alger Management, Inc.		 Seeks long-term capital appreciation by focusing on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in 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.
<R>Asset Manager SM Portfolio Investment Company:
Fidelity Variable Insurance Products
Investment Manager:
Fidelity Management & Research Company		 Seeks to obtain high total return with reduced risk over the long term by allocating its assets among stocks, bonds and short-term instruments. Assets are allocated among stocks, bonds, and short-term and money market instruments, maintaining a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10% of assets in short-term and money market instruments.
Growth Portfolio Investment Company:
Fidelity Variable Insurance Products
Investment Manager:
Fidelity Management & Research Company		 Seeks to achieve capital appreciation. Normally invests primarily in common stocks of companies the investment adviser believes have above-average growth potential (often called "growth" stocks).

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
Index 500 Portfolio Investment Company:
Fidelity Variable Insurance Products
Investment Manager:
Fidelity Management & Research Company
Sub-Adviser:
Deutsche Asset Management, Inc.		 Seeks investment results that correspond to the total return of common stocks publicly traded in the United States, as represented by the Standard & Poor's 500 Index (S&P 500). Normally invests at least 80% of assets in common stocks included in the S&P 500.
Money Market Portfolio Investment Company:
Fidelity Variable Insurance Products
Investment Manager:
Fidelity Management & Research Company		 Seeks as high a level of current income as is consistent with preservation of capital and liquidity. Invests in U.S. dollar-denominated money market securities and repurchase agreements, and may enter into reverse repurchase agreements.
Overseas Portfolio Investment Company:
Fidelity Variable Insurance Products
Investment Manager:
Fidelity Management & Research Company		 Seeks long-term growth of capital. Normally invests at least 80% of total assets in foreign securities, primarily in common stocks.
Fully Managed Portfolio Investment Company:
The GCG Trust
Investment Manager:
Directed Services, Inc.
Portfolio Manager:
T. Rowe Price Associates, Inc.		 Seeks, over the long-term, a high total investment return, consistent with the preservation of capital and prudent investment risk. Pursues an active asset allocation strategy whereby investments are allocated among three asset classes-equity securities, debt securities, and money market instruments. Invests primarily in common stocks of established companies that are believed to have above-average potential for capital growth.
Mid-Cap Growth Portfolio Investment Company:
The GCG Trust
Investment Manager:
Directed Services, Inc.
Portfolio Manager:
Massachusetts Financial Services Company		 Seeks long-term growth of capital. Normally invests at least 80% of its net assets in common stocks and related securities (such as preferred stocks, convertible securities and depositary receipts) of companies with medium market capitalizations which the Portfolio Manager believes have above-average growth potential.
ING UBS Tactical Asset Allocation Portfolio - Initial Class Investment Company:
ING Partners, Inc.
Investment Adviser:
ING Life Insurance and Annuity Company (formerly Aetna Life Insurance and Annuity Company)
Sub-Adviser:
UBS Global Asset Management (US) Inc.		 Seeks total return, consisting of long-term capital appreciation and current income. Allocates assets between a stock portion that is designed to track the performance of the S&P 500 Composite Stock Index and a fixed income portion that consists of either five-year U.S. Treasury notes or U.S. Treasury bills with remaining maturities of 30 days.

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
ING Van Kampen Comstock Portfolio - Initial Class Investment Company:
ING Partners, Inc.
Investment Adviser:
ING Life Insurance and Annuity Company (formerly Aetna Life Insurance and Annuity Company)
Sub-Adviser:
Morgan Stanley Investment Management Inc. d/b/a Van Kampen		 Seeks capital growth and income. Invests in a portfolio of equity securities, including common stocks, preferred stocks and securities convertible into common and preferred stocks consisting principally of common stocks.
ING VP Bond Portfolio (formerly Aetna Income Shares d/b/a Aetna Bond VP)- Class R Shares Investment Company:
ING Income Shares
Investment Adviser:
ING Investments, LLC
Sub-Adviser:
Aeltus Investment Management, Inc. (Aeltus)		 Seeks to maximize total return as is consistent with reasonable risk, through investment in a diversified portfolio consisting of debt securities. Under normal market conditions, invests at least 80% of net assets in high-grade corporate bonds, mortgage-related and other asset-backed securities, and securities issued or guaranteed by the U.S. Government, its agencies or instrumentalities.
ING VP Index Plus LargeCap Portfolio (formerly Aetna Index Plus Large Cap VP) - Class R Shares Investment Company:
ING Variable Portfolios, Inc. (formerly Aetna Variable Portfolios, Inc.)
Investment Adviser:
ING Investments, LLC
Sub-Adviser:
Aeltus Investment Management, Inc. (Aeltus)		 Seeks to outperform the total return performance of the Standard & Poor's 500 Composite Index (S&P 500), while maintaining a market level of risk. Invests at least 80% of net assets in stocks included in the S&P 500. The S&P 500 is a stock market index comprised of common stocks of 500 of the largest companies traded in the U.S. and selected by Standard & Poor's Corporation.
ING VP Index Plus MidCap Portfolio (formerly Aetna Index Plus Mid Cap VP) - Class R Shares Investment Company:
ING Variable Portfolios, Inc. (formerly Aetna Variable Portfolios, Inc.)
Investment Adviser:
ING Investments, LLC
Sub-Adviser:
Aeltus Investment Management, Inc. (Aeltus)		 Seeks to outperform the total return performance of the Standard & Poor's MidCap 400 Index (S&P 400), while maintaining a market level of risk. Invests at least 80% of net assets in stocks included in the S&P 400. The S&P 400 is a stock market index comprised of common stocks of 400 mid-capitalization companies traded in the U.S. and selected by Standard & Poor's Corporation.
ING VP Index Plus SmallCap Portfolio (formerly Aetna Index Plus Small Cap VP) - Class R Shares Investment Company:
ING Variable Portfolios, Inc. (formerly Aetna Variable Portfolios, Inc.)
Investment Adviser:
ING Investments, LLC
Sub-Adviser:
Aeltus Investment Management, Inc. (Aeltus)		 Seeks to outperform the total return performance of the Standard and Poor's SmallCap 600 Index (S&P 600), while maintaining a market level of risk. Invests at least 80% of net assets in stocks included in the S&P 600. The S&P 600 is a stock market index comprised of common stocks of 600 small-capitalization companies traded in the U.S. and selected by Standard & Poor's Corporation.

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
ING VP Growth Opportunities Portfolio (formerly Pilgrim VP Growth Opportunities Portfolio) - Class R Shares Investment Company:
ING Variable Products Trust (formerly Pilgrim Variable Products Trust)
Investment Adviser:
ING Investments, LLC (formerly ING Pilgrim Investments, LLC)		 Seeks long-term growth of capital. Invests primarily in common stock of U.S. companies that the portfolio managers feel have above average prospects for growth. Under normal market conditions, invests at least 65% of total assets in securities purchased on the basis of the potential for capital appreciation. These securities may be from large-cap, mid-cap or small-cap companies.
ING VP MagnaCap Portfolio (formerly Pilgrim VP MagnaCap Portfolio) - Class R Shares Investment Company:
ING Variable Products Trust (formerly Pilgrim Variable Products Trust)
Investment Adviser:
ING Investments, LLC (formerly ING Pilgrim Investments, LLC)		 Seeks growth of capital, with dividend income as a secondary consideration. Under normal conditions, invests at least 80% of assets in equity securities that meet the following criteria: attractive valuation characteristics; dividends; and balance sheet strength. Candidates are also analyzed for some catalyst or vector of change that may spark an increase in share price. Normally, investments are generally in larger companies that are included in the largest 500 U.S. companies as measured by sales, earnings or assets.
ING VP MidCap Opportunities Portfolio (formerly Pilgrim VP MidCap Opportunities Portfolio) - Class R Shares Investment Company:
ING Variable Products Trust (formerly Pilgrim Variable Products Trust)
Investment Adviser:
ING Investments, LLC (formerly ING Pilgrim Investments, LLC)		 Seeks long-term capital appreciation. Normally invests at least 80% of assets in the common stocks of mid-sized U.S. companies that the portfolio managers feel have above average prospects for growth. For this Portfolio, mid-size companies are those with market capitalizations that fall within the range of companies in the Standard & Poor's MidCap 400 Index (S&P MidCap 400 Index).
ING VP SmallCap Opportunities Portfolio (formerly Pilgrim VP SmallCap Opportunities Portfolio) - Class R Shares Investment Company:
ING Variable Products Trust (formerly Pilgrim Variable Products Trust)
Investment Adviser:
ING Investments, LLC (formerly ING Pilgrim Investments, LLC)		 Seeks long-term capital appreciation. Normally invests at least 80% of assets in the common stock of smaller, lesser-known U.S. companies that the portfolio manager believes have above average prospects for growth. For this Portfolio, smaller companies are those with market capitalizations that fall within the range of companies in the Russell 2000® Index, which is an index that measures the performance of small companies.
VIF-Core Equity Fund (formerly, VIF-Equity Income Fund) Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc.		 Seeks to provide a high total return through both growth and current income by normally investing at least 65% (80% effective July 31, 2002) of its assets in common and preferred stock. At least 50% of common stock which the Fund holds will be dividend-paying common and preferred stocks. Stocks selected for the Fund generally are expected to produce income and consistent, stable returns. Although the Fund focuses on stocks of larger companies with a history of paying dividends, it also may invest in companies that have not paid regular dividends. The Fund will normally invest up to 5% of its assets in debt securities, generally corporate bonds that are rated investment grade or better.

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
VIF-Health Sciences Fund Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc.		 Seeks capital growth by normally investing at least 80% of its assets in the equity securities and equity-related instruments of companies that develop, produce, or distribute products or services related to health care. These companies include, but are not limited to, medical equipment or supplies, pharmaceuticals, biotechnology, and health care providers and services companies. A portion of the Fund's assets are not required to be invested in the sector.
VIF-High Yield Fund Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc.		 Seeks to provide a high level of current income by investing primarily in bonds and other debt securities. It also seeks capital appreciation. The Fund normally invests at least 65% (80% effective July 31, 2002) of its assets in a diversified portfolio of high yield corporate bonds rated below investment grade, commonly known as "junk bonds," and preferred stock with investment grade and below investment grade ratings. These investments generally offer higher rates of return, but are riskier than investments in securities of issuers with higher credit ratings. A portion of the Funds' assets may be invested in other securities such as corporate short-term notes, repurchase agreements, and money market funds. There are no limitations on the maturities of the securities held by the Fund, and the Fund's average maturity will vary as INVESCO responds to changes in interest rates.
VIF-Small Company Growth Fund Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc.		 Seeks long-term capital growth by normally investing at least 65% (80% effective July 31, 2002) of its assets in small-capitalization companies. INVESCO defines small capitalization companies as companies that are included in the Russell 2000® Growth Index at the time of purchase, or if not included in that Index, have market capitalizations of $2.5 billion or below at the time of purchase. The scope of the Index varies with market performance of the companies in the Index.
VIF-Total Return Fund Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc.		 Seeks to provide high total return through both growth and current income by normally investing at least 65% of its assets in a combination of common stocks of companies with a history of paying regular dividends and in debt securities. Debt securities include corporate obligations and obligations of the U.S. government and government agencies. The remaining assets of the fund are allocated among these and other investments at INVESCO's discretion, based upon current business, economic and market conditions.

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
VIF-Utilities Fund Investment Company:
INVESCO Variable Investment Funds, Inc.
Investment Adviser:
INVESCO Funds Group, Inc. 		Seeks capital growth. It also seeks current income. The Fund normally invests at least 80% of its assets in the equity securities and equity-related instruments of companies that produce, generate, transmit, or distribute natural gas or electricity, as well as in companies that provide telecommunications services, including local, long distance and wireless, and excluding broadcasting. The remainder of the fund's assets are not required to be invested in the utilities economic sector.
Janus Aspen Series Aggressive Growth Portfolio Service Shares Investment Company:
Janus Aspen Series
Investment Adviser:
Janus Capital		 A nondiversified Portfolio that seeks long-term growth of capital. Invests primarily in common stocks selected for their growth potential and normally invests at least 50% of its equity assets in medium-sized companies. Medium-sized companies are those whose market capitalization falls within the range of companies in the Standard and Poor's (S&P) MidCap 400 Index.
Janus Aspen Series Growth Portfolio Service Shares Investment Company:
Janus Aspen Series
Investment Adviser:
Janus Capital		 Seeks long-term growth of capital in a manner consistent with the preservation of capital. Invests primarily in common stocks selected for their growth potential. Although it can invest in companies of any size, it generally invests in larger, more established companies.
Janus Aspen Series International Growth Portfolio Service Shares Investment Company:
Janus Aspen Series
Investment Adviser:
Janus Capital		 Seeks long-term growth of capital. Under normal circumstances, invests at least 80% of its net assets in securities of issuers from at least five different countries, excluding the United States. Although the Portfolio intends to invest substantially all of its assets in issuers located outside the United States, it may at times invest in U.S. issuers and it may at times invest all of its assets in fewer than five countries or even a single country.
Janus Aspen Series Worldwide Growth Portfolio Service Shares Investment Company:
Janus Aspen Series
Investment Adviser:
Janus Capital		 Seeks long-term growth of capital in a manner consistent with the preservation of capital. Invests primarily in common stocks of companies of any size located throughout the world. Normally invests in issuers from at least five different countries, including the United States. May at times invest in fewer than five countries or even in a single country.
Growth Portfolio Investment Company:
Neuberger Berman Advisers Management Trust
Investment Adviser:
Neuberger Berman Management Inc.
Sub-Adviser:
Neuberger Berman, LLC		 Seeks growth of capital by investing mainly in common stocks of mid-capitalization companies.</R>

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
Limited Maturity Bond Portfolio Investment Company:
Neuberger Berman Advisers Management Trust
Investment Adviser:
Neuberger Berman Management Inc.
Sub-Adviser:
Neuberger Berman, LLC		 Seeks the highest available current income consistent with liquidity and low risk to principal by investing mainly in investment-grade bonds and other debt securities from U.S. Government and corporate issuers.
Partners Portfolio Investment Company:
Neuberger Berman Advisers Management Trust
Investment Adviser:
Neuberger Berman Management Inc.
Sub-Adviser:
Neuberger Berman, LLC		 Seeks growth of capital by investing mainly in common stock of mid- to large-capitalization companies.
<R>Mid Cap Value VCT Portfolio - Class I Shares Investment Company:
Pioneer Variable Contracts Trust
Investment Adviser:
Pioneer Investment Management, Inc.		 Seeks capital appreciation by investing in a diversified portfolio of securities consisting primarily of common stocks. Normally, invests at least 80% of total assets in equity securities of mid-size companies, that is, companies with market values within the range of market values of companies included in Standard & Poor's MidCap 400 Index.
Small Cap Value VCT Portfolio - Class I Shares Investment Company:
Pioneer Variable Contracts Trust
Investment Adviser:
Pioneer Investment Management, Inc.		 Seeks capital growth by investing in a diversified portfolio of securities consisting primarily of common stocks. Normally, invests at least 80% of total assets in equity securities of small companies, that is, companies with market values within the range of market values of issuers included in the Russell 2000® Index.
Putnam VT Growth and Income Fund - Class IB Shares Investment Company:
Putnam Variable Trust
Investment Adviser:
Putnam Investment Management, LLC		 Seeks capital growth and current income. The fund seeks its goal by investing mainly in common stocks of U.S. companies with a focus on value stocks that offer the potential for capital growth, current income or both.
Putnam VT New Opportunities Fund - Class IB Shares Investment Company:
Putnam Variable Trust
Investment Adviser:
Putnam Investment Management, LLC		 Seeks long-term capital appreciation. The fund seeks its goal by investing mainly in common stocks of U.S. companies with a focus on growth stocks in sectors of the economy that Putnam Management believes have high growth potential.
Putnam VT Small Cap Value Fund - Class IB Shares Investment Company:
Putnam Variable Trust
Investment Adviser:
Putnam Investment Management, LLC		 Seeks capital appreciation. The fund seeks its goal by investing at least 80% of its net assets in small companies of a size similar to those in the Russell 2000® Value Index.

 

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INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/Adviser/ Manager/ Sub-Adviser Investment Objective
Putnam VT Voyager Fund - Class IB Shares Investment Company:
Putnam Variable Trust
Investment Adviser:
Putnam Investment Management, LLC		 Seeks capital appreciation. The fund seeks its goal by investing mainly in common stocks of U.S. companies with a focus on growth stocks.</R>
Worldwide Bond Fund Investment Company:
Van Eck Worldwide Insurance Trust
Investment Adviser and Manager:
Van Eck Associates Corporation		 Seeks high total return--income plus capital appreciation--by investing globally, primarily in a variety of debt securities.
Worldwide Emerging Markets Fund Investment Company:
Van Eck Worldwide Insurance Trust
Investment Adviser and Manager:
Van Eck Associates Corporation		 Seeks long-term capital appreciation by investing in equity securities in emerging markets around the world.
Worldwide Hard Assets Fund Investment Company:
Van Eck Worldwide Insurance Trust
Investment Adviser and Manager:
Van Eck Associates Corporation		 Seeks long-term capital appreciation by investing primarily in "hard asset securities." Hard assets include precious metals, natural resources, real estate and commodities. Income is a secondary consideration.
Worldwide Real Estate Fund Investment Company:
Van Eck Worldwide Insurance Trust
Investment Adviser and Manager:
Van Eck Associates Corporation		 Seeks high total return by investing in equity securities of companies that own significant real estate or that principally do business in real estate.

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.

<R>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, as amended ("1933 Act"). Also, we have not registered the guaranteed interest division or the general account as an investment company under the 1940 Act (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.</R>

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 the net premium you allocate to that division, plus amounts you transfer to it, plus interest earned, minus amounts you transfer out or withdraw. It may be reduced by deductions for charges from your account value allocated to the guaranteed interest division.

 

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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. Thereafter, the credited interest rate will be guaranteed for a successive period of at least twelve months at an interest rate current at that time. 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 general account. We bear all of the investment risk for the guaranteed interest division.

DETAILED INFORMATION ABOUT THE POLICY

<R>This prospectus describes our standard Estate Designer variable universal life insurance policy. There may be differences in the policy features, benefits and charges because of state requirements where we issue your policy. We describe all such differences in your policy.

If you would like to know about variations specific to your state, please ask your agent/registered representative. We can provide him/her with the list of variations that will apply to your policy.</R>

Applying for a Policy

<R>You purchase your policy by submitting an application to us. On the policy date, the joint equivalent age of the two insured people must be at least 15 and generally no older than age 85. The individual age of each insured person generally must be no more than 90 on the policy date. There is no maximum age difference between the two insured people.</R>

The insured people are the two people on whose lives we issue the policy. The insured people share some relationship and commonly include husband and wife; business partners; parent and child; grandparent and grandchild; and siblings. Upon the death of the second of the insured people we pay the death benefit. See Age, page 48.

<R>You may request that we back-date the policy up to six months to allow the insured people to give proof of a younger age or for certain other purposes.</R>

From time to time, we may accept an insured person who exceeds our normal maximum age limit. We will not unfairly discriminate in determining the maximum age at issue. All exceptions to our normal limit are dependent upon our ability to obtain acceptable reinsurance coverage for our risk with an older insured.

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.

<R>We and our affiliates offer other insurance products which may have different fees and charges and better match your needs. Contact your agent/registered representative if you would like information about these other products.</R>

Temporary Insurance

<R>If you apply and qualify, we may issue temporary insurance in an amount equal to the face amount of the policy for which you applied. The maximum amount of temporary insurance is $4.5 million, which includes other in-force coverage you have with us. Temporary insurance may not be available in all states.

Temporary coverage begins when all of the following events have occurred:

  • you have completed and signed our temporary life insurance coverage form.
  • we receive and accept a premium payment of at least your scheduled premium (selected on your application).
  • part I of the application is complete.

Temporary life insurance coverage ends on the earliest of:

  • the date we return your premium payments.
  • five days after we mail notice of termination to the address on your application.
  • the date your policy coverage starts.
  • the date we refuse to issue a policy based on your application.
  • 90 days after you sign our temporary life insurance coverage form.

 

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There is no death benefit under the temporary insurance agreement if any of the following events occur:

  • there is a material misrepresentation in your answers on the temporary life insurance coverage form.</R>
  • there is a material misrepresentation in statements on your application.
  • the person or persons intended to be the insured people die by suicide or self-inflicted injury.
  • 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 underwriting and issue requirements.

The policy date shown on your policy schedule determines:

  • monthly processing dates
  • policy months
  • policy years
  • policy anniversaries.

The policy date is not affected by when you receive the policy. Generally, we charge monthly deductions from your policy date.

The policy date is determined one of three ways:

  1. the date you designate on your application, subject to our approval.
  2. <R>the back-date of the policy to save age, subject to our approval and the law.</R>
  3. if there is no designated date or back-date, the policy date is:
  •      the date all underwriting and administrative requirements have been met if we receive your initial premium before we issue your policy; or
  •      the date we receive your initial premium if it is after we approve your policy for issue.

If you choose to have your policy date be earlier than the date we issue your policy (called back-dating), then the following charges will be charged from that earlier date on your first monthly processing date:

  • <R>mortality and expense risk charge;
  • policy charge;
  • administrative charge;
  • cost of insurance charges; and
  • rider charges.

If you have elected to backdate your policy which enables you to benefit from a lower age for the purposes of calculating the cost of insurance charges on your policy, you should understand there are some inherent costs associated with your decision to backdate. For each month that your policy is backdated, the applicable cost of insurance charges are accumulated and deducted from your initial premium payment. Thus, backdating your policy has the effect of lowering your initial net premium and thus the amount available to be allocated to the investment options. On backdated policies the accrued cost of insurance charges deducted from the initial premium result in policy values being lower than those in any policy illustrations you have received.</R>

Definition of Life Insurance

<R>We apply a test to help make sure that your policy meets the federal income tax definition of life insurance. 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 58.</R>

Premium Payments

You may choose the amount and frequency of premium payments, within limits. We cannot accept 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 38.

 

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We consider payments we receive to be premium payments 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 payment, we add the remaining net premium to your policy.

<R>A payment is received by us when it is received at our offices. After you have paid your initial premium, we suggest you send payments directly to us, rather than through your agent/registered representative, to help assure the earliest crediting date.</R>

Scheduled Premiums

Your premiums are flexible. You may select your scheduled (planned) premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. This amount may or may not be enough to keep your policy in force. You may receive premium reminder notices for the scheduled premium on a quarterly, 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. Your financial institution may charge for this service. If you choose to pay your initial premium by electronic transfer, please be sure to include the appropriate information as part of your application to avoid a delay in making your coverage effective.

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:

  • 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.
  • 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.
  • <R>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. The "seven-pay" limit is defined by the Internal Revenue Code, as amended and actuarially determined. It varies with the age, gender and premium class of each insured, as well as the death benefit and additional benefits or riders on the policy. It is generally the maximum premium that we may receive during the first seven policy years in order for the policy not to be classified as a modified endowment contract.</R>

See Modified Endowment Contracts, page 59, and Changes to Comply with the Law, page 61.

If you have an outstanding policy loan and you make an unscheduled payment, we will consider it a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not deduct tax or sales charges.

Target Premium

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 persons. The target premium is used to determine your initial 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 is listed in your policy schedule pages.

 

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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:

  • each insured person's age, gender and premium class.
  • the stated death benefit of your policy.
  • 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:

  • the sum of all premiums you have paid, minus partial withdrawals that you have taken, minus outstanding policy loans, including accrued loan interest is greater than or equal to;
  • the minimum monthly premiums for each policy month from the first month of your policy through the current monthly processing date.

The minimum monthly premium is one-twelfth of the minimum annual premium.

<R>During the first five years of your policy if there is not enough net account value to pay the monthly charges and you have satisfied these 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 charges 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 an amount that covers your estimated monthly charges for the following two months. See Lapse, page 46.</R>

Allocation of Net Premium

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 the amount of your scheduled premiums from your policy date through your investment date.

<R>The investment date is the first date we apply net premium to your policy. If we receive your premium after we approve your policy for issue, the investment date is the date we receive your initial premium.

We apply the initial net premium to your policy after all of the following conditions have been met:</R>

  • we receive the required amount of premium.
  • all issue requirements have been received by our customer service center.
  • we have approved your policy for issue.

<R>Amounts you designate for the guaranteed interest division will be allocated to that division on the investment date. If your state requires return of your premium during the free look period, we initially invest amounts you have designated for the variable investment options in the variable investment option which invests in the Fidelity VIP Money Market Portfolio. We later transfer these amounts from this variable investment option to your selected variable investment options, based on your most recent premium allocation instructions, at the earlier of the following dates:

  • five days after the date we mailed your policy plus the length of your state free look period; or
  • the date we have received your delivery receipt plus the length of your state free look period.

If your state provides for return of account value during the free look period (or provides no free look period), we invest amounts you designate for the variable investment options directly into your selected variable investment options.

We allocate all later premium payments to your policy on the valuation date of receipt. We will use

 

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your most recent premium allocation instructions specified in percentages stated to the nearest tenth and totaling 100%. A payment is received by us when it is received at our offices. After you have paid your initial premium, we suggest you send payments directly to us, rather than through your agent/registered representative, to help assure the earliest crediting date. You may change your premium allocation at any time by sending notice to us.</R>

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 46, and Grace Period, page 46.

<R>If you pay your minimum annual 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 28.</R>

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 59.

Death Benefits

<R>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 the second of the insured people. The death benefit is calculated as of the date of death of the second of the insured people.</R>

You decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance (base coverage) with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available with one policy. The stated death benefit is the permanent element of your policy. The adjustable term insurance rider is the term insurance element of your policy. See Adjustable Term Insurance Rider, page 34.

Generally we require a minimum total 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 total death benefit is at least $500,000.

<R>It may be to your economic advantage to include part of your insurance coverage under the adjustable term insurance rider. The adjustable term insurance rider has no cash value, however, and provides no growth potential. 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 sales compensation, but may increase the monthly cost of insurance. See Adjustable Term Insurance Rider, page 34.</R>

 

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Death Benefit Summary

<R>This chart assumes no death benefit option changes and that partial withdrawals are less than the premium we receive.

Option 1 Option 2 Option 3
Stated Death Benefit The sum of death benefit segments under the policy. The stated death benefit changes when there is an increase or decrease or when a policy transaction causes it to change. The sum of death benefit segments under the policy. The stated death benefit changes when there is an increase or decrease or when a policy transaction causes it to change. The sum of death benefit segments under the policy. The stated death benefit changes when there is an increase or decrease or when a policy transaction causes it to change.</R>
Base Death Benefit The greater of:
  • the stated death benefit; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.
 The greater of:
  • the stated death benefit plus the account value; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.
 The greater of:
  • the stated death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.
Target Death Benefit <R>Stated death benefit plus adjustable term insurance rider benefit, if any. Stated death benefit plus adjustable term insurance rider benefit, if any. Stated death benefit plus adjustable term insurance rider benefit, if any.
Total Death Benefit The greater of:
  • the target death benefit; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.
 The greater of:
  • the target death benefit plus the account value; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.
 The greater of:
  • the target death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken; or
  • the account value multiplied by the appropriate factor from the definition of life insurance factors.</R>

 

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Adjustable Term Insurance Rider Benefit The total death benefit minus base death benefit, but not less than zero.

<R>If the account value multiplied by the death benefit corridor factor is greater than the stated death benefit, the adjustable term insurance rider benefit will be decreased. It will be decreased so that the sum of the base death benefit and the adjustable term insurance rider benefit is not greater than the target death benefit. If the base death benefit becomes greater than the target death benefit, then the adjustable term insurance rider benefit is zero.</R>

 The total death benefit minus the base death benefit, but not less than zero.

If the account value multiplied by the death benefit corridor factor is greater than the stated death benefit plus the account value, the adjustable term insurance rider benefit will be decreased. It will be decreased so that the sum of the base death benefit and the adjustable term insurance rider benefit is not greater than the target death benefit plus the account value. If the base death benefit becomes greater than the target death benefit plus the account value, then the adjustable term insurance rider benefit is zero.

 <R>The total death benefit minus the base death benefit, but not less than zero.</R>

If the account value multiplied by the death benefit corridor factor is greater than the stated death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken, the adjustable term insurance rider benefit will be decreased. It will be decreased so that the sum of the base death benefit and the adjustable term insurance rider benefit is not greater than the target death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken. If the base death benefit becomes greater than the target death benefit plus the sum of all premiums we receive minus partial withdrawals you have taken, then the adjustable term insurance rider benefit is zero.

Base Death Benefit

Your base death benefit can be different from your stated death benefit as a result of:

  • your choice of death benefit option.
  • increases or decreases in the stated death benefit.
  • 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 the attained age of the younger insured person. See Appendix A, page 209.

As long as your policy is in force, we will pay the death proceeds to your beneficiaries calculated at the date of death of the second of the insured people. The beneficiaries are the people you name to receive the death proceeds from your policy. The death proceeds are:

  • <R>your base death benefit on the date of the death of the second of the insured people; plus
  • the amount of any rider benefits; minus
  • any outstanding policy loan with accrued loan interest; minus
  • any outstanding charges and deductions incurred before the death of the second of the insured people.

There could be outstanding charges and deductions if the second of the insured people dies while your

 

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policy is in the grace period or in the five-year special continuation period.</R>

Death Benefit Options

<R>You have a choice of three death benefit options (described below). Your choice may result in your base death benefit being greater than your stated death benefit.</R>

If you choose death benefit option 1, your base death benefit is the greater of:

  • your stated death benefit on the date of death of the second of the insured people; or
  • 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.

With 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:

  • your stated death benefit plus your account value on the date of death of the second of the insured people; or
  • 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.

With option 2, investment performance is reflected in your insurance coverage.

<R>If you choose death benefit option 3, your base death benefit is the greater of:

  • your stated death benefit plus all premium we have received minus partial withdrawals you have taken under your policy; or
  • 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 premium and decrease if you take partial withdrawals.</R>

Death benefit options 2 and 3 are not available during the continuation of coverage period. If you select option 2 or 3, it automatically converts to death benefit option 1 when the continuation of coverage period begins. See Continuation of Coverage, page 38.

Changes in Death Benefit Options

<R>You may request a change in your death benefit option at any time on or after your first monthly processing date and before the continuation of coverage period begins.</R>

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, the change will be effective on the 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.

<R>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. We may not approve a death benefit option change if it reduces the target death benefit below the minimum we require to issue your policy.

You may change from death benefit option 1 to option 2, from option 2 to option 1 or from option 3 to option 1. You may not change from death benefit option 1 or 2 to option 3, or 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, unless prohibited by the terms of your policy.</R>

 

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On the effective date of your option change, your stated death benefit changes as follows:

Change From Change To Stated Death Benefit Following Change:
Option 1 Option 2 Your stated death benefit before the change minus your account value on the effective date of the change.
Option 2 Option 1 Your stated death benefit before the change plus your account value on 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 56.

<R>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 death 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 allocated to each segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to each segment.</R>

Changing your death benefit option may have tax consequences. You should consult a tax adviser before making changes.

Changes in Death Benefit Amount

<R>Contact your agent/registered representative or our customer service center to request a change in the amount of your policy's death benefit. The change is effective as of the next monthly processing date after we 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. Keep it with your policy. Or we may ask you to send your policy to us so that we can make the change for you. You may change your target death benefit once a policy year.</R>

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 57.

You may request a decrease in the stated death benefit after your first policy anniversary.

If you decrease your death benefit, you may not decrease your target death benefit below the minimum we require to issue your policy. You cannot decrease the stated death benefit below $1,000.

<R>Requested reductions in the death benefit amount will first decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide decreases in stated death benefit among your death benefit segments pro rata unless the law requires differently.

Decreasing the face amount of your policy could cause the policy to be classified as a modified endowment contract and could subject prior and subsequent distributions (including loans) from your policy to adverse tax treatment. You should consult a tax adviser before changing your death benefit amount See Modified Endowment Contracts, page 59.</R>

 

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You may increase your target or stated death benefit on or after your first monthly processing date and before the policy anniversary when the joint equivalent age of the insured people is 85.

<R>You must provide satisfactory evidence that the insured people are still insurable to increase your death benefit. Unless you tell us differently, we assume a request to increase your target death benefit is also a request for an increase to your stated death benefit. Thus, the amount of your adjustable term insurance rider will not change.

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 created, it is permanent unless the law requires differently. The segment year runs from the segment's effective date to its anniversary.

Each new segment may have:

  • a new sales charge.
  • new cost of insurance charges, guaranteed and current.
  • a new incontestability period.
  • a new suicide exclusion period.
  • a new target premium.
  • a new minimum annual premium during the special continuation period.

Premium payments 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 shows your target premium which is used to determine your sales charge.

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 58, and Modified Endowment Contracts, page 59.</R>

Riders

Your policy may include benefits attached by rider. A rider may have an additional cost. You may cancel riders at any time.

<R>We may offer riders not listed here. Not all riders may be available under your policy. Contact your agent/registered representative for a list of riders and their availability.

Adding or canceling riders may have tax consequences. See Modified Endowment Contracts, page 59.</R>

Adjustable Term Insurance Rider

You may increase your death proceeds by adding an adjustable term insurance rider before the insured people's joint equivalent age of 85, assuming both insured people are alive and insurable. This rider allows you to schedule the death benefits based on your anticipated needs. As the name suggests, the adjustable term insurance rider adjusts over time to maintain your desired level of coverage.

You specify a target death benefit when you apply for this rider. The target death benefit can be level for the life of your policy or scheduled to change at the beginning of a selected policy year(s). See Death Benefits, page 29.

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.

<R>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:</R>

     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.

 

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     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 changes 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 Benefit Target Death Benefit Adjustable Term 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 coverage would be zero.

<R>Even when the adjustable term insurance is reduced to zero, your rider remains in effect until you remove it from your policy. Therefore, if the base death benefit later drops below your target death benefit, the adjustable term insurance rider coverage reappears to maintain your target death benefit.</R>

You may change the target death benefit schedule after it is issued, based on our rules. See Changes in Death Benefit Amounts, page 33.

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 44, and Changes in Death Benefit Options, page 32.

<R>There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a monthly cost of insurance charge from your account value. The cost of insurance for this rider is calculated as the monthly cost of insurance rate for the rider coverage multiplied by the adjustable term death benefit in effect 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. Rates will not exceed 125% of the levels in the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The monthly guaranteed maximum cost of insurance rates for this rider will be in your policy. See Cost of Insurance Charge, page 56.

The only charge for this rider is the cost of insurance charge. The total charges that you pay may be more or less if you have some coverage under an adjustable term insurance rider rather than as stated death benefit. There are no sales charges for this coverage.

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 new evidence of insurability is required for the increased schedule.</R>

 

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Not all policy features apply to the adjustable term insurance rider. The rider does not contribute to the policy account value or surrender value. It does not affect investment performance and cannot be used for a policy loan. The adjustable term insurance 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 insured people under your policy. You may choose to add a single life term insurance rider for one insured person. Or, you may add two 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:

  • the insured person covered by this rider reaches age 100.
  • the continuation of coverage provision becomes effective.
  • the insured person covered by this rider dies.
  • the grace period expires.
  • the policy is surrendered.

See Continuation of Coverage, page 38.

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 insured person will be subject 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.

Accelerated Death Benefit Rider

<R>The rider pays part of the death benefit to you upon your written request if a qualified doctor diagnoses a terminal illness of the sole surviving insured person. Receipt of an accelerated payment of death benefit reduces the death benefit of your policy and the net cash surrender value by the percentage of eligible coverage that is accelerated. For example, if the accelerated payment is 75% of the eligible coverage, the new death benefit will be 25% of the amount prior to acceleration. Any rider on the insured under the base policy will also be reduced in the same manner. No policy loans are permitted after this rider is exercised. There is no charge for this rider. Benefits paid under this rider may be taxable. You should consult with your tax adviser before requesting payment under this rider. See Accelerated Death Benefit Rider, page 60.</R>

Special Features

Designated Deduction Option

<R>You may designate one investment option from which we deduct your monthly charges. You may make this designation at any time. You may not use the loan division as your designated deduction option.

If you do not elect a designated deduction option or the amount in your designated deduction option is not enough to cover the monthly charges, then your monthly charges are taken from the variable investment options and guaranteed interest division in the same proportion that your account value in each has to your total net account value on the monthly processing date.</R>

Policy Split Option

<R>Under certain circumstances, you may exchange your policy for two single life insurance policies: one on each of the two insured people. The policy

 

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split option has insurability requirements which must be met at or before 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.</R>

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.

<R>Unless law requires otherwise, you may use the policy split option upon the occurrence of any of the following events:</R>

  • three months following the effective date of a final divorce decree regarding the marriage of the two insured people.
  • 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.
  • there is a dissolution of business conducted or owned by the two insured people.

You must send us written notice of your election to use the policy split option within 180 days of the 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 premium 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. Premium 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 stated death benefit was divided between the two single life insurance policies, unless we agree to a different allocation. If this allocation causes an increase in the stated death benefit of either of the new single life policies, we may limit the account value you may apply to each new policy. Remaining account value will be paid to you and may be taxable. The refund of sales charge does not apply to 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. A 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 person on the new policy, if that rider is available. Other riders may or may not be available on the new policies and may be subject to 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 57.

You may not split your policy into two single life insurance policies if:

  • the continuation of coverage period has begun.
  • one of the insured people has died.
  • your policy grace period has ended.
  • your policy has been terminated or surrendered.

You should consult a tax adviser before exercising the policy split option.

 

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<R>Right to Change Policy

During the first 24 months after your policy date, you have the right to permanently change your policy to a guaranteed policy, unless state law requires differently. If you elect to make this change, unless state law requires that we issue you a new guaranteed policy, we will transfer the amount you have in the variable investment options to the guaranteed interest division and allocate all future net premium to the guaranteed interest division. We do not allow future payments or transfers to the variable investment options after you exercise this right. We do not charge for this change. See Guaranteed Interest Division, page 24.</R>

Policy Maturity

<R>If at the policy anniversary nearest the younger insured person's 100th birthday you do not want the continuation of coverage feature to become effective, you should surrender the policy for the net account value and end coverage. Part of this payment may be taxable. You should consult your tax adviser.</R>

Continuation of Coverage

<R>The continuation of coverage feature automatically continues your insurance coverage in force beyond the policy anniversary nearest the younger insured person's 100th birthday, unless prohibited by state law. If you do not surrender your policy before this date, on this date we:</R>

  • convert target death benefit to stated death benefit.
  • convert death benefit option 2 or 3 to death benefit option 1.
  • terminate all riders.
  • transfer your net account value (excluding the amount in the loan division) into the guaranteed interest division.
  • terminate dollar cost averaging and automatic rebalancing.

<R>Your insurance coverage continues in force until the death of the second of the insured people, unless the policy lapses or is surrendered. However:

  • we accept no further premium payments;
  • your monthly charges cease;
  • we deduct no further charges except transaction fees, if applicable; and
  • loan interest continues to accrue.

You may not make transfers into the variable investment options during the continuation of coverage period, but 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 38.</R>

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 repay loans 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 other normal consequences of surrender apply. See Surrender, page 47.

The continuation of coverage feature is not available in all states. If a state has approved this feature, it is automatic and you do not need to take any action to activate it.

<R>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. See Continuation of Policy beyond Age 100, page 60.</R>

Persistency Refund

<R>Where state law permits, 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 the account value. This refund is 0.60% of your account value on an annual basis.</R>

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

 

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division, we will pay it even if your policy is in the continuation of coverage period.

<R>If applicable, we add the persistency refund to the variable investment options and guaranteed interest division, but not the loan division, in the same proportion that your account value in each investment option has to your net account value as of the monthly processing date.</R>

Here are two examples of how the persistency refund may affect your account value:

Example 1: Your policy has no loan:

  • <R>account value = $10,000 (all in the variable investment options)</R>
  • monthly persistency refund rate = 0.0005
  • persistency refund = 10,000 x 0.0005 = $5.00
Value Before
Persistency Refund 		Value After
Persistency Refund
 
<R>Variable Investment Options</R> $10,000.00 $10,005.00

Example 2: Your policy does have a loan:

  • account value = $10,000
  • <R>account value in the variable investment options = $6,000</R>
  • account value in the loan division = $4,000
  • monthly persistency refund rate = 0.0005
  • persistency refund = 10,000 x 0.0005 = $5.00
Value Before
Persistency Refund		 Value After
Persistency Refund
 
<R>Variable Investment Options</R> $6,000.00 $6,005.00
Loan $4,000.00 $4,000.00

The persistency refund may have adverse tax consequences if it results in a difference between the interest rate charged and the interest rate credited on a policy loan (a low cost loan).

Refund of Sales Charges

<R>If you surrender your policy within the first two policy years and your policy has not lapsed, we may refund a portion of the sales charges we previously deducted from your premium payments. In the first policy year, the amount of the refund will not be less than 5% of the premium we received. In the second policy year, the refund will not be less than 2.5% of the premium we received in the first policy year. The refund of sales charge is guaranteed only for the first two policy years. We reserve the right to extend the refund of sales charges beyond the first two policy years.</R>

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.

Policy Values

Account Value

<R>Your account value is the total amount you have in the guaranteed interest division, the variable investment options and the loan division. Your account value reflects:</R>

  • net premiums applied.
  • charges deducted.
  • loan interest deducted.
  • partial withdrawals taken.
  • <R>investment performance of the investment portfolios.</R>
  • interest earned on the guaranteed interest division.
  • 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

<R>Your cash surrender value is your account value plus any refund of sales charge due.</R>

 

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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.

<R>Determining Values in the Variable Investment Options

The amounts in the variable investment options are measured by accumulation units and accumulation unit values. The value of a variable investment option is the accumulation unit value for that option multiplied by the number of accumulation units you own in that option. Each variable investment option has a different accumulation unit value.

The accumulation unit value is the value determined on each valuation date. The accumulation unit value of each variable investment option varies with the investment performance of the underlying investment portfolio. It reflects:</R>

  • investment income.
  • realized and unrealized gains and losses.
  • investment portfolio expenses.
  • daily mortality and expense risk charges we take from the separate account.

<R>A valuation date is one on which the net asset value of the investment portfolio shares and unit values of the variable investment options are determined. Valuation dates are each day the New York Stock Exchange ("NYSE") and the company's customer service center are open for business, except for days on which a corresponding investment portfolio does not value its shares, or any other day as required by law. Each valuation date ends at 4:00 p.m. Eastern Time. Our customer service center may not be open for business on major holidays.</R>

You purchase accumulation units when you allocate premium or make transfers to a variable investment option, including transfers from the loan division.

We redeem accumulation units:

  • when amounts are transferred from a variable investment option (including transfers to the loan division).
  • <R>for the monthly deductions from your account value.
  • for policy transaction fees.</R>
  • when you take a partial withdrawal.
  • when you surrender your policy.
  • to pay the death proceeds.

To calculate the number of accumulation units purchased or sold we divide the dollar amount of your transaction by the accumulation unit value for that variable investment option calculated at the close of business on the valuation date of the transaction.

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.

<R>The value of amounts allocated to the variable investment options goes up or down depending on investment performance of the corresponding investment portfolios.</R>

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, the accumulation unit value on any valuation date is:

  • the accumulation unit value for the preceding valuation date multiplied by
  • 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.

 

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We calculate an accumulation experience factor for each variable investment option every valuation date as follows:

  • <R>We take the net asset value of the underlying investment portfolio shares as reported to us by the investment portfolio managers as of the close of business on that valuation date.
  • We add dividends or capital gain distributions declared and reinvested by the investment portfolio during the current valuation period.
  • We subtract a charge for taxes, if applicable.
  • We divide the resulting amount by the net asset value of the shares of the underlying investment portfolio at the close of business on the previous valuation date.</R>
  • 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.

Transfer of Account Value

<R>You generally may transfer your account value among the variable investment options and the guaranteed interest division. 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.</R>

Currently, we do not limit the number of transfers you may make; but, we reserve the right to do so if we determine the trading within your policy is excessive. You may not make transfers during the continuation of coverage period. See Excessive Trading, page 41, and Continuation of Coverage, page 38.

<R>You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. You may fax your request to us. Telephone and facsimile transfers may not always be available. Telephone or fax systems, whether ours, yours, your service provider's or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request in writing.</R>

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:

  • increased trading and transaction costs.
  • forced and unplanned portfolio turnover.
  • lost opportunity costs.
  • 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 and may impose a fee for each future transfer of $25. We will take such actions when we determine, in our sole discretion, that transfers are harmful to the investment portfolios or to policyowners as a whole.

Guaranteed Interest Division Transfers

Transfers into the guaranteed interest division are not restricted.

<R>You may transfer from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary will 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

 

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made at any other time will not be processed. The minimum amount you may transfer is $100.</R>

Transfers from the guaranteed interest division in each policy year are limited to the largest of:

  • <R>25% of your guaranteed interest division balance at the time of your first transfer or withdrawal out of it in that policy year; or
  • the sum of the amounts you have transferred and withdrawn from the guaranteed interest division in the prior policy year; or</R>
  • $100.

Dollar Cost Averaging

<R>You may elect dollar cost averaging if your policy has at least $10,000 invested in the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio. There is no charge for this feature.</R>

Dollar cost averaging does not assure a profit nor does it protect you against a loss in a declining market.

<R>The main goal of dollar cost averaging is to help protect your policy values from short-term price changes. This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of a portfolio's shares is high. It also reduces the risk of investing too little when the price of a portfolio's shares is low. Since you transfer the same dollar amount to these investment options each period, you purchase more units when the unit value is low and you purchase fewer units when the unit value is high.

You may add dollar cost averaging to your policy at any time. The first dollar cost averaging date must be at least one day after we receive your dollar cost averaging request. If your state requires a refund of premium during the free look period, dollar cost averaging begins after the end of your free look period.

With dollar cost averaging, you designate either a dollar amount or a percentage of your account value to be automatically transferred at regular intervals from the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio to one or more other variable investment options. Fractional percentages, stated to the nearest tenth, are permitted. You may not use the guaranteed interest division or the loan division in dollar cost averaging.</R>

The minimum percentage you may transfer to one investment option is 1% of the total amount you transfer. You must transfer at least $100 on each dollar cost averaging transfer date.

Dollar cost averaging may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly on the monthly processing date.

You may have both dollar cost averaging and automatic rebalancing at the same time. However, the dollar cost averaging source portfolio cannot be included in your automatic rebalancing program.

Changing Dollar Cost Averaging

<R>If you have telephone privileges, you may change the program by telephoning our customer service center or you may fax your request to us. Telephone and facsimile transfers may not always be available. Telephone or fax systems, whether ours, yours, your service provider's or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transfer request in writing. See Telephone Privileges, page 50.</R>

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:

  • you specify.
  • your balance in the source portfolio reaches a dollar amount you set.

 

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  • <R>the amount in the source portfolio is equal to or less than the amount to be transferred. We will transfer the remaining amount and dollar cost averaging ends.</R>

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. There is no charge for this feature.

<R>If you choose this feature, on each rebalancing date we transfer amounts among the investment options to match your pre-set automatic rebalancing allocation. You may select allocation percentages stated to the nearest tenth. 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.</R>

You may choose automatic rebalancing on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month on a monthly, quarterly, semi-annual or annual basis. If you do not specify a frequency, automatic rebalancing will occur quarterly.

The first transfer occurs on the date you select (after your free look period ends if your state requires return of premium during the free look period). If you do not request a date, processing is on the last valuation date of the calendar quarter in which we receive your request.

You may have both automatic rebalancing and dollar cost averaging at the same time. However, the source portfolio for your dollar cost averaging cannot be included in your automatic rebalancing program. You may not include the loan division.

Changing Automatic Rebalancing

You may change your allocation percentages for automatic rebalancing at any time. Your allocation change is effective on the valuation date that we receive it at our customer service center. If you reduce the amount allocated to the guaranteed interest division, it is considered a transfer from that division. You must meet the requirements for the maximum transfer amount and time limitations on transfers from the guaranteed interest division. See Transfer of Account Value, page 41.

Terminating Automatic Rebalancing

You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least one day before the next automatic rebalancing date.

Policy Loans

You may borrow from your policy after the first monthly processing date, by using your policy as security for a loan, or as otherwise required by law. The amount you borrow (policy loan) is:

  • the amount you borrow from your policy; plus
  • policy loan interest that is capitalized when due; minus
  • 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, 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.

<R>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 telephone or fax. Telephone and facsimile transactions may not always be available. Telephone or fax systems, whether ours, yours, your service provider's or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent

 

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our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transaction request in writing. See Telephone Privileges, page 50.

When you request a loan you may specify the investment options from which the loan will be taken. If you do not specify the investment options, the loan will be taken proportionately from each active investment option you have, including the guaranteed interest division.

Currently, 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 it when due, we add it to your policy loan balance.</R>

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. The loan division is part of our general account specifically designed to hold money used as collateral for loans and loan interest. 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. We assume that payments you make, other than scheduled premium payments, 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 repayment from the loan division to the variable investment options and the guaranteed interest division in the same proportion as your current premium allocation, unless you tell us otherwise.

Effects of a Policy Loan

Taking a loan decreases the amount you have in the investment options. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan.

Even if you repay your loan, it has a permanent effect on your account value. The benefits under your policy may be affected.

<R>The loan is a first lien on your policy. If you do not repay your policy loan, we deduct your outstanding policy loan and accrued loan interest from the death proceeds or the cash surrender value when payable.</R>

Failure to repay your loan may affect the length of time your policy remains in force. 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 46.

<R>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, page 59.</R>

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. If your policy qualifies as being "in corridor," you may make partial withdrawals prior to your first anniversary. A policy is "in corridor" if:

  • Under Death Benefit Option 1, your account value multiplied by the appropriate factor from Appendix A is greater than your stated death benefit.
  • Under Death Benefit Option 2, your account value multiplied by the appropriate factor from Appendix A is greater than your stated death benefit plus your account value.
  • <R>Under Death Benefit Option 3, your account value multiplied by the appropriate factor from Appendix A is greater than your stated death benefit plus the sum of your premium payments minus partial withdrawals.

 

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You make a partial withdrawal by withdrawing part of your net account value. If your request is by telephone or fax, 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. Telephone and facsimile transactions may not always be available. Telephone or fax systems, whether ours, yours, your service provider's or your agent's, can experience outages or slowdowns for a variety of reasons. These outages or slowdowns may delay or prevent our processing of your request. Although we have taken precautions to help our systems handle heavy use, we cannot promise complete reliability under all circumstances. If you are experiencing problems, you should make your transaction request in writing. See Telephone Privileges, page 50.

You may take up to twelve partial withdrawals per policy year. The minimum withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. The maximum withdrawal from an "in corridor" policy prior to the first policy anniversary is limited to the amount that would cause your policy to no longer qualify as being "in corridor." If you request a withdrawal of more than this maximum, you must surrender your policy or reduce the withdrawal amount.

When you take a partial withdrawal, we deduct the withdrawal amount plus a partial withdrawal fee from your account value. See Charges and Deductions, page 54.

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 26.

When you request a partial withdrawal you may specify the investment options from which the partial withdrawal will be taken. If you do not specify the investment options, we will take 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. 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.

Partial withdrawals may have adverse tax consequences. See Distributions Other than Death Benefits, page 59.</R>

Partial Withdrawals under Death Benefit Option 1

<R>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, then 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 withdrawn in excess of the greater of 10% of your account value or 5% of your stated death benefit 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. Then at least part of your partial withdrawal may be taken without reducing your stated death benefit.</R>

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.

<R>Under death benefit option 3, a partial withdrawal will reduce the stated death benefit by the amount of the partial withdrawal in excess of the total premium we have received minus the total of your partial withdrawals.

 

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If a partial withdrawal reduces the stated death benefit, the target death benefit for the current year and all future years will be reduced by an amount equal to the reduction in the stated death benefit.</R>

If your partial withdrawal is more than the amount of premium we have received minus your total prior 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
  2. The excess withdrawal amount you requested will reduce your stated death benefit if:
  •      the excess amount is greater than 10% of your account value after step "1" above; or
  •      the excess amount is greater than 5% of your stated death benefit.

     

<R>A reduction in the stated death benefit as a result of a partial withdrawal will be pro-rated among the existing death benefit segments, unless state law requires otherwise. Target premium will be adjusted for the reduced stated death benefit.</R>

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:

  • your base death benefit has been increased to qualify your policy as life insurance under the federal income tax laws; and
  • 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 58.

<R>We will send a new policy schedule page to you 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 reductions in the death benefits are effective as of the valuation date on which we receive your request. See Distributions Other than Death Benefits, page 59.</R>

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 28.

If the continuation of coverage feature is active, your policy could lapse if there is an outstanding policy loan even though there are no monthly deductions.

Grace Period

Your policy enters a 61-day lapse grace period if, on a monthly processing date:

  • your net account value is zero (or less).
  • the five-year special continuation period has expired, or you have not paid the required special continuation period premium.

<R>We notify you that your policy is in a grace period at least 30 days before it ends. We send this notice to you (or a person to whom you have assigned your policy) at your last known address in our records. We notify you of the premium payment necessary to prevent your policy from lapsing. This amount generally is the past due charges, plus the 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 beneficiaries, with reductions for your policy loan balance, accrued loan interest and monthly deductions owed.</R>

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.

 

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<R>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 investment options and guaranteed interest division. We deduct amounts you owe us and inform you that your policy coverage has ended.</R>

Lapse Summary

Special Continuation Period
If you meet the requirements If you do not meet the requirements or it is no longer in effect
<R>Your policy does not lapse if you do not have enough net account value to pay the monthly charges. The charges continue to be deducted and may cause a negative account value during the special continuation period. At the end of the special continuation period, you must pay enough premium to bring the net account value to zero plus the amount that covers your estimated monthly charges for the following two months or your policy will lapse.</R> Your policy enters the grace period if your net account value is not enough to pay the monthly charges, or if your loan plus accrued loan interest is more than your account value. If you do not pay enough premium to cover the past due monthly charges and interest due plus the monthly charges and 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.

Unless state law requires differently, we will reinstate your policy and riders if:

  • you are the owner and have not surrendered your policy.
  • 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.
  • we receive enough premium 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.

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 premium received after reinstatement according to your most recent instructions which may be those in effect at the start of the grace period.

<R>A policy that is reinstated more than 90 days after lapsing will be classified as a modified endowment contract for tax purposes. See Modified Endowment Contracts, page 59.</R>

Surrender

<R>You may surrender your policy for its net cash surrender value any time after the free look period before the death of the second of the insured people.

 

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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 (or lost policy form) at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. See Policy Values, page 39, and Settlement Provisions, page 52.

We do not pro-rate or add back to your account value charges or expenses which we deducted before your surrender, but a refund of sales charge may apply. See Refund of Sales Charge, page 39.

A surrender of your policy may have adverse tax consequences. See Distributions Other than Death Benefits, page 59.</R>

General Policy Provisions

Free Look Period

<R>You have the right to examine your policy and return it (for any reason) to us during the period shown in the policy. The right to examine period (also called the free look period) starts on the date you receive it. If you return your policy to us within your state's specified time limit, we will cancel it as of your policy date.</R>

If you cancel your policy during this free look period, you will receive a refund as determined by state law. Generally, there are two types of free look refunds:

  • <R>some states require a return of all premium we receive. </R>
  • other states require payment of account value plus a refund of all charges deducted.

<R>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 premium we receive before the end of the free look period is allocated into the variable investment options. See Allocation of Net Premium, page 28.</R>

Your Policy

The entire contract between you and us is the combination of:

  • your policy;
  • a copy of your original application and any applications for benefit increases or decreases;
  • <R>your riders;</R>
  • endorsements;
  • policy schedule pages; and
  • 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.

<R>Unless there is fraud, we consider all statements made in an application to be representations and not warranties. We use no statement to deny a claim, unless it is in an application.</R>

A president or an officer of our company and our secretary or assistant secretary must sign all changes or amendments to your policy. No other person may change its terms or conditions.

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 differences in ages and gender, divided by two and rounded down.

The insured people must each be no more than age 90 at policy issue. The minimum joint equivalent age must be at least 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.

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.

 

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Ownership

The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive the benefits until the death of the second of the insured people. This includes the right to change the owner, beneficiaries 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 beneficiaries.

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.

Beneficiaries

You, as owner, name the beneficiaries when you apply for your policy. The primary beneficiaries who survive both of the insured people receives the death proceeds. Other surviving beneficiaries receive death proceeds only if there are no surviving primary beneficiaries. If more than one beneficiary 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 pay the death proceeds to you or your estate, as owner.

<R>You may name new beneficiaries any time before the death of the second of the insured people. We pay the death proceeds to the beneficiaries whom you have most recently named according to our records. We do not make payments to multiple sets of beneficiaries. The designation of certain beneficiaries may have tax consequences. See Other, page 61.</R>

Collateral Assignment

<R>You may assign your policy by sending written notice to us. After we record the assignment, your rights as owner and the beneficiaries' rights (unless the beneficiaries were made irrevocable beneficiaries under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. The transfer or assignment of a policy may have tax consequences. See Other, page 61.</R>

Incontestability

After your policy has been in force and both insured people are alive for two years from your policy date, and from the effective date of a new segment or an increase in any other benefit, we will not question the validity of statements in your applicable application.

Misstatements of Age or Gender

<R>Notwithstanding the Incontestability provision above, 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.</R>

If unisex cost of insurance rates apply, we do not make adjustments for a misstatement of gender.

Suicide

If either insured person commits suicide, while sane or insane, within two years of your policy date, unless otherwise required by law, we limit death proceeds payable 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 taken.

We make a limited payment to the beneficiaries for a new segment or other increase if the second of the insured people commits suicide, while sane or insane, within two years of the effective date of a

 

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new segment or within two years of an increase in any other benefit, unless otherwise required by law. The limited payment is equal to the cost of insurance and monthly expense charges which were deducted for the increase.

Transaction Processing

Generally, within seven days of when we receive all information required to process a payment, we pay:

  • death proceeds.
  • net cash surrender value.
  • partial withdrawals.
  • loan proceeds.

We may delay processing these transactions if:

  • the NYSE is closed for trading.
  • trading on the NYSE is restricted by the SEC.
  • <R>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 an investment option's assets.</R>
  • a governmental body with jurisdiction over the separate account allows suspension by its order.

<R>SEC rules and regulations generally determine whether or not these conditions exist.</R>

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 insured people. The death proceeds are not affected by subsequent changes in the value of the variable investment options.

We may delay payment from our guaranteed interest division for up to six months, unless law requires otherwise, of surrender proceeds, withdrawal amounts or loan amounts. If we delay payment more than 30 days, we pay interest at our declared rate (or at a higher rate if required by law) from the date we receive your complete request.

Notification and Claims Procedures

Except for certain authorized telephone requests, we must receive any election, designation, change, assignment or request in writing from the owner.

You must use a form acceptable to us. We are not liable for actions taken before we receive and record your notice. We may require you to return your policy for certain policy changes or if you surrender it.

If an insured person dies while your policy is in force, please let us know as soon as possible. We will immediately send you instructions on how to make a claim. 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 beneficiaries and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information such as medical records from doctors and hospitals.

Telephone Privileges

Telephone privileges are automatically provided to you and your agent/registered representative, unless you decline it on the application or contact our customer service center. Telephone privileges allow you or your agent/registered representative to call our customer service center to:

  • make transfers
  • change premium allocations
  • change features in your dollar cost averaging and automatic rebalancing programs
  • request partial withdrawals
  • 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:

  • requiring some form of personal identification
  • providing written confirmation of any transactions
  • 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.

 

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Non-participation

<R>Your policy does not participate in the surplus earnings of ING Security Life.</R>

Distribution of the Policies

<R>The principal underwriter (distributor) for our policies is ING America Equities, Inc., an affiliate and wholly owned subsidiary of ours. 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 affiliated and unaffiliated broker/dealers. The affiliated broker/dealers may include:

  • VESTAX Securities Corporation,
  • Locust Street Securities, Inc.,
  • Multi-Financial Securities Corporation,
  • IFG Network Securities, Inc.,
  • Financial Network Investment Corporation,
  • Washington Square Securities, Inc.,
  • Guaranty Brokerage Services, Inc.,
  • ING Financial Advisers, LLC
  • PrimeVest Financial Services, Inc.,
  • Granite Investment Services, Inc.,
  • Financial Northeastern Securities, Inc.,
  • Aeltus Capital, Inc.,
  • BancWest Investment Services, Inc.,
  • Baring Investment Services, Inc.,
  • Compulife Investor Services, Inc.,
  • Directed Services, Inc.,
  • ING Barings Corp.,
  • ING Direct Funds Limited,
  • ING DIRECT Securities, Inc.,
  • ING Funds Distributor, Inc.,
  • ING TT&S (U.S.) Securities, Inc.,
  • Systematized Benefits Administrators, Inc.,
  • United Variable Services, Inc.</R>

All broker/dealers who sell this policy have entered into selling agreements with us. Under these agreements, we pay a distribution allowance to the broker/dealers, who pay commissions to their agents/registered representatives who sell this policy.

There are two structures for the distribution allowances, but the structure choice does not affect fees or charges on your policy.

<R>Under the levelized structure, the distribution allowance in policy years one through seven is up to 12% of the premium we receive up to target premium and lower thereafter.

Under the modified structure, the distribution allowance in policy year one is up to 30% of premium we receive up to target premium and lower thereafter.

Although it varies by policy, we estimate the typical first year compensation payable to a selling broker/dealer if a policy pays target premium to be $6 per $1,000 of death benefit.

Broker/dealers receive annual renewal payments (trails) of up to 0.20% of the average net account value for the first ten policy years and are paid at a lower rate 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.

We pay wholesaler fees and marketing and training allowances. We may provide repayments or make sponsor payments for broker/dealers to use in sales contests for their registered representatives. We do not hold contests directly based on sales of this product. We do hold training programs from time to time at our own expense. We pay dealer concessions, wholesaling fees, other allowances and the costs of all other incentives or training programs from our resources which include sales charges.</R>

Advertising Practices and Sales Literature

We may use advertisements and sales literature to promote this product, including:

  • articles on variable life insurance and other information published in business or financial publications;
  • indices or rankings of investment securities; and
  • comparisons with other investment vehicles, including tax considerations.

 

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<R>We may use information regarding the past performance of the variable investment options and investment portfolios. Past performance is not indicative of future performance of the variable investment options or investment portfolios and is not reflective of the actual investment experience of policyowners.

We may feature certain variable investment options, the underlying investment portfolios 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.</R>

Settlement Provisions

<R>You may elect to take your net cash surrender value in other than one lump sum payment. Likewise, you may elect to have the beneficiaries receive the death benefit proceeds other than in one one lump 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 beneficiaries may do so within 60 days after we receive proof of death of the second of the insured people.</R>

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

<R>If none of these settlement options have been elected, your net cash surrender value or the death benefit proceeds will be paid in one lump sum payment. Unless you request otherwise, death benefit proceeds generally will be paid into an interest bearing account which can be accessed through the use of a checking account provided to the beneficiaries. Interest earned on this account may be less than interest paid on other settlement options.</R>

Administrative Information About the Policy

Voting Privileges

<R>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 investment portfolio's current prospectus or issues requiring a vote by shareholders under the 1940 Act.</R>

Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your account value. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions.

Each investment portfolio share has the right to one vote. The votes of all investment portfolio shares are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis.

Examples of issues that require a portfolio-by-portfolio vote are changes in the fundamental investment policy of a particular investment portfolio; or approval of an investment advisory agreement.

We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies and any investment portfolio shares for which the owner does not give us instructions, 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

 

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owners if the federal securities laws, regulations or their interpretations change to allow this.

You may instruct us only on matters relating to the investment portfolios corresponding to those in which you have invested assets as of the record date 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

<R>We are required to track events to identify material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, ING Security Life and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if:</R>

  • state insurance law or federal income tax law changes.
  • investment management of an investment portfolio changes.
  • 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.

<R>Under the 1940 Act, 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.</R>

Right to Change Operations

<R>Subject to state and federal law limitations and the rules and regulations thereunder, we may from time to time make any of the following changes to our separate account with respect to some or all classes of policies:</R>

  • Change the investment objective.
  • <R>Offer additional variable investment options which will invest in investment portfolios we find appropriate for policies we issue.</R>
  • Eliminate variable investment options.
  • Combine two or more variable investment options.
  • <R>Substitute a new investment portfolio for a portfolio in which a variable investment option currently invests. A substitution may become necessary if, in our judgment:
         »     an investment portfolio no longer suits the purposes of your policy;
         »     there is a change in laws or regulations;
         »     there is a change in an investment portfolio's investment objectives or restrictions;
         »     the investment portfolio is no longer available for investment; or
         »     another reason we deem a substitution is appropriate
                In the case of a substitution, the new investment portfolio may have different fees and charges than the investment portfolio it replaced.</R>
  • Transfer assets related to your policy class to another separate account.
  • Withdraw the separate account from registration under the 1940 Act.
  • Operate the separate account as a management investment company under the 1940 Act.

 

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  • Cause one or more variable investment options to invest in a mutual fund other than, or in addition to, the investment portfolios.
  • Stop selling these policies.
  • End any employer or plan trustee agreement with us under the agreement's terms.
  • Limit or eliminate any voting rights for the separate account.
  • Make any changes required by the 1940 Act or its rules or regulations.
  • Close an investment option to new investments.

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:

  • your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any).
  • your account value.
  • your policy loan, if any, plus accrued interest.
  • your net cash surrender value.
  • your account transactions during the policy year showing net premiums, transfers, deductions, loan amounts and withdrawals.

We 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 such as partial withdrawals and loans.

CHARGES AND DEDUCTIONS

The amount of a charge may not correspond to the cost incurred by us to provide the service or benefit. For example, the sales charges may not cover all of our sales and distribution expenses. Some proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used to cover such expenses.

<R>Premiums Deductions</R>

We treat payments we receive as premium if you do not have an outstanding policy loan and your policy is not in the continuation of coverage period. After we deduct certain charges from your payment, we add the remaining net premium to your policy.

<R>Tax Charges

We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0% to 5%. We deduct 2.5% of each premium payment to cover these taxes. This rate approximates the average tax rate we expect to pay.

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 this charge for taxes if there are changes in the tax law, within limits set by law. We also reserve the right to increase or decrease the charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us.</R>

Sales Charge

<R>We deduct a percentage from each premium payment to help cover the costs of distribution, preparing our sales literature, promotional expenses and other direct and indirect expenses to sell the policy.</R>

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

 

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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 Segment Year Up to Policy or Segment Target Premium Above Policy or Segment Target Premium
1 8% 4%
2 - 7 8% 1.5%
8 + 1.5% 1.5%

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 57.

<R>Daily Charge</R>

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.

<R>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 investment options are greater than the amount we estimated.</R>

The mortality and expense risk charge does not apply to your account value in the guaranteed interest division or the loan division.

<R>We may reduce or waive the mortality and expense risk charge for certain group or sponsored arrangements or for corporate purchasers. See Group or Sponsored Arrangements, or Corporate Purchasers, page 57.

Monthly Charges

We deduct charges from your account value on each monthly processing date until the policy anniversary nearest the younger insured person's 100th birthday. You may designate one 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.

If you do not choose a designated deduction investment option or the amount in your designated deduction investment option is not enough to cover the monthly charges, then your monthly charges are taken from the variable investment options and guaranteed interest division in the same proportion that your account value in each has to your total net account value on the monthly processing date.</R>

Policy Charge

The initial policy charge is $15 per month for the first ten years of your policy. After the first ten years, the policy charge is $9 per month. This charge compensates us for such costs as:

  • application processing.
  • medical examinations.
  • establishment of policy records.
  • insurance underwriting costs.

<R>We may reduce or waive the policy charge for certain group or sponsored arrangements, or for corporate purchasers. See Group or Sponsored Arrangements, or Corporate Purchasers, page 57.</R>

Administrative Charge

<R>We charge a per month administrative charge of a maximum of $0.06 per $1,000 for the first ten policy years for the greater of target or stated death benefit. We charge a maximum of $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.</R>

 

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This charge is designed to compensate us for ongoing costs such as:

  • premium billing and collections
  • claim processing
  • policy transactions
  • record keeping
  • reporting and communications with policy owners
  • other expenses and overhead.

<R>We may reduce or waive the administrative charge for certain group or sponsored arrangements, or for corporate purchasers. See Group or Sponsored Arrangements, or Corporate Purchasers, page 57.</R>

Cost of Insurance Charge

The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage, including the expected cost of paying death proceeds that may be more than your account value.

<R>The cost of insurance charge is equal to our current monthly cost of insurance rate multiplied by the net amount at risk for each segment of your death benefit. We calculate the net amount at risk monthly, at the beginning of each policy month. For the base death benefit, the net amount at risk is calculated using the difference between the current base death benefit and your account value. We determine your account value after we deduct your policy charges due on that date other than cost of insurance charges.

If your base death benefit at the beginning of a month increases (as a requirement of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. The amount of your cost of insurance charge varies from month to month 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 as of the monthly processing date.</R>

We base your current cost of insurance rates on the insured people's ages, genders, policy duration, amount of target death benefit 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 each segment of the base death benefit, your adjustable term insurance rider and single life term insurance riders.

<R>The cost of insurance or rider charges for a class of insured persons may change from time to time. We base the new charge on changes in expectations about:</R>

  • investment earnings
  • mortality
  • the time policies remain in effect
  • expenses
  • 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.

Rider Charges

<R>On each monthly processing date, we deduct the cost of benefits under your riders, including the single life term insurance rider. Rider charges do not include the charge for the adjustable term insurance rider which is included in the cost of insurance charge. See Riders, page 34.</R>

Transaction Fees

<R>We charge fees for certain transactions under your policy. You may choose any investment option or combination of investment options from which we will deduct these fees. Otherwise, we will deduct these fees from the variable investment options and guaranteed interest division in the same proportion

 

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that your account value in each has to your total net account value on the transaction date.

Partial Withdrawal Fee

<R>We deduct a service fee of 2% of the requested partial withdrawal (but not more than $25) from your account value for each partial withdrawal. See Partial Withdrawals, page 44.</R>

Excess Illustration Fee

<R>We currently do not deduct a fee for policy illustrations. However, we reserve the right to assess a fee of $25 per illustration after the first in each policy year.</R>

Other Charges

<R>Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. So no charge is currently made to the variable investment options 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.</R>

Group or Sponsored Arrangements, or Corporate Purchasers

<R>Individuals, corporations or other institutions may purchase this policy. For group or sponsored arrangements (including employees and certain family members of employees of ING Security Life, its affiliates and appointed sales agents), corporate purchasers or internal exchanges, we may reduce or waive the:</R>

  • administrative charge
  • minimum stated death benefit
  • minimum target death benefit
  • minimum annual premium
  • target premium
  • sales charges
  • cost of insurance charges
  • other charges normally assessed.

We can reduce or waive these items based on expected economies. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors. We take into account when we reduce charges. We make reductions to charges based on our rules in effect when we approve a policy application. We may change these rules from time to time.

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. 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 surrender charge, administrative charge, or other charge, fee or privilege. 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.

<R>Tax Status of the Company

The Company is taxed as a life insurance company under the Internal Revenue Code of 1986, as amended. The separate account is not a separate entity from the company. Therefore, the separate account is not taxed separately as a "regulated investment company," but is taxed as part of the company. Investment income and realized capital gains attributable to the separate account are automatically applied to increase reserves under the policy. Because of this, under existing federal

 

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income tax law we believe that any such income and gains will not be taxed to the extent that such income and gains are applied to increase reserves under the policies. In addition, any foreign tax credits attributable to the separate account will first be used to reduce any income taxes imposed on the separate account before being used by the company.

In summary, we do not expect that we will incur any federal income tax liability attributable to the separate account and we do not intend to make provisions for any such taxes. However, if changes in the federal tax laws or their interpretation result in our being taxed in income or gains attributable to the separate account, then we may impose a charge against the separate account (with respect to some or all of the policies) to set aside provisions to pay such taxes.</R>

Tax Status of the Policy

<R>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. While there is very little guidance as to how these requirements are applied, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so.

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 209, for a table of the Guideline Premium/Cash Value Corridor Test factors.</R>

We will at all times strive to assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. See Tax Treatment of Policy Death Benefits, page 59.

Diversification and Investor Control Requirements

<R>In addition to meeting the Code Section 7702 guideline premium/cash value 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 represented that they will meet the diversification standards that apply to your policy.

In certain circumstances, you, as owner of a variable life insurance policy, may be considered the owner for federal income tax purposes of the separate account assets used to support your policy. Any income and gains from the separate account assets are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets.

Your ownership rights under your policy are similar to, but different in some ways from those described by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have additional 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. While we believe that the policy does not give you investment control

 

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over the assets of the separate account, 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.</R>

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

<R>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.</R>

Modified Endowment Contracts

<R>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. Since this policy pays its benefit after the death of the second of two insured people, there are special rules for determining if the policy will become a modified endowment contract. A decrease in the death benefit of the policy at any time during the life of the policy may cause the policy to become 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.</R>

If a policy becomes a modified endowment contract, distributions that occur during the policy year will be taxed as distributions from a modified endowment contract. In addition, distributions from a policy within two years before it becomes a modified endowment 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.

Distributions Other than Death Benefits

<R>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.</R>

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. <R>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. The amount of gain in the policy will be equal to the difference between the policy's account value and the investment in the policy.<R>

 

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  1. 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.
  2. <R>A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. This tax penalty generally does not apply to distributions (a) made on or after the date on which the taxpayer attains age 59 ½, (b) which are attributable to the taxpayer's becoming disabled (as defined in the Internal Revenue Code), or (c) which are part of a series of substantially equal periodic payments (not less frequently than annually) made for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her beneficiary. If the taxpayer is other than a natural person (trust, corporation, etc.), the 10% penalty tax will always be imposed. Consult a tax adviser to determine whether or not you may be subject to this penalty tax.</R>

<R>Policies That Are Not Modified Endowment Contracts</R>

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.

<R>Loan amounts from or secured by a policy that is not a modified endowment contract are generally not taxed as distributions. However, the tax consequences of such a loan that is outstanding after policy year 10 are uncertain and a tax advisor should be consulted about such loans. 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.</R>

Investment in the Policy

<R>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, and will be increased by the amount of taxable loan distributions under a modified endowment contracts.</R>

Policy Loans

<R>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.</R>

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.

<R>Accelerated Death Benefit Rider</R>

We believe that payments under the accelerated death benefit rider should be fully excludable from the gross income of the beneficiary if the beneficiary is the insured under the policy. (See Accelerated Death Benefit Rider, page 36, for more information about this rider.) However, you should consult a qualified tax adviser about the consequences of adding this rider to a policy or requesting payment under this rider.</R>

Continuation of Policy Beyond Age 100

The tax consequences of continuing the policy beyond the policy anniversary nearest the younger insured person's 100th birthday are unclear. You should consult a tax adviser if you intend to keep the policy in force beyond the policy anniversary nearest the younger insured person's 100th birthday.

 

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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.

Taxation of Policy Splits

<R>The policy split option permits a policy to be split into two other single life policies upon the occurrence of (i) a divorce of the joint insureds, or (ii) certain changes in federal estate tax law, or (iii) dissolution of business conducted or owned by the joint insureds. Using the policy split option could have adverse tax consequences. Before you exercise the policy split option, it is important that you consult with a tax advisor regarding the possible tax consequences.</R>

Tax-exempt Policy Owners

Special rules may apply to a policy that is owned by a tax-exempt entity. Tax-exempt entities should consult their tax adviser regarding the consequences of purchasing and owning a policy. These consequences could include an effect on the tax-exempt status of the entity and the possibility of the unrelated business income tax.

Possible Tax Law Changes

Although the likelihood of legislative action is uncertain, there is always the possibility that the tax treatment of the policy could be changed by legislation or otherwise. You should consult a tax adviser with respect to legislative developments and their effect on the policy.

Changes to Comply with the Law

So that your policy continues to qualify as life insurance under the Code, we reserve the right to refuse to accept all or part of your premium payments or to change your death benefit. We may refuse to allow you to make partial withdrawals that would cause your policy to fail to qualify as life insurance. We also may make changes to your policy or its riders or 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.

Any increase in your death benefit will cause an increase in your cost of insurance charges.

Other

<R>The policy is not available for sale to and cannot be acquired with funds that are assets of (i) an employee benefit plan as defined in section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"), and that is subject to Title I of ERISA; (ii) a plan described in section 4975(e)(1) of the Internal Revenue Code of 1986 or (iii) an entity whose underlying assets include plan assets by reason of the investment by an employee benefit plan or other plan in such entity within the meaning of 29 C.F.R. Section 2510.3-101 or otherwise.

Policy owners may use our policies in various other arrangements, including:</R>

  • non-qualified deferred compensation or salary continuance plans
  • split dollar insurance plans
  • executive bonus plans
  • retiree medical benefit plans
  • 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.

 

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The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you may have to pay income taxes and possibly penalties later.

The transfer of the policy or designation of a beneficiary may have federal, state and/or local transfer and inheritance tax consequences, including the imposition of gift, estate and generation-skipping transfer taxes. For example the transfer of the policy to, or the designation as a beneficiary of, or the payment of proceeds to a person who is assigned to a generation which is two or more generations below the generation assignment of the policy owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each policy owner or beneficiary will determine the extent, if any, to which federal, state and local transfer and inheritance taxes may be imposed and how ownership or receipt of policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes.

You should consult qualified legal or tax advisers for complete information on federal, state, local and other tax considerations.

 

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ADDITIONAL INFORMATION

<R>Directors and Principal Officers

Name and Address Position with Company Business Experience During Past 5 Years
Wayne R. Huneke* Director and Chief Financial Officer Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, Chief Financial Officer, President, Senior Executive Vice President, Senior Vice President, Vice President, and Treasurer.
P. Randall Lowery* Director Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, Executive Vice President, and General Manager and Chief Actuary.
Thomas J. McInerney** Director Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, President, and Chief Executive Officer.
Robert C. Salipante*** Director and Chief Executive Officer Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, Chairman, Vice Chairman, Chief Executive Officer, Chief Operating Officer, President, and Senior Vice President.
Mark A. Tullis* Director Has held several directorships and various executive officer positions with various affiliated companies within the ING organization since 1999, including positions as Director, President, Treasurer, and General Manager and Chief of Staff. Executive Vice President of Primerica from 1994 to 1999.
Chris D. Schreier* President Has held several directorships and various executive officer positions with various affiliated companies within the ING organization, including positions as Director, President, Vice President, Second Vice President, Treasurer, and Assistant Treasurer.
David S. Pendergrass* Vice President and Treasurer Has held several executive officer positions with various affiliated companies within the ING organization, including positions as Vice President and Treasurer.
David Wheat* Chief Accounting Officer Chief Accounting Officer of various affiliated companies within the ING organization since 2001. Partner of Ernst & Young LLP from 1999 to 2001. Office Managing Partner of Ernst & Young LLP from 1995-1999.
Paula Cludray-Engelke*** Secretary Has held various officer positions with various affiliated companies within the ING organization, including positions as Secretary, Assistant Secretary, Director of Individual Compliance, Director of Contracts Compliance and Special Benefits.

Directors, officers and employees of the Company are covered by a blanket fidelity bond in an amount in excess of $60 million issued by Lloyds of London.

*The address of these Directors and Officers is 5780 Powers Ferry Road, NW, Atlanta, Georgia 30327-4390. These individuals may also be directors and/or officers of other affiliates of the Company.

**The address of this Director is 151 Farmington Avenue, Hartford, Connecticut 06156. This individual may also be a director and/or an officer of other affiliates of the Company.

***The address of this Director and these Officers is 20 Washington Avenue South, Minneapolis, Minnesota 55401. These individuals may also be directors and/or officers of other affiliates of the Company.</R>

 

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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

<R>The legal matters in connection with the policy described in this prospectus and certain matters relating to federal securities laws have been passed on by Counsel of ING Security Life.</R>

Legal Proceedings

<R>We are aware of no material legal proceedings pending which involve the separate account as a party or which would materially affect the separate account. 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. Moreover, plaintiffs oftentimes seek to have cases certified as class actions. 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 materially adverse effect on the company's financial position or interfere with its operations.</R>

ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature.

Experts

<R>The statutory-basis financial statements of Security Life of Denver Insurance Company at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, and the financial statements of the Security Life Separate Account L1 at December 31, 2001, and for each of the three years in the period then ended, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing.

Actuarial matters in this prospectus have been examined by Lawrence D. Taylor, F.S.A., M.A.A.A., who is Senior Vice President, Product Management Group of ING Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC.</R>

Registration Statement

<R>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 1933 Act, 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.</R>

 

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FINANCIAL STATEMENTS

<R>The statutory-basis financial statements of Security Life of Denver Insurance Company ("ING Security Life") at December 31, 2001 and 2000, and for each of the three years in the period ended December 31, 2001, are prepared in conformity with accounting practices prescribed or permitted by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado (Colorado Division of Insurance), which is a comprehensive basis of accounting other than accounting principles generally accepted in the United States, and start on page 67.

The financial statements included for the Security Life Separate Account L1 at December 31, 2001, and for each of the three years in the period then ended, 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 financial statements of ING Security Life, 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 financial statements of ING Security Life 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 ING Security Life 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.

 

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Financial Statements -- Statutory Basis
Security Life of Denver Insurance Company
Years ended December 31, 2001, 2000 and 1999
with Report of Independent Auditors

 

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Security Life of Denver Insurance Company

Financial Statements - Statutory Basis

December 31, 2001, 2000 and 1999

Contents

Report of Independent Auditors     69

Audited Financial Statements - Statutory Basis

Balance Sheets - Statutory Basis     70
Statements of Operations - Statutory Basis     72
Statements of Changes in Capital and Surplus - Statutory Basis     74
Statements of Cash Flows - Statutory Basis     75
Notes to Financial Statements - Statutory Basis     77

 

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Report of Independent Auditors

Board of Directors and Stockholder

Security Life of Denver Insurance Company

We have audited the accompanying statutory basis balance sheets of Security Life of Denver Insurance Company ("the Company" and a wholly owned subsidiary of ING America Insurance Holdings, Inc.) as of December 31, 2001 and 2000, and the related statutory basis statements of operations, changes in capital and surplus, and cash flows for each of the three years in the period ended December 31, 2001. 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.

As described in Note 1 to the financial statements, the Company presents its financial statements in conformity with accounting practices prescribed or permitted by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado (Colorado Division of Insurance), which practices differ from accounting principles generally accepted in the United States. The variances between such practices and accounting principles generally accepted in the United States are described in Note 1. The effects on the financial statements of these variances are not reasonably determinable but are presumed to be material.

In our opinion, because of the effects of the matter described in the preceding paragraph, the financial statements referred to above do not present fairly, in conformity with accounting principles generally accepted in the United States, the financial position of Security Life of Denver Insurance Company at December 31, 2001 and 2000 or the results of its operations or its cash flows for each of the three years in the period ended December 31, 2001.

However, in our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Life of Denver Insurance Company at December 31, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting practices prescribed or permitted by the Colorado Division of Insurance.

As discussed in Note 3 to the financial statements, in 2001 the Company changed various accounting policies to be in accordance with the revised NAIC Accounting Practices and Procedures Manual, as adopted by the Colorado Division of Insurance.

March 29, 2002

 

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Security Life of Denver Insurance Company

Balance Sheets--Statutory Basis

December 31
2001
 2000
(In Thousands)
Admitted assets
Cash and invested assets:
   Bonds $  7,275,493 $4,573,658
   Preferred stocks 18,863 13,524
   Common stocks 38,083 15,483
   Subsidiaries 84,348 85,324
   Mortgage loans 2,208,583 1,672,169
   Real estate, less accumulated depreciation (2001-
   $11,684; 2000-$10,961)		 33,471 34,066
   Policy loans 1,124,108 992,911
   Other invested assets 51,647 42,926
   Cash and short-term investments 387,540
 203,664
Total cash and invested assets 11,222,136 7,633,725
 
 
 
Deferred and uncollected premiums, less loading
(2001-$2,115; 2000-$1,814)		 168,472 135,041
Accrued investment income 137,243 95,887
Reinsurance balances recoverable 38,388 54,559
Data processing equipment, less accumulated
   depreciation (2001-$1,390; 2000-$1,340)		 56 216
Indebtedness from related parties 21,528 69,338
Federal income taxes (including net
   admitted deferred tax asset of $43,768 at
   December 31, 2001)		 79,192 32,108
Separate account assets 903,086 799,966
Other assets 13,751 14,902
 
 
 
 
 
 
 
 
Total admitted assets $12,583,852
 $8,835,742

 

Estate Designer   			70

 

December 31
2001
 2000
(In Thousands,
except share amounts)
Liabilities and capital and surplus
Liabilities:
   Policy and contract liabilities:
      Life and annuity reserves $ 6,393,435 $5,247,418
      Accident and health reserves 23 23
      Guaranteed investment contracts - 1,685,391
      Deposit type contracts 3,790,181 -
      Policyholders' funds 56,820 71,669
      Dividends left on deposit 9,215 8,748
      Dividends payable 4,065 2,755
      Unpaid claims 208,679
 182,051
   Total policy and contract liabilities 10,462,418 7,198,055
 
   Accounts payable and accrued expenses 171,041 126,512
   Reinsurance balances due 15,007 15,520
   Indebtedness to related parties 5,441 8,016
   Contingency reserve 18,758 20,449
   Asset valuation reserve 58,531 52,125
   Borrowed money 129,381 127,993
   Other liabilities 149,661 (4,226)
   Separate account liabilities 903,086
 799,966
Total liabilities 11,913,324 8,344,410
 
Commitments and contingencies
 
Capital and surplus:
   Common stock, $20,000 par value:
      Authorized - 149 shares
      Issued and outstanding - 144 shares 2,880 2,880
   Surplus notes 165,032 184,259
   Paid-in and contributed surplus 572,634 435,562
   Unassigned deficit (70,018)
 (131,369)
Total capital and surplus 670,528
 491,332
Total liabilities and capital and surplus $12,583,852
 $8,835,742

 

Estate Designer   			71

 

See accompanying notes - statutory basis.

Security Life of Denver Insurance Company

Statements of Operations--Statutory Basis

Year ended December 31
2001
 2000
 1999
(In Thousands)
Premiums and other revenues:
   Life, annuity, and accident and health premiums $2,354,418 $2,959,593 $1,459,361
   Policy proceeds and dividends left on deposit 15 388 651
   Net investment income 630,261 474,021 387,685
   Amortization of interest maintenance reserve 193 670 2,358
Commissions, expense allowances and reserve
   adjustments on reinsurance ceded		 1,609 9,832 11,331
Considerations and reserve allowances on modified
   coinsurance
3,809
2,632
3,670
Total premiums and other revenues 2,990,305 3,447,136 1,865,056
 
Benefits paid or provided:
   Death benefits 340,336 316,167 273,368
   Annuity benefits 12,759 11,782 24,573
   Surrender benefits 270,377 258,858 229,434
   Interest on policy or contract funds 150,761 64,719 17,473
   Accident and health benefits - 93 2,235
   Guaranteed investment contract withdrawals - 1,072,574 12,186
   Other benefits 3,010 17,198 13,612
   Life contract withdrawals 1,109,878 - -
Increase in life, annuity, and accident and health
   reserves		 366,334 320,721 491,978
Increase in liability for guaranteed investment
   contracts		 - 721,725 335,507
Net transfers to separate accounts 180,415
 256,538
 78,988
Total benefits paid or provided 2,433,870 3,040,375 1,479,354
 
Insurance expenses:
   Commissions 253,283 242,998 222,005
   General expenses 134,795 130,962 104,808
   Insurance taxes, licenses and fees, excluding
      federal income taxes
18,212
23,103
23,861
Total insurance expenses 406,290
 397,063
 350,674
 
Gain from operations before policyholder
   dividends, federal income taxes and net realized
   capital gains		 150,146 9,698 35,028

 

Estate Designer   			72

 

Security Life of Denver Insurance Company

Statements of Operations--Statutory Basis (continued)

Year ended December 31
2001
 2000
 1999
(In Thousands)
 
Dividends to policyholders 2,951
 2,546
 2,594
 
Gain from operations before federal income taxes
   and net realized capital losses 147,194 7,152 32,434
Federal income taxes 63,729
 (1,339)
 8,613
Gain from operations before net realized capital
   losses		 83,465 8,491 23,821
Net realized capital (losses) gains net of income
   taxes (2001 - $(666); 2000 - $(7,916); 1999 -
   $(15,108) and excluding net transfers to the
   interest maintenance reserve (2001-$4,673; 2000
    - $(18,289); 1999 - $(19,866)
 		 (29,788)
 3,589
 (8,194)
Net income $     53,677
 $     12,080
 $     15,627

See accompanying notes - statutory basis.

 

Estate Designer   			73

 

Security Life of Denver Insurance Company

Statements of Changes in Capital and Surplus--Statutory Basis

Year ended December 31
2001
 2000
 1999
(In Thousands)
Common stock:
   Balance at beginning and end of year $     2,880
 $     2,880
 $     2,880
 
Surplus note:
   Balance at beginning of year $ 184,259 $ 100,000 $ 100,000
   (Decrease) increase in surplus note (19,227)
 84,259
 -
   Balance at end of year $ 165,032
 $ 184,259
 $ 100,000
 
Paid-in and contributed surplus:
   Balance at beginning of year $ 435,562 $ 374,562 $ 344,562
   Capital contributions 137,072
 61,000
 30,000
   Balance at end of year $ 572,634
 $ 435,562
 $ 374,562
 
Unassigned deficit:
   Balance at beginning of year $(131,369) $(119,441) $(134,540)
   Net income 53,677 12,080 15,627
   Change in net unrealized capital gains or losses (5,649) 12,101 (61)
   Increase in nonadmitted assets (19,497) (11,048) (7,336)
   Decrease (increase) in liability for reinsurance
       in unauthorized companies		 1,081 (393) (550)
   (Increase) decrease in asset valuation reserve (6,406) (22,250) 1,726
   Change in net deferred income tax 13,323 - -
   Change in accounting principle, net of tax 41,886 - 5,566
   Transfer of prepaid pension assets (9,010) - -
   Cession of existing risks, net of tax - (2,418) 127
   Prior period adjustments (8,054)
 -
 -
   Balance at end of year $ (70,018)
 $(131,369)
 $(119,441)
 
Total capital and surplus $ 670,528
 $ 491,332
 $ 358,001

See accompanying notes - statutory basis.

 

Estate Designer   			74

 

Security Life of Denver Insurance Company

Statements of Cash Flows--Statutory Basis

Year ended December 31
2001
 2000
 1999
(In Thousands)
Operations
Premiums, policy proceeds, and other
   considerations received, net of reinsurance paid $ 2,325,856 $ 2,910,602 $ 1,453,924
Net investment income received 608,322 470,812 379,574
Commission and expense allowances received on
   reinsurance ceded 1,609 9,831 9,246
Benefits paid (1,851,094) (1,691,985) (558,572)
Net transfers to separate accounts (194,532) (225,694) (101,948)
Insurance expenses paid (391,487) (361,130) (337,254)
Dividends paid to policyholders (1,642) (2,417) (2,562)
Federal income taxes (paid) received (67,046) 11,961 (28,779)
Other (expenses) revenues in excess of other (191,317)
 611,646
 (9,832)
Net cash provided by operations 238,669 1,733,626 803,797
 
Investments
Proceeds from sales, maturities, or repayments
   of investments:
      Bonds 3,820,764 2,254,036 2,051,280
      Preferred stocks 1,489 67 1,900
      Common stocks 27,098 - -
      Mortgage loans 181,131 79,874 45,272
      Other invested assets 12,860 106,724 310,554
      Net gain/loss on cash & short term investment 12 - -
      Miscellaneous proceeds 1,853 11,213 -
      Net tax on capital gains 666
 -
 -
Net proceeds from sales, maturities, or
   repayments of investments 4,045,873 2,451,914 2,409,006
 
Cost of investments acquired:
   Bonds 6,400,143 3,458,376 2,631,687
   Preferred stocks 10,473 11,031 -
   Common stocks 50,940 10,450 10
   Mortgage loans 718,240 769,741 262,886
   Real estate 145 3,653 189
   Other invested assets 23,759 109,244 88,661
   Miscellaneous applications (receipts) -
 23,155
 (18,179)
Total cost of investments acquired 7,203,700 4,385,650 2,965,254
 
Net increase in policy loans 131,198
 49,725
 35,890
Net cash used in investment activities (3,289,025) (1,983,461) (592,138)

 

Estate Designer   			75

 

Security Life of Denver Insurance Company

Statements of Cash Flows--Statutory Basis (continued)

Year ended December 31
2001
 2000
 1999
(In Thousands)
Financing and miscellaneous activities
Cash provided:
   Capital and surplus paid-in 117,844 126,000 20,000
   Borrowed money 1,389 112,792 15,200
   Net deposits on deposit-type contract funds 2,802,972 - -
   Other sources 312,027
 (11,347)
 (50,565)
Net cash provided by (used in) financing and
   miscellaneous activities
 		 3,234,232
 227,445
 (15,365)
 
Net increase (decrease) in cash and
   short-term investments 183,876 (22,390) 196,294
Cash and short-term investments:
   Beginning of year 203,664
 226,054
 29,760
   End of year $    387,540
 $    203,664
 $    226,054

See accompanying notes - statutory basis.

 

Estate Designer   			76

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis

December 31, 2001

1. Nature of Operations and Basis of Financial Reporting

Security Life of Denver Insurance Company (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 U.S. 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 preparation of financial statements of insurance companies requires management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known, which could impact the amounts reported and disclosed herein.

Basis of Presentation

The accompanying financial statements of the Company have been prepared in conformity with accounting practices prescribed or permitted by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado (Colorado Division of Insurance), which practices differ from accounting principles generally accepted in the United States ("GAAP"). The most significant variances from GAAP are as follows:

 

Estate Designer   			77

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Investments

Investments in bonds and mandatorily redeemable preferred stocks are reported at amortized cost or market value based on the National Association of Insurance Commissioners ("NAIC") rating; for GAAP, such fixed maturity investments are designated at purchase as held-to-maturity, trading or available-for-sale. Held-to-maturity investments are reported at amortized cost, and the remaining fixed maturity investments are reported at fair value with unrealized capital gains and losses reported in operations for those designated as trading and as a separate component of other comprehensive income in stockholder's equity for those designated as available-for-sale.

For structured securities, when a negative yield results from a revaluation based on new prepayment assumptions (i.e., undiscounted cash flows are less than current book value), an other than temporary impairment is considered to have occurred and the asset is written down to the value of the undiscounted cash flows. For GAAP, assets are re-evaluated based on the discounted cash flows using a current market rate. Impairments are recognized when there has been an adverse change in cash flows and the fair value is less than book. The asset is then written down to fair value.

Investments in real estate are reported net of related obligations rather than on a gross basis. Real estate owned and occupied by the Company is included in investments rather than reported as an operating asset as under GAAP, and investment income and operating expenses include rent for the Company's occupancy of those properties. Changes between depreciated cost and admitted asset investment amounts are credited or charged directly to unassigned surplus rather than income as would be required under GAAP.

Derivative instruments that meet the criteria of an effective hedge are valued and reported in a manner that is consistent with the hedged asset or liability. Embedded derivatives are not accounted for separately from the host contract. Under GAAP, the effective and ineffective portions of a single hedge are accounted for separately, an embedded derivative within a contract that is not clearly and closely related to the economic characteristics and risk of the host contract is accounted for separately from the host contract and valued and reported at fair value, and the change in fair value for cash flow hedges is credited or charged directly to a separate component of shareholders' equity rather than to income as required for fair value hedges.

 

Estate Designer   			78

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Valuation Allowances

The asset valuation reserve (AVR) is determined by an NAIC-prescribed formula and is reported as a liability rather than as a valuation allowance or an appropriation of surplus. The change in AVR is reported directly to unassigned surplus.

Under a formula prescribed by the NAIC, the Company defers the portion of realized gains and losses on sales of fixed-income investments, principally bonds and mortgage loans, attributable to changes in the general level of interest rates and amortizes those deferrals over the remaining period to maturity based on groupings of individual securities sold in five-year bands. The net deferral is reported as the interest maintenance reserve (IMR) in the accompanying balance sheets.

Realized gains and losses on investments are reported in operations net of federal income tax and transfers to the IMR. Under GAAP, realized capital gains and losses are reported in the statements of operations on a pretax basis in the period that the asset giving rise to the gain or loss is sold and valuation allowances are provided when there has been a decline in value deemed other than temporary, in which case the provision for such declines is charged to income.

Valuation allowances, if necessary, are established for mortgage loans based on the difference between the net value of the collateral, determined as the fair value of the collateral less estimated costs to obtain and sell, and the recorded investment in the mortgage loan. Prior to January 1, 2001, valuation allowances were based on the difference between the unpaid loan balance and the estimated fair value of the underlying real estate. Under GAAP, such allowances are based on the present value of expected future cash flows discounted at the loan's effective interest rate or, if foreclosure is probable, on the estimated fair value of the collateral.

     

The initial valuation allowance and subsequent changes in the allowance for mortgage loans as a result of a temporary impairment are charged or credited directly to unassigned surplus, rather than being included as a component of earnings as would be required under GAAP.

 

Estate Designer   			79

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Policy Acquisition Costs

The costs of acquiring and renewing business are expensed when incurred. Under GAAP, acquisition costs related to traditional life insurance, to the extent recoverable from future policy revenues, are deferred and amortized over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For universal life insurance and investment products, to the extent recoverable from future gross profits, acquisition costs are amortized generally in proportion to the present value of expected gross margins from surrender charges and investment, mortality, and expense margins.

Premiums

Life premiums are recognized as revenue when due. Subsequent to January 1, 2001 premiums for annuity policies with mortality and morbidity risk, except for guaranteed interest and group annuity contracts, are also recognized as revenue when due. Premiums received for annuity policies without mortality or morbidity risk and for guaranteed interest and group annuity contracts are recorded using deposit accounting. Prior to January 1, 2001, life, annuity, accident and health premiums are recognized as revenue when due.

Under GAAP, premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist primarily of whole life insurance policies, are recognized as revenue when due. Group insurance premiums are recognized as premium revenue over the time period to which the premiums relate. Revenues for universal life, annuities and guaranteed interest contracts consist of policy charges for the cost of insurance, policy administration charges, amortization of policy initiation fees and surrender charges assessed during the period.

Benefit and Contract Reserves

Life policy and contract reserves under statutory accounting practices are calculated based upon both the net level premium and Commissioners' Reserve Valuation methods using statutory rates for mortality and interest. GAAP requires that policy reserves for traditional products be based upon the net level premium method utilizing reasonably conservative estimates of mortality, interest, and withdrawals prevailing when the policies were sold. For interest-sensitive products, the GAAP policy reserve is equal to the policy fund balance plus an unearned revenue reserve which reflects the unamortized balance of early year policy loads over renewal year policy loads.

 

Estate Designer   			80

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Reinsurance

For business ceded to unauthorized reinsurers, statutory accounting practices require that reinsurance credits permitted by the treaty be recorded as an offsetting liability and charged against unassigned surplus. Under GAAP, an allowance for amounts deemed uncollectible would be established through a charge to earnings. Statutory income recognized on certain reinsurance treaties representing financing arrangements is not recognized on a GAAP basis.

Policy and contract liabilities ceded to reinsurers have been reported as reductions of the related reserves rather than as assets as required under GAAP.

Commissions allowed by reinsurers on business ceded are reported as income when received rather than being deferred and amortized with deferred policy acquisition costs as required under GAAP.

Subsidiaries

The accounts and operations of the Company's subsidiaries are not consolidated with the accounts and operations of the Company as would be required under GAAP.

Nonadmitted Assets

Certain assets designated as "nonadmitted," principally deferred federal income tax assets, disallowed interest maintenance reserves, non-operating software, past-due agents' balances, furniture and equipment, intangible assets, and other assets not specifically identified as an admitted asset within the Accounting Practices and Procedures Manual are excluded from the accompanying balance sheets and are charged directly to unassigned surplus. Prior to January 1, 2001, nonadmitted assets included certain assets designated as nonadmitted. Under GAAP, such assets are included in the balance sheet.

Employee Benefits

For purposes of calculating the Company's postretirement benefit obligation, only vested participants and current retirees are included in the valuation. Under GAAP, active participants not currently vested are also included.

 

Estate Designer   			81

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Universal Life and Annuity Policies

Revenues for universal life and annuity policies consist of the entire premium received and benefits incurred represent the total of death benefits paid and the change in policy reserves. Under GAAP, premiums received in excess of policy charges would not be recognized as premium revenue and benefits would represent the excess of benefits paid over the policy account value and interest credited to the account values.

Policyholder Dividends

Policyholder dividends are recognized when declared rather than over the term of the related policies.

Deferred Income Taxes

Prior to January 1, 2001, deferred federal income taxes were provided for differences between the financial statement amounts and the tax bases of assets and liabilities in accordance with a specific permitted practice approved by the Colorado Division of Insurance. Any deferred tax assets were treated as non-admitted. Starting in 2001, deferred tax assets are provided for and admitted to an amount determined under a standard formula. This formula considers the amount of differences that will reverse in the subsequent year, taxes paid in prior years that could be recovered through carrybacks, surplus limits and the amount of deferred tax liabilities available for offset. Any deferred tax assets not covered under the formula are non-admitted. Deferred taxes do not include any amounts for state taxes. Under GAAP, a deferred tax asset is recorded for the amount of gross deferred tax assets that are expected to be realized in future years and a valuation allowance is established for the portion that is not realizable.

Surplus Notes

Surplus notes are reported as a component of surplus. Under statutory accounting practices, no interest is recorded on the surplus notes until payment has been approved by the Colorado Division of Insurance. Under GAAP, surplus notes are reported as liabilities and the related interest is reported as a charge to earnings over the term of the note.

 

Estate Designer   			82

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Statements of Cash Flows

Cash and short-term investments in the statements of cash flows represent cash balances and investments with initial maturities of one year or less. Under GAAP, the corresponding caption of cash and cash equivalents include cash balances and investments with initial maturities of three months or less.

Reconciliation to GAAP

The effects of the preceding variances from GAAP on the accompanying statutory basis financial statements have not been determined, but are presumed to be material.

Other significant accounting practices are as follows:

Investments

Bonds, preferred stocks, common stocks, short-term investments and derivative instruments are stated at values prescribed by the NAIC, as follows:

      Bonds not backed by other loans are principally stated at amortized cost using the interest method.
 
Single class and multi-class mortgage-backed/asset-backed securities are valued at amortized cost using the interest method including anticipated prepayments. Prepayment assumptions are obtained from dealer surveys or internal estimates and are based on the current interest rate and economic environment. The retrospective adjustment method is used to value all such securities except for higher-risk asset backed securities, which are valued using the prospective method.
 
Redeemable preferred stocks rated as high quality or better are reported at cost or amortized cost. All other redeemable preferred stocks are reported at the lower of cost, amortized cost, or market value and nonredeemable preferred stocks are reported at market value or the lower of cost or market value as determined by the Securities Valuation Office of the NAIC ("SVO").

 

Estate Designer   			83

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Investments (continued)

      Common stocks are reported at market value as determined by the SVO and the related unrealized capital gains/(losses) are reported in unassigned surplus along with adjustment for federal income taxes. Prior to January 1, 2001, the related net unrealized capital gains (losses) were reported in unassigned surplus without any adjustment for federal income tax.
 
The Company uses interest rate swaps, caps and floors, options and certain other derivatives as part of its overall interest rate risk management strategy for certain life insurance and annuity products. As the Company only uses derivatives for hedging purposes, the Company values all derivative instruments on a consistent basis with the hedged item. Upon termination, gains and losses on those instruments are included in the carrying values of the underlying hedged items and are amortized over the remaining lives of the hedged items as adjustments to investment income or benefits from the hedged items. Any unamortized gains or losses are recognized when the underlying hedged items are sold.
 
Interest rate swap contracts are used to convert the interest rate characteristics (fixed or variable) of certain investments to match those of the related insurance liabilities that the investments are supporting. The net interest effect of such swap transactions is reported as an adjustment of interest income from the hedged items as incurred.
 
Interest rate caps and floors are used to limit the effects of changing interest rates on yields of variable rate or short-term assets or liabilities. The initial cost of any such agreement is amortized to net investment income over the life of the agreement. Periodic payments that are receivable as a result of the agreements are accrued as an adjustment of interest income or benefits from the hedged items.

     

 

Estate Designer   			84

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

     

Investments (continued)

      The Company's insurance subsidiaries are reported at their underlying statutory basis net assets plus the admitted portion of goodwill, and the Company's noninsurance subsidiary is reported at the GAAP-basis of its net assets. The admitted portion of goodwill, which represents the excess of the purchase price over the statutory basis net assets of the subsidiary at acquisition, is amortized on a straight-line basis over ten years. Dividends from subsidiaries are included in net investment income. The remaining net change in the subsidiaries' equity is included in the change in net unrealized capital gains or losses.
 
Mortgage loans are reported at unpaid principal balances, less allowance for impairments.
 
Policy loans are reported at unpaid principal balances.
 
Land is reported at cost. Real estate occupied by the Company is reported at depreciated cost; other real estate is reported at the lower of depreciated cost or fair value. Depreciation is calculated on a straight-line basis over the estimated useful lives of the properties.
 
For reverse repurchase agreements, Company policies require a minimum of 102% of the fair value of securities purchased under reverse repurchase agreements to be maintained as collateral. Cash collateral received is invested in short-term investments and the offsetting collateral liability is included in miscellaneous liabilities.
 
Dollar roll transactions are accounted for as collateral borrowings, where the amount borrowed is equal to the sales price of the underlying securities.
 
The Company engages in securities lending whereby certain domestic bonds from its portfolio are loaned to other institutions for short periods of time. Collateral, primarily cash, which is in excess of the market value of the loaned securities, is deposited by the borrower with a lending agent, and retained and invested by the lending agent to generate additional income for the Company. The Company does not have access to the collateral. The Company's policy requires a minimum of 102% of the fair value of securities loaned to be maintained as collateral. The market value of the loaned securities is monitored on a daily basis with additional collateral obtained or refunded as the market value fluctuates.

 

Estate Designer   			85

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

     

Investments (continued)

      At December 31, 2001 and 2000, the Company had loaned securities (which are reflected as invested assets on the Statutory Statement of Admitted Assets) with a market value of approximately $83,278,000 and $0, respectively.
 
Short-term investments are reported at cost. Short-term investments include investments with maturities of less than one year at the date of acquisition.
 
Other invested assets are reported at amortized cost using the effective interest method. Other invested assets primarily consist of residual collateralized mortgage obligations and partnership interests.
 
Realized capital gains and losses are determined using the specific identification basis.

Aggregate Reserve for Life Policies and Contracts

Life, annuity, and accident and health reserves are developed by actuarial methods and are determined based on published tables using statutorily specified interest rates and valuation methods that will provide, in the aggregate, reserves that are greater than or equal to the minimum or guaranteed policy cash value or the amounts required by law. Interest rates range from 2% to 11.25%.

The Company waives the deduction of deferred fractional premiums upon the death of the insured. It is the Company's practice to return a pro rata portion of any premium paid beyond the policy month of death, although it is not contractually required to do so for certain issues.

The methods used in valuation of substandard policies are as follows:

      1.   For Life, Endowment and Term policies issued substandard, the standard reserve during the premium-paying period is increased by 50% of the gross annual extra premium. Standard reserves are held on Paid-Up Limited Pay contracts.

 

 

Estate Designer   			86

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Aggregate Reserve for Life Policies and Contracts (continued)

      2.   For reinsurance accepted:
      a.   with table rating, the reserve established is a multiple of the standard reserve corresponding to the table rating;
b. with flat extra premiums, the standard reserve is increased by 50% of the flat extra.

The amount of insurance in force for which the gross premiums are less than the net premiums, according to the standard of valuation required by the Colorado Division of Insurance, is $129,435,360,000 at December 31, 2001. The amount of reserves for policies on which gross premiums are less than the net premiums is $593,581,000 at December 31, 2001.

The tabular interest has been determined from the basic data for the calculation of policy reserves for all direct ordinary life insurance and for the portion of group life insurance classified as group Section 79. The method of determination of tabular interest of funds not involving life contingencies is as follows: current year reserves, plus payments, less prior year reserves, less funds added.

Reinsurance

Reinsurance premiums, commissions, expense reimbursements, and reserves 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. Premiums and benefits ceded to other companies have been reported as a reduction of premium revenue and benefits expense. Amounts applicable to reinsurance ceded for reserves and unpaid claim liabilities have been reported as reductions of these items, and expense allowances received in connection with reinsurance ceded have been reflected in operations.

 

Estate Designer   			87

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Real Estate and Electronic Data Processing Equipment

Electronic data processing equipment are carried at cost less accumulated depreciation. Depreciation for major classes of assets is calculated on a straight-line basis over the estimated useful life.

Participating Insurance

Participating business approximates less than 1% of the Company's ordinary life insurance in force and 1.5% of premium income. 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 $0, $2,417,000, and $2,562,000 were paid in 2001, 2000, and 1999, respectively.

Pension Plans

The Company provides noncontributory retirement plans for substantially all employees and certain agents. Pension costs are charged to operations as contributions are made to the plan. The Company also provides a contributory retirement plan for substantially all employees.

 

Estate Designer   			88

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Nonadmitted Assets

Nonadmitted assets are summarized as follows:

December 31, 2001
 January 1, 2001
(In thousands)
 
Deferred federal income taxes $183,860 $163,040
Agents' debit balances 2,541 2,354
Furniture and equipment 2,592 4,308
Bonds in default 286 549
Deferred and uncollected premium 2,795 3,641
Non-operating software asset in progress 10,924 -
Transfer of prepaid pension asset - 9,010
Disallowed Interest Maintenance Reserves 17,055 17,436
Other 4,374
 4,592
Total nonadmitted assets $224,427
 $204,930

Changes in nonadmitted assets are generally reported directly in surplus as an increase or decrease in nonadmitted assets. Certain changes are reported directly in surplus as a change in unrealized capital gains or losses.

Claims and Claims Adjustment Expenses

Claim expenses represent the estimated ultimate net cost of all reported and unreported claims incurred through December 31. The Company does not discount claim and claim adjustment expense reserves. Such estimates are based on actuarial projections applied to historical claim payment data. Such liabilities are considered to be reasonable and adequate to discharge the Company's obligations for claims incurred but unpaid as of December 31.

 

Estate Designer   			89

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

1. Nature of Operations and Basis of Financial Reporting (continued)

Cash Flow Information

Cash and short-term investments include cash on hand, demand deposits and short-term fixed maturity instruments (with a maturity of less than one year at date of acquisition).

The Company borrowed $3,334,260,000 and repaid $3,340,187,000 in 2001, borrowed $1,387,826,000 and repaid $1,382,300,000 during 2000, and borrowed $2,055,061,000 and repaid $2,039,861,000 during 1999. These borrowings were on a short-term basis, at an interest rate that approximated current money market rates and exclude borrowings from dollar roll transactions. Interest paid on borrowed money was $2,079,000, $1,586,000, and $2,180,000 during 2001, 2000 and 1999, respectively.

Separate Accounts

Separate accounts assets and liabilities held by the Company represent funds held for the benefit of the Company's variable life and annuity policy and contract holders who bear all of the investment risk associated with the policies. Such policies are of a non-guaranteed nature. All net investment experience, positive or negative, is attributed to the policy and contract holders' account values. The assets and liabilities of these accounts are carried at fair value.

Reserves related to the Company's mortality risk associated with these policies are included in life and annuity reserves. The operations of the separate accounts are not included in the accompanying statements of operations.

Reclassifications

Certain prior year amounts in the Company's statutory basis financial statements have been reclassified to conform to the 2001 financial statement presentation.

 

Estate Designer   			90

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

2. Permitted Statutory Basis Accounting Practices

The Company prepares statutory basis financial statements in accordance with accounting practices prescribed or permitted by the Colorado Division of Insurance. Prescribed statutory accounting practices include state laws, general administrative rules, as well as a variety of publications of the 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 a state, and may change in the future.

The NAIC has revised the Accounting Practices and Procedures Manual in a process referred to as Codification. The revised manual was effective January 1, 2001. The State of Colorado required that insurance companies domiciled in the State of Colorado prepare their statutory basis financial statements in accordance with the revised manual. This is subject to any deviations prescribed or permitted by the State of Colorado Insurance Commissioner.

3. Accounting Changes and Corrections of Errors

Accounting changes adopted to conform to the provisions of the revised manual are reported as changes in accounting principles. The cumulative effect of changes in accounting principles is reported as an adjustment to unassigned surplus in the period of the change in accounting principle. The cumulative effect is the difference between the amount of capital and surplus at the beginning of the year and the amount of capital and surplus that would have been reported at that date if the new accounting principles had been applied retroactively for all prior periods.

As a result of these changes, the Company reported a change of accounting principle, as an adjustment that increased unassigned funds surplus by $41,886,000 as of January 1, 2001. These changes are primarily attributed to an increase in unassigned surplus of approximately $51,300,000 related to deferred tax assets, $4,100,000 related to prepayment penalties on bonds and mortgage loans released from the IMR liability and $686,000 related to due and deferred premiums. Offsetting this increase is a reduction of approximately $12,900,000 and $1,300,000 related to the Supplemental Employee Retirement Plan and compensated absences liabilities, respectively.

 

Estate Designer   			91

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

3. Accounting Changes and Corrections of Errors (continued)

During 2001 the Company discovered an error in the reporting of surplus note interest expense. The prior year's total assets, surplus and net income were overstated by $5,301,000. An additional error was noted in the prior year's federal income tax recoverable, overstating total assets and surplus by $2,753,000. A prior period adjustment of $8,054,000 was recorded through unassigned deficit in 2001 for these items.

4. Investments

The amortized cost and fair value of bonds and equity securities are as follows:

Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
(In Thousands)
At December 31, 2001:
   U.S. Treasury securities and
      obligations of U.S.
      government corporations and
      agencies		 $   91,177    $   1,043    $   1,120 $     91,100
   States, municipalities, and
      political subdivisions		 512 18 - 530
   Foreign government 423,900 13,552 25,724 411,728
   Public utilities securities 212,987 4,725 5,371 212,341
   Corporate securities 3,568,826 114,495 53,793 3,629,528
   Mortgage-backed securities 2,272,606 53,885 25,431 2,301,060
   Other structured securities 705,771
 22,940
 40,083
 688,628
Total fixed maturities 7,275,779 210,658 151,522 7,334,915
 
   Preferred stocks 22,094 293 3,231 19,156
   Common stocks 37,294
 1,240
 451
 38,083
Total equity securities 59,388
 1,533
 3,682
 57,239
Total $7,335,167
 $212,191
 $155,204
 $7,392,154

 

Estate Designer   			92

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

4. Investments (continued)

Amortized
Cost
 Gross
Unrealized
Gains
 Gross
Unrealized
Losses
 Fair
Value
(In Thousands)
At December 31, 2000:
   U.S. Treasury securities and
      obligations of U.S. government
      corporations and agencies		    $   90,840    $   3,049    $   317 $ 93,572
   States, municipalities, and
      political subdivisions		 125 2 - 127
   Public utilities securities 285,546 3,616 10,684 278,478
   Corporate securities 2,269,006 45,861 67,427 2,247,440
   Mortgage-backed securities 1,166,237 43,237 23,305 1,186,169
   Other structured securities 762,453
 18,052
 18,770
 761,735
Total fixed maturities 4,574,207 113,817 120,503 4,567,521
 
   Preferred stocks 13,524 3 - 13,527
   Common stocks 12,853
 2,630
 -
 15,483
Total equity securities 26,377
 2,633
 -
 29,010
Total $4,600,584
 $116,450
 $120,503
 $4,596,531

The amortized cost and fair value of investments in bonds at December 31, 2001, by contractual maturity, are shown below. Expected maturities may 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
December 31, 2001 (In Thousands)
Maturity:
   Due in 1 year or less    $   119,691 $   121,077
   Due after 1 year through 5 years 1,716,191 1,757,458
   Due after 5 years through 10 years 1,057,476 1,045,759
   Due after 10 years 1,404,044
 1,420,933
  4,297,402 4,345,227
Mortgage-backed securities 2,272,606 2,301,060
Other structured securities 705,771
 688,628
Total $7,275,779
 $7,334,915

 

Estate Designer   			93

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

4. Investments (continued)

At December 31, 2001, investments in certificates of deposit, bonds, and mortgage loans, with an admitted asset value of $21,688,000, were on deposit with state insurance departments to satisfy regulatory requirements.

Reconciliation of bonds from amortized cost to carrying value as of December 31:

2001
 2000
(In Thousands)
 
Amortized cost $7,275,779 $4,574,207
Less nonadmitted bonds 286
 549
Carrying value $7,275,493
 $4,573,658

Proceeds from sales of investments in bonds and other fixed maturity interest securities were $3,820,764,000, $2,254,036,000 and $3,273,528,000 in 2001, 2000 and 1999, respectively. Gross gains of $7,850,000, $31,736,000 and $18,928,000, and gross losses of $33,631,000, $54,352,000 and $55,203,000 during 2001, 2000 and 1999, respectively, were realized on those sales. A portion of the gains realized in 2001, 2000 and 1999 has been deferred to future periods in the interest maintenance reserve.

Net realized (losses) gains, before capital gains tax and interest maintenance reserve transfers and changes in net unrealized (losses) gains, are summarized as follows:

Capital (Losses) Gains
 Net Capital
(Loss) Gain
Bonds
 Stocks
 Other
(In Thousands)
2001:
   Net realized $(31,833)    $   (68)    $   6,120 $(25,781)
   Net unrealized 263
 (4,585)
 (1,327)
 (5,649)
Total $(31,570)
 $(4,653)
    $   4,793
 $(31,430)
 
2000:
   Net realized $(35,399) $ - $12,783 $(22,616)
   Net unrealized 3,754
 8,244
 103
 12,101
Total $(31,645)
 $ 8,244
 $12,886
 $(10,515)
 
1999:
   Net realized $(44,838) $ 124 $1,546 $(43,168)
   Net unrealized (4,303)
 4,078
 174
 (51)
Total $(49,141)
 $4,202
 $1,720
 $(43,219)

 

Estate Designer   			94

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

4. Investments (continued)

Major categories of net investment income are summarized as follows:

Year ended December 31
2001
 2000
 1999
(In Thousands)
Income:
   Bonds $459,233 $316,733 $233,247
   Mortgage loans 142,080 101,617 66,456
   Policy loans 74,322 67,909 59,085
   Company-occupied property 2,416 2,154 2,313
   Other (5,394)
 4,733
 41,800
Total investment income 672,657 493,146 402,901
Investment expenses (42,396)
 (19,125)
 (15,216)
Net investment income $630,261
 $474,021
 $387,685

As part of its overall investment strategy, the Company has entered into agreements to purchase securities as follows:

December 31
2001
 2000
 1999
(In Thousands)
 
     Investment purchase commitments $ 224,197 $ 98,228 $140,600

The Company entered into dollar roll transactions to increase its return on investments and improve liquidity. Dollar rolls involve a sale of securities and an agreement to repurchase substantially the same securities as those sold. The dollar rolls are accounted for as short term collateralized financings and the repurchase obligation is reported in borrowed money. The repurchase obligation totaled $128,715,000 at December 31, 2001. Such borrowings averaged approximately $200,558,000 during the last three months of 2001 and were collateralized by investment securities with fair values approximately equal to the loan value. The securities underlying these agreements are mortgage-backed securities with a book value and fair value of $122,048,000. The securities have a weighted average coupon of 6.8% and have maturities ranging from December 2016 through December 2031. The primary risk associated with short-term collateralized borrowings is that the counterparty will be unable to perform under the terms of the

 

Estate Designer   			95

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

4. Investments (continued)

contract. The Company's exposure is limited to the excess of the net replacement cost of the securities over the value of the short-term investments (such excess was not material at December 31, 2001). The Company believes the counterparties to the dollar roll agreements are financially responsible and that the counterparty risk is minimal.

The Company participates in reverse repurchase transactions. Such transactions include the sale of corporate securities to a major securities dealer and a simultaneous agreement to repurchase the same security in the near term. The proceeds are invested in new securities of intermediate durations. The terms of the reverse repurchase agreement call for payment of interest at a rate of between 1.8% and 2.26%. The agreements mature prior to the end of January 2002. At December 31, 2001, the amount due on these agreements included in borrowed money is $4,700,000. The securities underlying these agreements are mortgage-backed securities with a book value and fair value of $4,700,000. The securities have a weighted average coupon of 6.5% and have a maturity of September 2016.

The maximum and minimum lending rates for long-term mortgage loans during 2001 were 8.18% and 3.64%. Fire insurance is required on all properties covered by mortgage loans and must at least equal the excess of the loan over the maximum loan which would be permitted by law on the land without the buildings.

The maximum percentage of any loan to the value of collateral at the time of the loan, exclusive of insured or guaranteed or purchase money mortgages, was 76.9% on commercial properties. As of December 31, 2001, the Company held no mortgages with interest more than 180 days overdue. Total interest due equals $5,000.

5. 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.

 

Estate Designer   			96

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

5. Derivative Financial Instruments Held for Purposes Other than Trading (continued)

The Company uses interest rate swaps to reduce market risks from changes in interest rates and to alter interest rate exposure arising from mismatches between assets and liabilities. 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 invested 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 other invested assets.

Gains or losses realized 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. Changes in the fair value of the derivative are recorded as investment income. 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.

 

Estate Designer   			97

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

5. Derivative Financial Instruments Held for Purposes Other than Trading (continued)

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 contracts.

The table below summarizes the Company's interest rate contracts included in other invested assets at December 31, 2001 and 2000 (in thousands):

December 31, 2001
Notional
Amount
 Carrying
Value
 Fair
Value
 
Interest rate contracts:
   Swaps $4,107,585    $   (64) $ 24,248
   Swaps--affiliates 1,875,440
 64
 (28,023)
Total swaps 5,983,025 - (3,775)
 
   Caps owned 43,694
 935
 298
Total caps owned 43,694 935 298
 
   Floors owned 189,077
 327
 2,661
Total floors owned 189,077 327 2,661
 
   Options owned 25,000
 450
 664
Total options owned 25,000 450 664
 
Total derivatives $6,240,796
 $1,712
    $   (152)

 

Estate Designer   			98

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

5. Derivative Financial Instruments Held for Purposes Other than Trading (continued)

December 31, 2000
Notional
Amount
 Carrying
Value
 Fair
Value
 
Interest rate contracts:
   Swaps $2,478,442    $   95 $(49,375)
   Swaps--affiliates 1,645,143
 (95)
 60,703
Total swaps 4,123,585 - 11,328
 
   Caps owned 53,543 1,224 492
   Caps owned--affiliates 20,525
 26
 -
Total caps owned 74,068 1,250 492
 
   Floors owned 259,637
 905
 1,975
Total floors owned 259,637 905 1,975
 
   Options owned 97,000
 627
 342
Total options owned 97,000 627 342
 
Total derivatives $4,554,290
 $2,782
 $ 14,137

 

Estate Designer   			99

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

6. Concentrations of Credit Risk

The Company held less-than-investment-grade corporate bonds with an aggregate book value of $1,000,783,000 and $419,904,000 and with an aggregate market value of $947,668,000 and $395,837,000 at December 31, 2001 and 2000, respectively. Those holdings amounted to 13.8% of the Company's investments in bonds and 8% of total admitted assets at December 31, 2001. 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.

The Company held unrated bonds of $436,144,000 and $723,168,000 with an aggregate NAIC market value of $433,114,000 and $724,545,000 at December 31, 2001 and 2000, respectively. The carrying value of these holdings amounted to 6% of the Company's investment in bonds and 3.5% of the Company's total admitted assets at December 31, 2001.

At December 31, 2001, the Company's commercial mortgages involved a concentration of properties located in Calfornia (16%) and Florida (9.8%). The remaining commercial mortgages relate to properties located in 37 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 $59,027,000.

 

Estate Designer   			100

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

7. Annuity Reserves

At December 31, 2001 and 2000, the Company's annuity reserves, including those held in separate accounts and deposit fund liabilities that are subject to discretionary withdrawal (with adjustment), subject to discretionary withdrawal (without adjustment), and not subject to discretionary withdrawal provisions are summarized as follows:

December 31, 2001
Amount
 Percent
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
   With market value adjustment $4,336,801 57%
   At book value less surrender charge 63,141
 1%
Subtotal 4,399,942 58%
Subject to discretionary withdrawal
   (without adjustment) at book value with
   minimal or no charge or adjustment 139,095 2%
Not subject to discretionary withdrawal 3,086,345
 40%
Total annuity reserves and deposit fund liabilities--
   before reinsurance 7,625,382 100%
Less reinsurance ceded 2,622,390
Net annuity reserves and deposit fund liabilities $5,002,992

 

December 31, 2000
Amount
 Percent
(In Thousands)
Subject to discretionary withdrawal (with adjustment):
   With market value adjustment $2,619,437 60.8%
   At book value less surrender charge 134,697
 3.1
Subtotal 2,754,134 63.9
Subject to discretionary withdrawal
   (without adjustment) at book value with
   minimal or no charge or adjustment 248,208 5.8
Not subject to discretionary withdrawal 1,305,567
 30.3
Total annuity reserves and deposit fund liabilities--
   before reinsurance 4,307,909 100.0%
Less reinsurance ceded 2,269,160
Net annuity reserves and deposit fund liabilities $2,038,749

 

Estate Designer   			101

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans

Pension Plan and Postretirement Benefits

Prior to December 31, 2001, the Company maintained a qualified noncontributory defined benefit retirement plan covering substantially all employees. Effective December 31, 2001 the qualified plan of the Company, along with certain other US subsidiaries of ING America, were merged into one plan which will be recognized in ING America's financial statements. As a result of this plan merger, the Company transferred its qualified pension asset to ING North America Insurance Corporation, an affiliate. In addition, the Company maintains a nonqualified unfunded Supplemental Employees Retirement Plan (SERP) and also provides certain health care and life insurance benefits for retired employees.

A summary of assets, obligations and assumptions of the Pension and Other Postretirement Benefits Plans are as follows:

Pension Benefits Other Benefits
2001
 2000
 2001
 2000
Change in benefit obligation
Benefit obligation at beginning of
   year		 $ 50,981 $48,155 $ 6,370 $5,012
Service cost 3,253 3,041 261 312
Interest cost 4,135 4,118 497 414
Contribution by plan participants - - 109 120
Actuarial gain (loss) 5,024 (53) (1,267) 952
Benefits paid (2,552) (2,291) (475) (440)
Plan amendments (639) 97 - -
Business combinations,
   divestitures, curtailments,
   settlements and special
   termination benefits
 		 (45,322)
 (2,086)
 247
 -
Benefit obligation at end of year $ 14,880
 $50,981
 $ 5,742
 $6,370

 

Estate Designer   			102

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans (continued)

Pension Plan and Postretirement Benefits (continued)

Pension Benefits Other Benefits
2001
 2000
 2001
 2000
Change in plan assets
Fair value of plan assets at
   beginning of year		 $ 47,098 $50,495 $        - $        -
Actual return on plan assets (2,656) (1,481) - -
Employer contribution 513 375 366 320
Plan participants' contributions 109 120
Benefits paid (2,552) (2,291)
Business combinations,
   divestitures and settlements
 		 (42,403)
 -
 (475)
 (440)
Fair value of plan assets at end of
   year
 
 		 $        -
 $47,098
 $        -
 $        -
 
Funded status
Unamortized prior service credit $    474 $    45 $   118 $   114
Unrecognized (net gain) or loss (1,007) 824 1,957 742
Remaining net obligation or net
   asset at initial date of application		 (12,248) 178 (490) (981)
Accrued liabilities (2,099)
 (7,015)
 (7,327)
 (6,245)
Total funded status $ (14,880)
 $  (5,968)
 $ (5,742)
 $ (6,370)

 

Estate Designer   			103

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans (continued)

Pension Plan and Postretirement Benefits (continued)

Pension Benefits Other Benefits
2001
 2000
 2001
 2000
 
Components of net periodic
   benefit cost
Service cost $ 3,253 $ 3,041 $ 261 $ 312
Interest cost 4,135 4,118 497 414
Expected return on plan assets (4,299) (4,624) - -
Amortization of recognized
   transition obligation or transition
   asset		 (477) (285) 491 491
Amount of recognized gains and
   losses		 - (154) (52) (204)
Amount of prior service cost
   recognized		 - (7) 5 5
Amount of gain or loss recognized
   due to a settlement or
   curtailment
 		 -
 -
 246
 -
Total net periodic benefit cost $ 2,612
 $ 2,089
 $1,448
 $1,018

 

 

1 Percentage Point
Increase
 1 Percentage Point
Decrease
Effect on total of service and
   interest cost components		 $ 83 $ (72)
Effect on postretirement benefit
   obligation		 $446 $(387)

 

Estate Designer   			104

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans (continued)

Pension Plan and Postretirement Benefits (continued)

The funded status for the pension plans and other postretirement benefit plan is as follows:

Pension
Benefits
 Other
Benefits
 
December 31, 2001
Projected benefit obligation $(14,880) $(5,742)
Less plan assets at fair value -
 -
Plan assets less than projected benefit obligation $(14,880)
 $(5,742)
Pension
Benefits
 Other
Benefits
 
December 31, 2000
Projected benefit obligation $(53,066) $(6,370)
Less plan assets at fair value 47,098
 -
Plan assets less than projected benefit obligation $ (5,968)
 $(6,370)

In addition, the Company has pension benefit obligations and other benefit obligations for non-vested employees as of December 31, 2001 and 2000 in the amount of $260,000 and $1,918,000, and $2,086,000 and $1,906,000, respectively.

The net periodic pension cost, employer contribution, plan participant contributions, and benefits paid for the defined benefit plans for 1999 are as follows (in thousands):

December 31, 1999 Pension
Benefits
 Other
Benefits
Net periodic pension expense $ 2,011 $1,236
Employer contributions 387 467
Plan participants' contributions - 94
Benefits paid 1,625 561

 

Estate Designer   			105

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans (continued)

Pension Plan and Postretirement Benefits (continued)

Assumptions used in determining the accounting for the defined benefit plans as of December 31, 2001 and 2000 were as follows:

2001
 2000
 
      Weighted-average discount rate 7.50% 7.75%
      Rate of increase in compensation level 4.50% 5.00%
      Expected long-term rate of return on assets 9.25% 9.25%

Plan assets of the defined benefit plans at December 31, 2001 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 8.5% graded to 5.5% over 6 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, 2001 by $446,429. Decreasing the assumed health care cost trend rates by one percentage point in each year would decrease the accumulated postretirement benefit obligation for the medical plan as of December 31, 2001 by $(387,237).

The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.50% at December 31, 2001 and 7.75% at December 31, 2000.

 

Estate Designer   			106

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

8. Employee Benefit Plans (continued)

401(k) Plan

Effective January 1, 2000, the Security Life of Denver Insurance Company Savings Incentive Plan was merged into the ING Savings Plan (Savings Plan), a defined contribution plan sponsored by ING America. 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 $10,500 for 2001, 2000, and 1999. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participant 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 $1,362,000, $1,552,000 and $1,423,000 for 2001, 2000 and 1999, respectively.

Plan assets of the Savings Plan at December 31, 2001 are invested in a group deposit administration contract (the Contract) with the Company, various mutual funds maintained by the Riggs Bank, and loans to participants. The Contract is an employee benefit liability of the Company and had a balance of $28,500,000 and $28,000,000 at December 31, 2001 and 2000, respectively.

9. 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.

Premiums, deposits, and other considerations received for the years ended December 31, 2001, 2000 and 1999 were $239,490,000, $256,712,000 and $153,671,000, respectively.

 

Estate Designer   			107

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

9. Separate Accounts (continued)

A reconciliation of the amounts transferred to and from the separate accounts is presented below:

2001
 2000
 1999
(In Thousands)
Transfers as reported in the summary of operations
   of the Separate Accounts Statement:
      Transfers to separate accounts $299,309 $317,529 $161,205
      Transfers from separate accounts 118,766
 61,187
 82,218
Net transfers to separate accounts 180,543 256,342 78,987
 
Reconciling adjustments:
   Miscellaneous transfers (639)
 196
 1
Transfers as reported in the Statement of Operations $180,415
 $256,538
 $ 78,988

 

Estate Designer   			108

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

9. Separate Accounts (continued)

December 31
2001
 2000
 
Reserves for separate accounts by withdrawal
   characteristics:
      Subject to discretionary withdrawal:
         With market value adjustment $                  - $                  -
         At book value without market value
            adjustment less current surrender charge
            of 5% or more		 373,943,697 292,133,836
         At market value - -
         At book value without market value
            adjustment less current surrender charge
            of less than 5%
 		 469,222,786
 461,679,367
Subtotal 843,166,483 753,813,203
Not subject to discretionary withdrawal 29,517
 38,923
Total aggregate reserves for separate accounts $843,196,000
 $753,852,126

10. 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, 2001, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $5,000,000.

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 reinsured. 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.

Assumed premiums amounted to $713,221,000, $612,585,000 and $520,490,000 for the years ended December 31, 2001, 2000 and 1999, respectively.

 

Estate Designer   			109

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

10. Reinsurance (continued)

The Company's ceded reinsurance arrangements reduced certain items in the accompanying financial statements by the following amounts:

2001
 2000
 1999
(In Thousands)
 
Premiums $1,839,618    $   859,405 $1,701,959
Benefits paid or provided 240,909 247,622 216,778
Policy and contract liabilities at year end 3,179,438 2,647,258 3,890,702

During 2001, 2000 and 1999, the Company had ceded blocks of insurance under reinsurance treaties to provide funds for financing and other purposes. These reinsurance transactions, generally known as "financial reinsurance," represent financing arrangements. Financial reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as the reinsurers recapture amounts.

11. Federal Income Taxes

The Company and its subsidiaries file a consolidated federal income tax return with its parent, ING America Insurance Holdings, Inc., a Delaware Corporation, and other US affiliates and subsidiaries. The method of tax allocation is governed by a written tax sharing agreement. The tax sharing agreement provides that each member of the consolidated return shall reimburse ING America Insurance Holdings, Inc. for its respective share of the consolidated federal income tax liability and shall receive a benefit for its losses at the statutory rate.

 

Estate Designer   			110

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

11. Federal Income Taxes (continued)

The components of the net admitted deferred tax asset are as follows:

December 31, 2001
 January 1, 2001
 Change
(In Thousands)
 
Gross deferred tax asset $ 253,283 $ 229,891 $ 23,392
Gross deferred tax liabilities 25,655
 15,586
 10,069
Net deferred taxes and change for year 227,628 214,305 13,323
Nonadmitted deferred tax assets and change
   for the year
 		 (183,860)
 (163,040)
 (20,820)
Net admitted deferred tax asset and change
   for the year
 
 		 $   43,768
 $   51,265
    $   (7,497)

 

Estate Designer   			111

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

11. Federal Income Taxes (continued)

For 2001, the Company's federal income tax expense and change in deferred taxes differs from the amount obtained by applying the federal statutory rate of 35% to income (including capital losses) before taxes for the following reasons:

Year ended
December 31,
2001
(In Thousands)
 
Expected federal income tax expense at statutory rate of 35% $42,494
Deferred acquisition costs 15,948
Insurance reserves (10,323)
Due and deferred premiums (12,573)
Investments 8,404
Compensation 3,920
Other 3,608
Prior year true-up to return 11,585
Federal income taxes expense 63,063
 
Change in deferred taxes (13,323)
Total statutory federal income taxes $49,740

For 2000 and 1999, income before federal income taxes differs from taxable income principally due to dividends-received tax deductions, and differences in reserves for policy and contract liabilities for tax and statutory basis financial reporting purposes.

The amount of federal income taxes incurred that will be available for recoupment in the event of future net losses is $47,182,110, $11,323,001 and $14,442,300 from 2001, 2000 and 1999, respectively.

Prior to 1984, the Company was allowed certain special deductions for federal income tax reporting purposes that were required to be accumulated in a "policyholders' surplus account" (PSA). In the event those amounts are distributed to shareholders, or the balance of the account exceeds certain limitations prescribed by the Internal Revenue Code, the excess amounts would be subject to income tax at current rates. Income taxes also would be payable at current rates if the Company ceases to qualify as a life insurance company

 

Estate Designer   			112

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

11. Federal Income Taxes (continued)

for tax reporting purposes, or if the income tax deferral status of the PSA is modified by future tax legislation. Management does not intend to take any actions nor does management expect any events to occur that would cause income taxes to become payable on the PSA balance. Accordingly, the Company has not accrued income taxes on the PSA balance of $60,490,000 at December 31, 2001. However, if such taxes were assessed, the amount of the taxes payable would be $21,172,000. No deferred tax liabilities are recognized related to the PSA.

12. Investment in and Advances to Subsidiaries

The Company has two wholly owned insurance subsidiaries, Midwestern United Life Insurance Company (Midwestern United) and First ING Life Insurance Company of New York (First ING). The Company also has three wholly owned noninsurance subsidiaries, First Secured Mortgage Deposit Corporation, Tailored Investments Notes Trust, and ING America Equities, Inc.

ING America Equities, Inc. is a wholesale broker/dealer whose business activities consist only of the distribution of variable life and annuity contracts. ING America Equities, Inc. does not hold customer funds or securities.

Amounts invested in and advanced to the Company's subsidiaries are summarized as follows:

December 31
2001
 2000
(In Thousands)
 
Common stock (cost-$61,318 in 2001 and 2000) $84,348 $85,324
(Payable) receivable from subsidiaries - (2,476)

 

Estate Designer   			113

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

12. Investment in and Advances to Subsidiaries (continued)

Summarized financial information for these subsidiaries is as follows:

2001
 2000
 1999
(In Thousands)
 
Revenues $ 96,208    $   97,086 $ 89,507
Income before net realized gains on investments 6,833 9,783 7,884
Net (loss) income (2,031) 9,571 6,301
Admitted assets 293,080 298,260 296,265
Liabilities 208,732 212,936 219,139

Midwestern United paid a common stock dividend to the Company of $1,210,000 in 2001. No such dividends were paid in 2000.

On May 3, 2001, the Company entered into a stock purchase agreement with Security Mutual Life Insurance Company of New York, Ohio National Financial Services, Inc., and SMON Holdings, Inc. to sell First ING Life Insurance Company of New York to SMON Holdings, Inc. After having received regulatory approval for the sale on January 3, 2002, the transaction was closed on January 4, 2002. As a result of the sale, First ING Life Insurance Company of New York changed its name to National Security Life and Annuity Company effective January 4, 2002.

13. Capital and Surplus

Under Colorado insurance regulations, the Company is required to maintain a minimum total capital and surplus of $1,500,000. Additionally, the amount of dividends which can be paid by the Company to its stockholder without prior approval of the Colorado Division of Insurance is limited to the greater of 10% of statutory surplus or the statutory net gain from operations.

The Company has two surplus notes to a related party for $65,032,000 and $100,000,000 which represent the cumulative cash draws on two $100,000,000 commitments issued by ING America through December 31, 2001, less principal payments. In 2001, the surplus notes were assigned by the issuer to an affiliated holding Company, Lion Connecticut Holdings, Inc., and were amended and restated. The amended and restated surplus notes have the following repayment conditions.

 

Estate Designer   			114

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

13. Capital and Surplus (continued)

These subordinated notes bear interest at a variable rate equal to the prevailing rate for 10-year U.S. Treasury bonds plus 1/4% adjusted annually. The principal sum plus accrued interest shall be repaid in five annual installments beginning April 15, 2017 and continuing through April 15, 2021 (Repayment Period). The repayment amount shall be determined and adjusted annually on the last day of December, commencing December 31, 2016, and shall be an amount calculated to amortize any unpaid principal plus accrued interest over the years remaining in the Repayment Period. In the event that the Commissioner of Insurance of the State of Colorado does not grant approval for repayment, then any unpaid annual installment shall be considered unpaid principal plus accrued interest for purposes of calculating subsequent annual installments. Repayment of principal and payment of interest shall be subordinated to the prior payment of, or provision for, all liabilities of the Company, but shall rank superior to the claim, interest and equity of the shares of shareholders of the Company. Such subordination shall be equally applicable in the case of any merger, consolidations, liquidation, rehabilitations, reorganization, dissolution, sale or other disposal of all, or substantially all, of the Company's assets, including the assumption, whether by reinsurance or otherwise, of the major portion of the Company's in force business pursuant to the reinsurance agreement or agreements approved by the Commissioner of Insurance of the State of Colorado.

The repayment of these notes are 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. In July 2001, the Company made payments of $19,227,000 and $6,614,000 for principal and interest, respectively, after receiving approval from the Commissioner of Insurance of the State of Colorado.

14. 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 financial instrument. Accordingly, the aggregate fair value amounts presented herein do not represent the underlying value of the Company.

 

Estate Designer   			115

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

14. Fair Values of Financial Instruments (continued)

Life insurance liabilities that contain mortality risk and all nonfinancial instruments have been excluded from the 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.

The carrying amounts and fair values of the Company's financial instruments are summarized as follows:

December 31
2001 2000
Carrying
Amount
 Fair
Value
 Carrying
Amount
 Fair
Value
(In Thousands)
Assets:
   Bonds $7,275,493 $7,334,915 $4,573,658 $4,567,521
   Preferred stocks 18,863 19,156 13,524 13,527
   Unaffiliated common stocks 38,083 38,083 15,483 15,483
   Mortgage loans 2,208,583 2,284,192 1,672,169 1,705,801
   Policy loans 1,124,108 1,124,108 992,911 992,911
   Residual collateralized
      mortgage obligations - - 30,846 13,141
   Derivative securities 1,712 152 2,782 14,137
   Short-term investments 321,381 321,381 114,848 114,848
   Cash 66,159 66,159 88,816 88,816
   Indebtedness from related parties 21,528 21,528 69,338 69,338
   Separate account assets 903,086 903,086 799,966 799,966
   Receivable for securities 4,301 4,301 5,084 5,084
 
Liabilities:
   Individual and group annuities 133,039 139,890 203,489 142,743
   Guaranteed investment contracts - - 1,578,057 1,575,822
   Deposit type contract 3,790,181 3,714,330 - -
   Policyholder funds 56,820 56,820 71,669 71,669
   Policyholder dividends 10,033 10,033 11,503 11,503
   Indebtedness to related parties 5,441 5,441 8,016 8,016
   Separate account liabilities 903,086 903,086 799,966 799,966
   Payable for securities 175,048 175,048 3,162 3,162

 

Estate Designer   			116

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

14. Fair Values of Financial Instruments (continued)

The following methods and assumptions were used by the Company in estimating the fair value disclosures for financial instruments in the accompanying financial statements and notes thereto:

      Fixed maturities and equity securities: The fair values for bonds, preferred stocks and common stocks, reported herein, are based on quoted market prices, where available. For securities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements, collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting the 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 5% and 21% over the total portfolio. Fair values determined on this basis can differ from values published by the NAIC Securities Valuation Office. Market value as determined by the NAIC as of December 31, 2001 and 2000 is $7,457,970,000 and $4,675,995,000, respectively.
 
    Mortgage loans: Estimated market values for commercial real estate loans were 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 loans were discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values.
 
Residual collateralized mortgage obligations: Residual collateralized mortgage obligations are included in the other invested assets balance. Fair values are calculated using discounted 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 5% and 25% over the total portfolio.

 

Estate Designer   			117

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

14. Fair Values of Financial Instruments (continued)

      Derivative financial instruments: Fair values for on-balance-sheet derivative financial instruments (caps, options 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.
 
Guaranteed investment contracts: The fair values of the Company's guaranteed investment contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued.
 
Off-balance-sheet instruments: The Company accepted additional deposits on existing synthetic guaranteed investment contracts in the amounts of $709,000,000, $0, and $70,000,000 in 2001, 2000 and 1999, respectively, from trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such assets had a value of $1,077,456,000 and $406,896,000 at December 31, 2001 and 2000, 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 100% 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.
 
Other investment-type insurance contracts: The fair values of the Company's deferred annuity contracts are estimated based on the cash surrender values. The carrying values of other policyholder liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies, and premium deposits, approximate their fair values.
 
The carrying value of all other financial instruments approximates their fair value.

 

Estate Designer   			118

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

15. 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 materially adverse effect on the Company's financial position or interfere with its operations.

The Company guarantees the obligations incurred by its wholly owned subsidiary, Midwestern United, with respect to all life insurance policies in force in 2001, 2000 and 1999. In the event Midwestern United is unable to fulfill its obligations under these policies, the Company would be required to assume the policy obligations. The statutory reserve liabilities for the guaranteed policies totaled $194,071,000 and $201,306,000 as of December 31, 2001 and 2000, respectively.

The Company has agreed to guarantee a revolving line of credit issued to Pen-Cal Administrators, Inc., a California producer group, and represented by the credit agreement dated January 1, 2000 between Bank One and Pen-Cal Administrators, Inc., in the principal amount of $2,500,000.

The Company is a member of the Federal Home Loan Bank of Topeka (FHLB). As a member of FHLB, the Company has issued non-putable funding agreements to FHLB. Assets with a book value of $808,634,000 at December 31, 2001 collateralize these agreements. The reserves on these agreements were $710,191,000 at December 31, 2001. The difference of $98,442,000 was secured by a letter of credit. The letter of credit is for the benefit of the Company in the amount of $100,000,000.

16. Financing Agreements

The Company has a line of credit of $100,000,000 to provide short-term liquidity which expires July 31, 2002. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. Interest on all loans is based on the cost of funds by the lender plus .23%. The Company has no outstanding borrowings under this agreement at December 31, 2001.

 

Estate Designer   			119

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

16. Financing Agreements (continued)

The Company is the beneficiary of letters of credit totaling $363,334,000 that were established in accordance with the terms of reinsurance agreements. The terms of the letters of credit provide for automatic renewal for the following year at December 31, unless otherwise canceled or terminated by either party to the financing. The letters were unused during both 2001 and 2000. The Company is also the beneficiary of a letter of credit issued by its parent ING America Insurance Holding, Inc., totaling $100,000,000.

17. Related Party Transactions

Affiliates

The Company has a $241,000,000 line of credit issued by the Company's parent to provide short-term liquidity. Interest on the loans are indexed to the A1+/P1 commercial paper rates. The average borrowing by the Company in 2001 and 2000 was $29,363,000 and $17,453,000, respectively, with an average borrowing rate of 4.25% and 6.29%, respectively.

The Company provides administrative, investment and other operating services to affiliates. Amounts received for these services were $15,798,000, $13,053,000 and $2,606,000 for 2001, 2000 and 1999, respectively.

The Company also has an Investment Advisory Agreement with an affiliate whereby it receives investment and portfolio management services for a fee. Total fees under the agreement were approximately $20,992,000, $9,885,000 and $11,373,000 for 2001, 2000 and 1999, respectively.

Subsidiaries

The Company provides administrative, investment and other operating services to certain of its subsidiaries pursuant to contractual arrangements. Amounts received for these services were $3,506,000, $3,561,000 and $4,057,000 for 2001, 2000 and 1999, respectively.

 

Estate Designer   			120

 

Security Life of Denver Insurance Company

Notes to Financial Statements - Statutory Basis (continued)

 

18. Guaranty Fund Assessments

Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state.

The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. The Company has estimated this liability to be $2,305,000 as of December 31, 2001 and 2000 and has recorded a reserve. The Company has also recorded an asset of $3,805,000 and $5,045,000 as of December 31, 2001 and 2000, respectively, for future credits to premium taxes for assessments already paid. Payments received for guaranty fund assessments in 2001 and 2000 were $415,000 and $267,000, respectively.

19. Regulatory Risk-Based Capital

The NAIC prescribes risk-based capital (RBC) requirements for life/health insurance companies. RBC is a series of dynamic surplus-related formulas for monitoring solvency. At December 31, 2001, the Company exceeded all minimum RBC requirements.

 

Estate Designer   			121

 

Security Life Separate Account L1 of
Security Life of Denver Insurance Company
Financial Statements
Years ended December 31, 2001, 2000 and 1999

 

Estate Designer   			122

 

Security Life Separate Account L1

Financial Statements

Years ended December 31, 2001, 2000 and 1999

Contents

Report of Independent Auditors     124

Audited Financial Statements

Statement of Assets and Liabilities     125
Statement of Operations     136
Statement of Changes in Net Assets     161
Notes to Financial Statements     186

 

Estate Designer   			123

 

Report of Independent Auditors

Policyholders
Security Life Separate Account L1 of
      Security Life of Denver Insurance Company

We have audited the accompanying statements of assets and liabilities 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, Asset Manager SC, Growth, Growth SC, Overseas, Overseas SC, 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"), AIM Advisors, Inc. (comprising the Capital Appreciation and Government Securities Divisions) ("AIM"), Directed Services, Inc. (comprising the Equity Income, Growth, Hard Asset, Limited Maturity Bond, Liquid Asset, MidCap Growth, Research, Total Return and Fully Managed Divisions) ("GCG"), the Janus Aspen Series Funds (comprising the Growth, Aggressive Growth, Worldwide Growth and International Growth Divisions) ("Janus"), the M Funds (comprising the Brandes, Clifton, Frontier and Turner Divisions) ("M Funds"), the ING Pilgrim Funds (comprising the Growth Opportunities, MagnaCap, Mid-Cap Opportunities and Small Cap Opportunities Divisions) ("Pilgrim"), and Putnam Investment Management (comprising the New Opportunities, Voyager, Growth and Income and Small Cap Value Divisions) ("Putnam"), as of December 31, 2001, 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, 2001, 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 each of the divisions constituting the Security Life Separate Account L1 as of December 31, 2001, and the results of their operations and changes in their net assets for each of the three years in the period then ended, in conformity with accounting principles generally accepted in the United States.

 

March 29, 2002

 

Estate Designer   			124

 

Security Life Separate Account L1

Statement of Assets and Liabilities

December 31, 2001

NB
Limited
Maturity Bond
 Growth
 Partners
Assets
Investments in mutual funds at
     fair value (Note 4) $22,952,076
 $12,972,374
 $32,085,039
Total assets 22,952,076
 12,972,374
 32,085,039
 
Liabilities
Due to (from) Security Life of
     Denver (23,293)
 (47,885)
 (105,864)
Total liabilities (23,293)
 (47,885)
 (105,864)
 
Net assets $22,975,369
 $13,020,259
 $32,190,903
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $22,975,369
 $13,020,259
 $32,190,903
 
Total policyholder reserves $22,975,369
 $13,020,259
 $32,190,903
 
Number of divisional units
     outstanding (Note 8):
           Class A 1,563,241.423
 705,598.464
 1,363,030.770
           Class B 39,537.080
 10,739.687
 20,100.728
 
Value per divisional unit:
           Class A $14.43
 $18.32
 $23.47
           Class B $10.58
 $  8.50
 $  9.69
 
Number of shares owned 1,703,940.308
 1,126,074.174
 2,124,836.998

See accompanying notes.

 

Estate Designer   			125

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Assets
Investments in mutual funds at
     fair value (Note 4) $19,989,267
 $42,463,219
 $48,841,037
 $23,192,966
Total assets 19,989,267
 42,463,219
 48,841,037
 23,192,966
 
Liabilities
Due to (from) Security Life of Denver 61,122
 (99,578)
 88,747
 (82,539)
Total liabilities 61,122
 (99,578)
 88,747
 (82,539)
 
Net assets $19,928,145
 $42,562,797
 $48,752,290
 $23,275,505
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $19,928,145
 $42,562,797
 $48,752,290
 $23,275,505
 
Total policyholder reserves $19,928,145
 $42,562,797
 $48,752,290
 $23,275,505
 
Number of divisional units outstanding
     (Note 8):
          Class A 1,466,793.746
 1,383,374.977
 1,975,719.831
 683,287.979
          Class B 69,967.617
 61,462.688
 77,595.637
 13,007.449
 
Value per divisional unit:
          Class A $13.26
 $30.21
 $24.32
 $33.88
          Class B $  6.80
 $12.57
 $  8.98
 $  9.45
 
Number of shares owned 1,207,810.671
 2,403,125.005
 1,328,284.934
 735,117.770

See accompanying notes.

 

Estate Designer   			126

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Fidelity
Asset
Manager
 Asset
Manager
SC
 Growth
 Growth SC
 Overseas
 Overseas
SC
 Money
Market
 Index 500
Assets
Investments in mutual funds at
     fair value (Note 4) $19,960,342
 $314,050
 $59,945,720
 $209,485
 $34,907,789
 $150,870
 $95,075,229
 $200,292,726
Total assets 19,960,342
 314,050
 59,945,720
 209,485
 34,907,789
 150,870
 95,075,229
 200,292,726
 
Liabilities
Due to (from) Security Life of
     Denver 118,014
 -
 194,610
 -
 (157,507)
 -
 241,953
 (111,320)
Total liabilities 118,014
 -
 194,610
 -
 (157,507)
 -
 241,953
 (111,320)
 
Net assets $19,842,328
 $314,050
 $59,751,110
 $209,485
 $35,065,296
 $150,870
 $94,833,276
 $200,404,046
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $19,842,328
 $314,050
 $59,751,110
 $209,485
 $35,065,296
 $150,870
 $94,833,276
 $200,404,046
 
Total policyholder reserves $19,842,328
 $314,050
 $59,751,110
 $209,485
 $35,065,296
 $150,870
 $94,833,276
 $200,404,046
 
Number of divisional units
     outstanding (Note 8):
          Class A 1,169,409.479
 -
 2,364,197.375
 -
 2,641,985.743
 -
 6,921,270.660
 7,473,642.160
          Class B -
 31,709.841
 79,531.899
 24,401.921
 132,813.006
 19,780.950
 -
 1,380,613.887
 
Value per divisional unit:
          Class A $16.97
 -
 $24.97
 -
 $12.86
 -
 $13.70
 $25.18
          Class B -
 $9.90
 $  8.93
 $8.58
 $  8.18
 $7.63
 -
 $  8.85
 
Number of shares owned 1,375,626.568
 21,793.891
 1,783,567.987
 6,257.024
 2,514,970.369
 10,908.914
 95,075,229.110
 1,539,884.108

See accompanying notes.

 

Estate Designer   			127

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Assets
Investments in mutual funds at
     fair value (Note 4) $15,234,156
 $29,132,555
 $10,635,767
 $7,922,856
 $14,717,749
Total assets 15,234,156
 29,132,555
 10,635,767
 7,922,856
 14,717,749
 
Liabilities
Due to (from) Security Life of Denver (13,157)
 30,878
 (71,742)
 (4,962)
 (143,697)
Total liabilities (13,157)
 30,878
 (71,742)
 (4,962)
 (143,697)
 
Net assets $15,247,313
 $29,101,677
 $10,707,509
 $7,927,818
 $14,861,446
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $15,247,313
 $29,101,677
 $10,707,509
 $7,927,818
 $14,861,446
 
Total policyholder reserves $15,247,313
 $29,101,677
 $10,707,509
 $7,927,818
 $14,861,446
 
Number of divisional units outstanding
     (Note 8):
          Class A 924,011.935
 1,151,183.215
 799,888.932
 509,732.849
 1,003,430.592
          Class B 10,209.578
 87,235.776
 32,038.470
 15,767.536
 29,425.399
 
Value per divisional unit:
          Class A $16.39
 $24.54
 $13.08
 $15.33
 $14.49
          Class B $  9.97
 $  9.82
 $  7.72
 $  7.05
 $10.77
 
Number of shares owned 1,195,773.570
 1,567,952.393
 1,392,116.157
 562,702.882
 999,847.067

See accompanying notes.

 

Estate Designer   			128

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Van Eck
Worldwide
Hard
Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
 Worldwide
Real
Estate
Assets
Investments in mutual funds
     at fair value (Note 4) $1,727,476
 $1,225,301
 $4,518,221
 $2,826,133
Total assets 1,727,476
 1,225,301
 4,518,221
 2,826,133
 
Liabilities
Due to (from) Security Life of Denver 10
 (5)
 2,599
 (1)
Total liabilities 10
 (5)
 2,599
 (1)
 
Net assets $1,727,466
 $1,225,306
 $4,515,622
 $2,826,134
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $1,727,466
 $1,225,306
 $4,515,622
 $2,826,134
 
Total policyholder reserves $1,727,466
 $1,225,306
 $4,515,622
 $2,826,134
 
 
Number of divisional units outstanding
     (Note 8):
          Class A 180,562.259
 126,396.770
 551,889.362
 268,497.720
          Class B 33.337
 1,095.329
 36,144.511
 2,412.726
 
Value per divisional unit:
          Class A $9.57
 $9.61
 $7.65
 $10.42
          Class B $8.91
 $9.52
 $8.12
 $11.55
 
Number of shares owned 161,597.368
 130,074.380
 555,064.039
 259,993.819

See accompanying notes.

 

Estate Designer   			129

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

AIM
Capital
Appreciation
 Government
Securities
Assets
Investments in mutual funds at
     fair value (Note 4) $12,811,977
 $25,706,520
Total assets 12,811,977
 25,706,520
 
Liabilities
Due to (from) Security Life of Denver (19,484)
 41,293
Total liabilities (19,484)
 41,293
 
Net assets $12,831,461
 $25,665,227
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $12,831,461
 $25,665,227
 
Total policyholder reserves $12,831,461
 $25,665,227
 
Number of divisional units outstanding (Note 8):
     Class A 1,089,855.994
 2,121,716.258
     Class B 83,909.812
 34,600.989
 
Value per divisional unit:
     Class A $11.06
 $11.90
     Class B $  9.30
 $11.81
 
Number of shares owned 589,870.036
 2,229,533.397

See accompanying notes.

 

Estate Designer   			130

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

GCG
Equity
Income
 Growth
 Hard
Assets
 Limited
Maturity
Bond
 Liquid
Asset
 MidCap
Growth
 Research
 Total
Return
 Fully
Managed
Assets
Investments in mutual funds
     at fair value (Note 4) $6,451
 $3,688
 -
 $54,670,548
 $7,832,059
 $465,470
 $3,197
 $53,206
 $3,909,123
Total assets 6,451
 3,688
 -
 54,670,548
 7,832,059
 465,470
 3,197
 53,206
 3,909,123
 
Liabilities
Due to (from) Security Life
     of Denver -
 -
 -
 -
 -
 -
 -
 -
 -
Total liabilities -
 -
 -
 -
 -
 -
 -
 -
 -
 
Net assets $6,451
 $3,688
 -
 $54,670,548
 $7,832,059
 $465,470
 $3,197
 $53,206
 $3,909,123
 
Policyholder reserves
Reserves attributable to the
     policyholders (Note 2) $6,451
 $3,688
 -
 $54,670,548
 $7,832,059
 $465,470
 $3,197
 $53,206
 $3,909,123
 
Total policyholder
     reserves $6,451
 $3,688
 -
 $54,670,548
 $7,832,059
 $465,470
 $3,197
 $53,206
 $3,909,123
 
Number of divisional units
     outstanding (Note 8):
          Class A -
 -
 -
 -
 -
 43,228.093
 -
 -
 355,521.872
          Class B      599.540
 444.729
 -
 4,610,394.902
 696,490.126
 3,611.049
 364.292
 4,565.988
 13,042.811
Value per divisional unit:
          Class A -
 -
 -
 -
 -
 $  9.68
 -
 -
 $10.60
          Class B $10.76
 $8.29
 -
 $11.86
 $11.25
 $13.04
 $8.78
 $11.65
 $10.66
 
Number of shares owned 565.417
 267.270
 -
 4,961,029.795
 7,832,058.590
 32,825.812
 199.783
 3,329.560
 223,378.490

See accompanying notes.

 

Estate Designer   			131

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Janus
Growth
 Aggressive
Growth
 Worldwide
Growth
 International
Growth
Assets
Investments in mutual funds at fair value (Note 4) $3,099,080
 $1,857,717
 $3,234,547
 $5,153,721
Total assets 3,099,080
 1,857,717
 3,234,547
 5,153,721
 
Liabilities
Due to (from) Security Life of Denver (2)
 -
 (2)
 13,395
Total liabilities (2)
 -
 (2)
 13,395
 
Net assets $3,099,082
 $1,857,717
 $3,234,549
 $5,140,326
 
Policyholder reserves
Reserves attributable to the policyholders (Note 2) $3,099,082
 $1,857,717
 $3,234,549
 $5,140,326
 
Total policyholder reserves $3,099,082
 $1,857,717
 $3,234,549
 $5,140,326
Number of divisional units
     outstanding (Note 8):
          Class A 464,858.877
 414,348.816
 443,501.334
 742,421.160
          Class B 36,725.219
 37,258.111
 40,602.765
 37,343.822
 
Value per divisional unit:
          Class A $6.17
 $4.11
 $6.68
 $6.59
          Class B $6.23
 $4.15
 $6.74
 $6.67
 
Number of shares owned 156,836.026
 85,490.853
 113,972.774
 221,189.757

See accompanying notes.

 

Estate Designer   			132

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

M Funds
Brandes
 Clifton
 Frontier
 Turner
Assets
Investments in mutual funds at fair value (Note 4) $1,895,218
 $1,194,435
 $1,726,955
 $295,829
Total assets 1,895,218
 1,194,435
 1,726,955
 295,829
 
Liabilities
Due to (from) Security Life of Denver -
 -
 -
 -
Total liabilities -
 -
 -
 -
 
Net assets $1,895,218
 $1,194,435
 $1,726,955
 $295,829
 
Policyholder reserves
Reserves attributable to the policyholders (Note 2) $1,895,218
 $1,194,435
 $1,726,955
 $295,829
 
Total policyholder reserves $1,895,218
 $1,194,435
 $1,726,955
 $295,829
 
Number of divisional units outstanding (Note 8):
          Class A 199,081.408
 120,205.971
 163,708.339
 31,036.713
          Class B      776.953
 48.487
 550.547
 122.120
Value per divisional unit:
          Class A $9.48
 $9.93
 $10.51
 $9.49
          Class B      $9.54
 $9.98
 $10.57
 $9.55
 
Number of shares owned 153,210.831
 88,085.209
 102,005.638
 22,076.812

See accompanying notes.

 

Estate Designer   			133

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Pilgrim
Growth
Opportunities
 MagnaCap
 Mid-Cap
Opportunities
 Small Cap
Opportunities
Assets
Investments in mutual funds at fair value (Note 4) $146,625
 $201,750
 $294,443
 $729,667
Total assets 146,625
 201,750
 294,443
 729,667
 
Liabilities
Due to (from) Security Life of Denver -
 -
 -
 -
Total liabilities -
 -
 -
 -
 
Net assets $146,625
 $201,750
 $294,443
 $729,667
 
Policyholder reserves
Reserves attributable to the policyholders (Note 2) $146,625
 $201,750
 $294,443
 $729,667
 
Total policyholder reserves $146,625
 $201,750
 $294,443
 $729,667
 
Number of divisional units outstanding (Note 8):
          Class A 16,883.560
 18,106.005
 29,585.862
 64,009.201
          Class B      95.454
 2,550.666
 2,485.429
 11,257.814
Value per divisional unit:
          Class A $8.64
 $9.76
 $9.18
 $9.69
          Class B      $8.68
 $9.80
 $9.18
 $9.74
 
Number of shares owned 26,756.293
 22,592.404
 48,507.906
 38,647.615

See accompanying notes.

 

Estate Designer   			134

 

Security Life Separate Account L1

Statement of Assets and Liabilities (continued)

December 31, 2001

Putnam
New
Opportunities
 Voyager
 Growth
and Income
 Small
Cap Value
Assets
Investments in mutual funds at fair value (Note 4) $397,431
 $852,482
 $3,382,696
 $6,203,409
Total assets 397,431
 852,482
 3,382,696
 6,203,409
 
Liabilities
Due to (from) Security Life of Denver -
 -
 -
 12,233
Total liabilities -
 -
 -
 12,233
 
Net assets $397,431
 $852,482
 $3,382,696
 $6,191,176
 
Policyholder reserves
Reserves attributable to the policyholders (Note 2) $397,431
 $852,482
 $3,382,696
 $6,191,176
 
Total policyholder reserves $397,431
 $852,482
 $3,382,696
 $6,191,176
 
Number of divisional units outstanding (Note 8):
          Class A 38,647.184
 86,011.211
 330,355.679
 524,956.967
          Class B      2,912.492
 3,574.942
 13,681.079
 10,045.267
Value per divisional unit:
          Class A $9.56
 $9.51
 $9.83
 $11.57
          Class B $9.61
 $9.57
 $9.89
 $11.66
 
Number of shares owned 24,013.937
 29,848.812
 144,312.963
 412,735.145

See accompanying notes.

 

Estate Designer   			135

 

Security Life Separate Account L1

Statement of Operations

Year ended December 31, 2001

NB
Limited
Maturity Bond
 Growth
 Partners
Investment Income
Dividends from mutual funds $   953,448 $ 6,951,959 $1,186,558
Less valuation period deductions
     (Note 2) 132,697
 105,031
 216,387
Net investment income (loss) 820,751
 6,846,928
 970,171
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (87,864) (11,434,496) (2,225,180)
Net unrealized gains (losses) on
     investments 569,231
 (1,174,669)
 527,179
Net realized and unrealized gains
     (losses) on investments 481,367
 (12,609,165)
 (1,698,001)
 
Net increase (decrease) in net assets
     resulting from operations $1,302,118
 $(5,762,237)
 $  (727,830)

See accompanying notes.

 

Estate Designer   			136

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Investment Income
Dividends from mutual funds $      11,078 $16,595,646 $ 6,375,756 $    844,791
Less valuation period deductions
     (Note 2) 158,574
 267,520
 368,683
 170,805
Net investment income (loss) (147,496)
 16,328,126
 6,007,073
 673,986
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (4,309,122) (18,083,166) (2,236,799) (11,574,279)
Net unrealized gains (losses) on
     investments (3,834,697)
 (871,507)
 (10,755,118)
 6,004,341
Net realized and unrealized gains
     (losses) on investments (8,143,819)
 (18,954,673)
 (12,991,917)
 (5,569,938)
 
Net increase (decrease) in net assets
     resulting from operations $(8,291,315)
 $(2,626,547)
 $(6,984,844)
 $(4,895,952)

See accompanying notes.

 

Estate Designer   			137

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Fidelity
Asset
Manager
 Asset
Manager SC
 Growth
 Growth SC
 Overseas
 Overseas SC
 Money
Market
 Index 500
Investment Income
Dividends from mutual funds $   903,965 $       - $  4,536,923 $          - $  5,340,174 $          - $3,159,167 $  1,936,486
Less valuation period deductions
     (Note 2) 142,387
 -
 459,921
 -
 279,119
 -
 615,031
 1,315,473
Net investment income (loss) 761,578
 -
 4,077,002
 -
 5,061,055
 -
 2,544,136
 621,013
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (1,814,082) (732) (15,379,391) (11,229) (14,704,916) (1,125) - 2,221,426
Net unrealized gains (losses) on
     investments 349,904
 7,820
 (1,622,287)
 11,404
 (583,408)
 (8,761)
 -
 (26,837,194)
Net realized and unrealized gains
     (losses) on investments (1,464,178)
 7,088
 (17,001,678)
 175
 (15,288,324)
 (9,886)
 -
 (24,615,768)
 
Net increase (decrease) in net
     assets resulting from operations $  (702,600)
 $7,088
 $(12,924,676)
 $      175
 $(10,227,269)
 $(9,886)
 $2,544,136
 $(23,994,755)

See accompanying notes.

 

Estate Designer   			138

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Investment Income
Dividends from mutual funds $  321,870 $     413,519 $  1,126,915 $       85,369 $           -
Less valuation period deductions
     (Note 2) 94,009
 191,542
 77,489
 62,847
 91,669
Net investment income (loss) 227,861
 221,977
 1,049,426
 22,522
 (91,669)
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (658,064) 85,514 (619,401) (308,679) (2,076,897)
Net unrealized gains (losses) on
     investments 215,214
 (2,794,783)
 (2,082,139)
 (3,121,553)
 (369,834)
Net realized and unrealized gains
     (losses) on investments (442,850)
 (2,709,269)
 (2,701,540)
 (3,430,232)
 (2,446,731)
 
Net increase (decrease) in net assets
     resulting from operations $(214,989)
 $(2,487,292)
 $(1,652,114)
 $(3,407,710)
 $(2,538,400)

See accompanying notes.

 

Estate Designer   			139

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Van Eck

Worldwide
Hard Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
Worldwide
Real Estate
Investment Income
Dividends from mutual funds $   25,272 $ 44,322 $           - $38,335
Less valuation period deductions
     (Note 2) 16,631
 8,518
 29,985
 14,502
Net investment income (loss) 8,641
 35,804
 (29,985)
 23,833
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 126,168 (52,880) (1,122,394) 72,084
Net unrealized gains (losses) on
     investments (392,863)
 (66,978)
 1,077,161
 1,756
Net realized and unrealized gains
     (losses) on investments (266,695)
 (119,858)
 (45,233)
 73,840
 
Net increase (decrease) in net assets
     resulting from operations $(258,054)
 $(84,054)
 $    (75,218)
 $97,673

See accompanying notes.

 

Estate Designer   			140

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

AIM
Capital
Appreciation
 Government
Securities
Investment Income
Dividends from mutual funds $ 1,015,515 $   715,050
Less valuation period deductions
     (Note 2) 77,610
 141,794
Net investment income (loss) 937,905
 573,256
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (2,979,016) 2,676,383
Net unrealized gains (losses) on
     investments (3,129,679)
 231,049
Net realized and unrealized gains
     (losses) on investments (6,108,695)
 2,907,432
 
Net increase (decrease) in net assets
     resulting from operations $(5,170,790)
 $3,480,688

See accompanying notes.

 

Estate Designer   			141

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

GCG
Equity
Income
 Growth
 Hard
Assets
 Limited
Maturity
Bond
 Liquid
Asset
 MidCap
Growth
 Research
 Total
Return
 Fully
Managed
Investment Income
Dividends from mutual funds $225 $     - $ - $2,096,564 $186,865 $  2,422 $  87 $3,382 $154,098
Less valuation period deductions
     (Note 2) -
 -
 -
 -
 -
 587
 -
 -
 8,190
 
Net investment income (loss) 225
 -
 -
 2,096,564
 186,865
 1,835
 87
 3,382
 145,908
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (40) (978) - 8,532 - (15,299) (446) (525) (4,172)
Net unrealized gains (losses) on
     investments (148)
 298
 -
 (1,963,429)
 -
 21,648
 (78)
 (1,893)
 (85,305)
Net realized and unrealized gains
     (losses) on investments (188)
 (680)
 -
 (1,954,897)
 -
 6,349
 (524)
 (2,418)
 (89,477)
 
Net increase (decrease) in net assets
     resulting from operations $  37
 $(680)
 $ -
 $   141,667
 $186,865
 $  8,184
 $(437)
 $   964
 $  56,431

See accompanying notes.

 

Estate Designer   			142

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Janus
Investment Income Growth
 Aggressive
Growth
 Worldwide
Growth
 International
Growth
Dividends from mutual funds $     4,387 $           - $     6,741 $   29,978
Less valuation period deductions
     (Note 2) 13,345
 8,795
 12,462
 24,862
Net investment income (loss) (8,958)
 (8,795)
 (5,721)
 5,116
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (147,023) (231,210) (214,517) (324,204)
Net unrealized gains (losses) on
     investments (355,294)
 (240,987)
 (160,388)
 (312,755)
Net realized and unrealized gains
     (losses) on investments (502,317)
 (472,197)
 (374,905)
 (636,959)
 
Net increase (decrease) in net assets
     resulting from operations $(511,275)
 $(480,992)
 $(380,626)
 $(631,843)

See accompanying notes.

 

Estate Designer   			143

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

M Funds
Brandes
 Clifton
 Frontier
 Turner
Investment Income
Dividends from mutual funds $92,119 $51,579 $       172 $   285
Less valuation period deductions
     (Note 2) 3,533
 2,311
 3,083
 541
Net investment income (loss) 88,586
 49,268
 (2,911)
 (256)
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (3,407) (1,576) (12,747) (1,138)
Net unrealized gains (losses) on
     investments (85,989)
 (19,553)
 113,573
 6,123
Net realized and unrealized gains
     (losses) on investments (89,396)
 (21,129)
 100,826
 4,985
 
Net increase (decrease) in net assets
     resulting from operations $    (810)
 $28,139
 $  97,915
 $4,729

See accompanying notes.

 

Estate Designer   			144

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Pilgrim
Growth
Opportunities
 MagnaCap
 Mid-Cap
Opportunities
 Small Cap
Opportunities
Investment Income
Dividends from mutual funds $       - $   934 $         - $     241
Less valuation period deductions
     (Note 2) 75
 309
 448
 639
Net investment income (loss) (75)
 625
 (448)
 (398)
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (190) (1,591) (6,764) (11,992)
Net unrealized gains (losses) on
     investments 1,324
 3,018
 17,907
 28,841
Net realized and unrealized gains
     (losses) on investments 1,134
 1,427
 11,143
 16,849
 
Net increase (decrease) in net assets
     resulting from operations $1,059
 $2,052
 $10,695
 $16,451

See accompanying notes.

 

Estate Designer   			145

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2001

Putnam
New
Opportunities
 Voyager
 Growth
and Income
 Small
Cap Value
Investment Income
Dividends from mutual funds $         - $       - $         - $           -
Less valuation period deductions
     (Note 2) 587
 456
 3,794
 7,241
Net investment income (loss) (587)
 (456)
 (3,794)
 (7,241)
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 2,370 (1,070) (5,484) 2,459
Net unrealized gains (losses) on
     investments 39,965
 9,229
 59,773
 481,874
Net realized and unrealized gains
     (losses) on investments 42,335
 8,159
 54,289
 484,333
 
Net increase (decrease) in net assets
     resulting from operations $41,748
 $7,703
 $50,495
 $477,092

See accompanying notes.

 

Estate Designer   			146

 

Security Life Separate Account L1

Statement of Operations

Year ended December 31, 2000

NB
Limited
Maturity Bond
 Growth
 Partners
Investment Income
Dividends from mutual funds $775,107 $ 1,356,082 $4,890,882
Less valuation period deductions
     (Note 2) 92,250
 138,445
 220,263
Net investment income (loss) 682,857
 1,217,637
 4,670,619
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (281,540) 3,777,374 (5,304,540)
Net unrealized gains (losses) on
     investments 351,484
 (7,971,190)
 294,355
Net realized and unrealized gains
     (losses) on investments 69,944
 (4,193,816)
 (5,010,185)
 
Net increase (decrease) in net assets
     resulting from operations $752,801
 $(2,976,179)
 $  (339,566)

See accompanying notes.

 

Estate Designer   			147

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Investment Income
Dividends from mutual funds $ 9,941,662 $2,936,254 $ 6,249,935 $ 2,457,193
Less valuation period deductions
     (Note 2) 222,078
 194,721
 366,802
 198,843
Net investment income (loss) 9,719,584
 2,741,533
 5,883,133
 2,258,350
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (9,976,931) 1,057,836 1,775,571 2,107,246
Net unrealized gains (losses) on
     investments (9,435,613)
 (2,672,195)
 (16,304,212)
 (12,453,495)
Net realized and unrealized gains
     (losses) on investments (19,412,544)
 (1,614,359)
 (14,528,641)
 (10,346,249)
 
Net increase (decrease) in net assets
     resulting from operations $(9,692,960)
 $1,127,174
 $(8,645,508)
 $(8,087,899)

See accompanying notes.

 

Estate Designer   			148

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

Fidelity
Asset
Manager
 Growth
 Overseas
 Money
Market
 Index 500
Investment Income
Dividends from mutual funds $1,469,444 $ 6,670,347 $ 3,516,677 $2,798,325 $   2,232,964
Less valuation period deductions
     (Note 2) 105,478
 489,501
 301,304
 340,745
 1,243,353
Net investment income (loss) 1,363,966
 6,180,846
 3,215,373
 2,457,580
 989,611
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 8,816 2,581,814 1,800,478 - 6,124,495
Net unrealized gains (losses) on
     investments (2,092,103)
 (17,925,268)
 (13,999,080)
 -
 (24,758,151)
Net realized and unrealized gains
     (losses) on investments (2,083,287)
 (15,343,454)
 (12,198,602)
 -
 (18,633,656)
 
Net increase (decrease) in net assets
     resulting from operations $  (719,321)
 $(9,162,608)
 $(8,983,229)
 $2,457,580
 $(17,644,045)

See accompanying notes.

 

Estate Designer   			149

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Investment Income
Dividends from mutual funds $1,540,605 $1,186,862 $      97,398 $324,011 $    338,388
Less valuation period deductions
     (Note 2) 80,022
 139,132
 78,969
 43,912
 62,899
Net investment income (loss) 1,460,583
 1,047,730
 18,429
 280,099
 275,489
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (314,414) 593,634 (390,743) 256,021 1,194,928
Net unrealized gains (losses) on
     investments (1,435,710)
 (904,246)
 (1,002,431)
 (372,493)
 (3,986,250)
Net realized and unrealized gains
     (losses) on investments (1,750,124)
 (310,612)
 (1,393,174)
 (116,472)
 (2,791,322)
 
Net increase (decrease) in net assets
     resulting from operations $  (289,541)
 $   737,118
 $(1,374,745)
 $163,627
 $(2,515,833)

See accompanying notes.

 

Estate Designer   			150

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

Van Eck

Worldwide
Hard Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
Worldwide
Real Estate
Investment Income
Dividends from mutual funds $  25,149 $20,595 $           - $  13,473
Less valuation period deductions
     (Note 2) 17,641
 5,005
 31,191
 5,985
Net investment income (loss) 7,508
 15,590
 (31,191)
 7,488
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 140,202 (14,783) 87,666 7,144
Net unrealized gains (losses) on
     investments 123,530
 23,588
 (2,508,578)
 137,513
Net realized and unrealized gains
     (losses) on investments 263,732
 8,805
 (2,420,912)
 144,657
 
Net increase (decrease) in net assets
     resulting from operations $271,240
 $24,395
 $(2,452,103)
 $152,145

See accompanying notes.

 

Estate Designer   			151

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

AIM
Capital
Appreciation
 Government
Securities
Investment Income
Dividends from mutual funds $    266,665 $551,812
Less valuation period deductions
     (Note 2) 58,290
 70,584
Net investment income (loss) 208,375
 481,228
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 418,127 57,242
Net unrealized gains (losses) on
     investments (2,171,530)
 350,661
Net realized and unrealized gains
     (losses) on investments (1,753,403)
 407,903
 
Net increase (decrease) in net assets
     resulting from operations $(1,545,028)
 $889,131

See accompanying notes.

 

Estate Designer   			152

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

GCG
Equity
Income
 Growth
 Hard
Assets
 Limited
Maturity
Bond
 Liquid
Asset
 MidCap
Growth
 Research
 Total
Return
Investment Income
Dividends from mutual funds $   - $  90 $   - $54,281 $861,303 $   - $   - $786
Less valuation period deductions
     (Note 2) -
 -
 -
 -
 -
 -
 -
 -
 
Net investment income (loss) -
 90
 -
 54,281
 861,303
 -
 -
 786
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments - - - - - - - -
Net unrealized gains (losses) on
     investments -
 (168)
 -
 (45,286)
 -
 -
 -
 (550)
Net realized and unrealized gains
     (losses) on investments -
 (168)
 -
 (45,286)
 -
 -
 -
 (550)
 
Net increase (decrease) in net assets
     resulting from operations $   -
 $ (78)
 $   -
 $  8,995
 $861,303
 $   -
 $   -
 $236

See accompanying notes.

 

Estate Designer   			153

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 2000

Janus
Growth
 Aggressive
Growth
 Worldwide
Growth
 International
Growth
Investment Income
Dividends from mutual funds $           - $           - $         83 $       810
Less valuation period deductions
     (Note 2) 180
 218
 147
 213
Net investment income (loss) (180)
 (218)
 (64)
 597
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (1,546) (86) (7,584) (513)
Net unrealized gains (losses) on
     investments (15,107)
 (50,478)
 (16,753)
 (16,513)
Net realized and unrealized gains
     (losses) on investments (16,653)
 (50,564)
 (24,337)
 (17,026)
 
Net increase (decrease) in net assets
     resulting from operations $(16,833)
 $(50,782)
 $(24,401)
 $(16,429)

See accompanying notes.

 

Estate Designer   			154

 

Security Life Separate Account L1

Statement of Operations

Year ended December 31, 1999

NB
Limited
Maturity Bond
 Growth
 Partners
Investment Income
Dividends from mutual funds $911,596 $   453,085 $   759,238
Less valuation period deductions
     (Note 2) 108,699
 70,308
 192,211
Net investment income (loss) 802,897
 382,777
 567,027
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (293,615) 318,964 532,601
Net unrealized gains (losses) on
     investments (423,477)
 3,714,218
 506,991
Net realized and unrealized gains
     (losses) on investments (717,092)
 4,033,182
 1,039,592
 
Net increase (decrease) in net assets
     resulting from operations $  85,805
 $4,415,959
 $1,606,619

See accompanying notes.

 

Estate Designer   			155

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 1999

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Investment Income
Dividends from mutual funds $2,200,048 $1,636,538 $2,764,203 $   724,692
Less valuation period deductions
     (Note 2) 141,734
 88,955
 233,373
 93,349
Net investment income (loss) 2,058,314
 1,547,583
 2,530,830
 631,343
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
     investments 5,993,398
 2,015,333
 4,584,649
 4,907,565
Net realized and unrealized gains
     (losses) on investments 6,088,223
 2,338,307
 6,592,274
 7,505,410
 
Net increase (decrease) in net assets
     resulting from operations $8,146,537
 $3,885,890
 $9,123,104
 $8,136,753

See accompanying notes.

 

Estate Designer   			156

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 1999

Fidelity
Asset
Manager
 Growth
 Overseas
 Money
Market
 Index 500
Investment Income
Dividends from mutual funds $   798,528 $  3,508,501 $   820,014 $1,277,704 $  1,503,735
Less valuation period deductions
     (Note 2) 83,646
 308,868
 188,207
 188,211
 860,369
Net investment income (loss) 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 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
     investments 316,538
 3,509,953
 8,740,414
 -
 17,585,537
Net realized and unrealized gains
     (losses) on investments 439,012
 10,969,835
 9,293,644
 -
 20,808,763
 
Net increase (decrease) in net assets
     resulting from operations $1,153,894
 $14,169,468
 $9,925,451
 $1,089,493
 $21,452,129

See accompanying notes.

 

Estate Designer   			157

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 1999

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Investment Income
Dividends from mutual funds $ 276,071 $   252,055 $618,531 $  37,038 $           -
Less valuation period deductions
     (Note 2) 71,255
 97,430
 65,338
 23,769
 14,338
Net investment income (loss) 204,816
 154,625
 553,193
 13,269
 (14,338)
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
     investments (923,083)
 965,264
 379,005
 179,598
 1,535,014
Net realized and unrealized gains
     (losses) on investments (636,460)
 1,472,031
 137,394
 484,509
 1,772,563
 
Net increase (decrease) in net assets
     resulting from operations $(431,644)
 $1,626,656
 $690,587
 $497,778
 $1,758,225

See accompanying notes.

 

Estate Designer   			158

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 1999

Van Eck

Worldwide
Hard Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
Worldwide
Real Estate
Investment Income
Dividends from mutual funds $  16,585 $ 12,446 $           - $   1,795
Less valuation period deductions
     (Note 2) 12,646
 2,550
 10,886
 1,732
Net investment income (loss) 3,939
 9,896
 (10,886)
 63
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
     investments 592,123
 (9,920)
 809,962
 (17,973)
Net realized and unrealized gains
     (losses) on investments 279,114
 (35,773)
 1,220,346
 (16,351)
 
Net increase (decrease) in net assets
     resulting from operations $283,053
 $(25,877)
 $1,209,460
 $(16,288)

See accompanying notes.

 

Estate Designer   			159

 

Security Life Separate Account L1

Statement of Operations (continued)

Year ended December 31, 1999

AIM
Capital
Appreciation
 Government
Securities
Investment Income
Dividends from mutual funds $   113,467 $198,299
Less valuation period deductions
     (Note 2) 19,289
 31,722
Net investment income (loss) 94,178
 166,577
 
Realized and unrealized gains
     (losses) on investments
Net realized gains (losses) on
     investments 92,256 (8,224)
Net unrealized gains (losses) on
     investments 1,257,369
 (220,437)
Net realized and unrealized gains
     (losses) on investments 1,349,625
 (228,661)
  
Net increase (decrease) in net assets
     resulting from operations $1,443,803
 $ (62,084)

See accompanying notes.

 

Estate Designer   			160

 

Security Life Separate Account L1

Statement of Changes in Net Assets

Year ended December 31, 2001

NB
Limited
Maturity Bond
 Growth
 Partners
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     820,751 $  6,846,928 $     970,171
Net realized gains (losses) on
     investments (87,864) (11,434,496) (2,225,180)
Net unrealized gains (losses) on
     investments 569,231
 (1,174,669)
 527,179
Increase (decrease) in net assets from
     operations 1,302,118
 (5,762,237)
 (727,830)
 
Changes from principal
     transactions
Net premiums 3,295,398 3,628,883 4,728,769
Cost of insurance and
     administrative charges (685,448) (725,661) (1,603,314)
Benefit payments - - -
Surrenders (495,304) (254,511) (1,147,488)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 5,067,884 (3,811,594) 3,353,033
Other (3,430)
 473
 31,954
Increase (decrease) from principal
     transactions 7,179,100
 (1,162,410)
 5,362,954
 
Total increase (decrease) in net assets 8,481,218 (6,924,647) 4,635,124
 
Net assets at beginning of year 14,494,151
 19,944,906
 27,555,779
 
Net assets at end of year $22,975,369
 $13,020,259
 $32,190,903

See accompanying notes.

 

Estate Designer   			161

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $    (147,496) $16,328,126 $  6,007,073 $     673,986
Net realized gains (losses) on
     investments (4,309,122) (18,083,166) (2,236,799) (11,574,279)
Net unrealized gains (losses) on
     investments (3,834,697)
 (871,507)
 (10,755,118)
 6,004,341
Increase (decrease) in net assets from
     operations (8,291,315)
 (2,626,547)
 (6,984,844)
 (4,895,952)
 
Changes from principal
     transactions
Net premiums 5,708,041 9,828,654 11,712,597 6,382,755
Cost of insurance and
     administrative charges (1,311,713) (1,992,952) (2,826,690) (1,710,023)
Benefit payments - - - -
Surrenders (786,316) (1,310,921) (1,469,772) (1,011,779)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (1,538,649) 5,468,382 (1,714,891) (5,812)
Other (21,033)
 (97,570)
 (82,542)
 138,708
Increase (decrease) from principal
     transactions 2,050,330
 11,895,593
 5,618,702
 3,793,849
 
Total increase (decrease) in net assets (6,240,985) 9,269,046 (1,366,142) (1,102,103)
 
Net assets at beginning of year 26,169,130
 33,293,751
 50,118,432
 24,377,608
 
Net assets at end of year $19,928,145
 $42,562,797
 $48,752,290
 $23,275,505

See accompanying notes.

 

Estate Designer   			162

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Fidelity
Asset
Manager
 Asset
Manager
SC
 Growth
 Growth SC
 Overseas
Overseas SC
 Money
Market
 Index 500
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     761,578 $           - $  4,077,002 $          - $  5,061,055 $           - $  2,544,136 $       621,013
Net realized gains (losses) on
     investments (1,814,082) (732) (15,379,391) (11,229) (14,704,916) (1,125) - 2,221,426
Net unrealized gains (losses) on
     investments 349,904
 7,820
 (1,622,287)
 11,404
 (583,408)
 (8,761)
 -
 (26,837,194)
Increase (decrease) in net assets from
     operations (702,600)
 7,088
 (12,924,676)
 175
 (10,227,269)
 (9,886)
 2,544,136
 (23,994,755)
 
Changes from principal
     transactions
Net premiums 4,928,026 258,504 14,447,067 178,717 9,192,216 109,043 117,488,335 49,621,850
Cost of insurance and
     administrative charges (1,113,478) (14,177) (3,260,239) (5,041) (1,994,142) (2,894) (4,840,874) (10,446,440)
Benefit payments - - - - - - (635,172) -
Surrenders (498,056) - (2,691,247) - (1,735,115) 5 (3,841,661) (7,463,200)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 1,499,048 61,002 (4,315,470) 35,724 (3,404,356) 54,084 (77,914,357) 11,980,505
Other (25,230)
 1,633
 (10,528)
 (90)
 (87,915)
 518
 18,057
 (234,355)
Increase (decrease) from principal
     transactions 4,790,310
 306,962
 4,169,583
 209,310
 1,970,688
 160,756
 30,274,328
 43,458,360
 
Total increase (decrease) in net assets 4,087,710 314,050 (8,755,093) 209,485 (8,256,581) 150,870 32,818,464 19,463,605
 
Net assets at beginning of year 15,754,618
 -
 68,506,203
 -
 43,321,877
 -
 62,014,812
 180,940,441
 
Net assets at end of year $19,842,328
 $314,050
 $59,751,110
 $209,485
 $35,065,296
 $150,870
 $94,833,276
 $200,404,046

See accompanying notes.

 

Estate Designer   			163

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     227,861 $     221,977 $  1,049,426 $     22,522 $     (91,669)
Net realized gains (losses) on
     investments (658,064) 85,514 (619,401) (308,679) (2,076,897)
Net unrealized gains (losses) on
     investments 215,214
 (2,794,783)
 (2,082,139)
 (3,121,553)
 (369,834)
Increase (decrease) in net assets from
     operations (214,989)
 (2,487,292)
 (1,652,114)
 (3,407,710)
 (2,538,400)
 
Changes from principal
     transactions
Net premiums 3,859,882 6,274,961 2,362,344 2,759,195 3,465,524
Cost of insurance and
     administrative charges (981,884) (1,712,565) (640,769) (544,844) (678,377)
Benefit payments - - - - -
Surrenders (605,337) (547,139) (254,529) (111,633) (529,298)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 1,489,607 6,071,660 391,814 1,373,706 3,317,951
Other 5,403
 (34,044)
 4,411
 47,172
 (24,057)
Increase (decrease) from principal
     transactions 3,767,671
 10,052,873
 1,863,271
 3,523,596
 5,551,743
 
Total increase (decrease) in net assets 3,552,682 7,565,581 211,157 115,886 3,013,343
 
Net assets at beginning of year 11,694,631
 21,536,096
 10,496,352
 7,811,932
 11,848,103
 
Net assets at end of year $15,247,313
 $29,101,677
 $10,707,509
 $7,927,818
 $14,861,446

See accompanying notes.

 

Estate Designer   			164

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Van Eck
Worldwide
Hard
Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
 Worldwide
Real
Estate
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $       8,641 $     35,804 $   (29,985) $     23,833
Net realized gains (losses) on
     investments 126,168 (52,880) (1,122,394) 72,084
Net unrealized gains (losses) on
     investments (392,863)
 (66,978)
 1,077,161
 1,756
Increase (decrease) in net assets from
     operations (258,054)
 (84,054)
 (75,218)
 97,673
 
Changes from principal
     transactions
Net premiums 342,840 367,493 1,356,359 659,384
Cost of insurance and
     administrative charges (132,854) (98,441) (259,040) (104,193)
Benefit payments - - - -
Surrenders (673,391) (10,393) (105,458) (2,318)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 137,343 117,746 (960,427) 863,760
Other (1,769)
 1,528
 (2,594)
 (480)
Increase (decrease) from principal
     transactions (327,831)
 377,933
 28,840
 1,416,153
 
Total increase (decrease) in net assets (585,885) 293,879 (46,378) 1,513,826
 
Net assets at beginning of year 2,313,351
 931,427
 4,562,000
 1,312,308
 
Net assets at end of year $1,727,466
 $1,225,306
 $4,515,622
 $2,826,134

See accompanying notes.

 

Estate Designer   			165

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

AIM
Capital
Appreciation
 Government
Securities
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $       937,905 $     573,256
Net realized gains (losses) on
     investments (2,979,016) 2,676,383
Net unrealized gains (losses) on
     investments (3,129,679)
 231,049
Increase (decrease) in net assets from
     operations (5,170,790)
 3,480,688
 
Changes from principal
     transactions
Net premiums 4,763,948 4,226,929
Cost of insurance and
     administrative charges (931,231) (2,206,157)
Benefit payments - -
Surrenders (428,080) (342,794)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (38,858,721) 3,341,837
Other 2,417,659
 400,826
Increase (decrease) from principal
     transactions (33,036,425)
 5,420,641
 
Total increase (decrease) in net assets (38,207,215) 8,901,329
 
Net assets at beginning of year 51,038,676
 16,763,898
 
Net assets at end of year $12,831,461
 $25,665,227

See accompanying notes.

 

Estate Designer   			166

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

GCG
Equity
Income
 Growth
 Hard
Assets
 Limited
Maturity
Bond
 Liquid
Asset
 MidCap
Growth
 Research
 Total
Return
 Fully
Managed
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $   225 $       - $ - $  2,096,564 $   186,865 $    1,835 $     87 $  3,382 $   145,908
Net realized gains (losses) on
     investments (40) (978) - 8,532 - (15,299) (446) (525) (4,172)
Net unrealized gains (losses) on
     investments (148)
 298
 -
 (1,963,429)
 -
 21,648
 (78)
 (1,893)
 (85,305)
Increase (decrease) in net assets from
     operations 37
 (680)
 -
 141,667
 186,865
 8,184
 (437)
 964
 56,431
 
Changes from principal
     transactions
Net premiums 4,020 7,110 - 144,609 17,241,086 96,915 4,019 37,494 320,026
Cost of insurance and
     administrative charges (320) (319) - (291,274) (399,712) (7,121) (265) (1,316) (43,440)
Benefit payments - - - - - - - - -
Surrenders - - - (59,014) (68,804) 2 - - (518)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 2,732 (4,032) - 53,857,873 (11,129,464) 364,600 (112) 5,627 3,576,855
Other (18)
 376
 -
 (111)
 10,586
 2,890
 (8)
 (96)
 (231)
Increase (decrease) from principal
     transactions 6,414
 3,135
 -
 53,652,083
 5,653,692
 457,286
 3,634
 41,709
 3,852,692
 
Total increase (decrease) in net assets 6,451 2,455 - 53,793,750 5,840,557 465,470 3,197 42,673 3,909,123
 
Net assets at beginning of year -
 1,233
 -
 876,798
 1,991,502
 -
 -
 10,533
 -
 
Net assets at end of year $6,451
 $3,688
 $ -
 $54,670,548
 $7,832,059
 $465,470
 $3,197
 $53,206
 $3,909,123

See accompanying notes.

 

Estate Designer   			167

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Janus
Increase (decrease) in net assets Growth
 Aggressive
Growth
 Worldwide
Growth
 International
Growth
 
Operations
Net investment income (loss) $     (8,958) $     (8,795) $     (5,721) $       5,116
Net realized gains (losses) on investments (147,023) (231,210) (214,517) (324,204)
Net unrealized gains (losses) on investments (355,294)
 (240,987)
 (160,388)
 (312,755)
Increase (decrease) in net assets from operations (511,275)
 (480,992)
 (380,626)
 (631,843)
 
Changes from principal transactions
Net premiums 1,136,268 868,460 1,175,344 1,283,587
Cost of insurance and administrative expenses (104,121) (94,851) (115,877) (134,454)
Benefit payments - - - -
Surrenders (3,422) (9,526) (59,256) (3,760)
Net transfers among divisions (including the loan
     division and guaranteed interest division in the
     general account) 2,337,020 1,045,378 2,291,636 4,213,346
Other 971
 4,665
 3,908
 (7,166)
Increase (decrease) from principal transactions 3,366,716
 1,814,126
 3,295,755
 5,351,553
 
Total increase (decrease) in net assets 2,855,441 1,333,134 2,915,129 4,719,710
 
Net assets at beginning of year 243,641
 524,583
 319,420
 420,616
 
Net assets at end of year $3,099,082
 $1,857,717
 $3,234,549
 $5,140,326

See accompanying notes.

 

Estate Designer   			168

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

M Funds
Brandes
 Clifton
 Frontier
 Turner
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     88,586 $    49,268 $     (2,911) $      (256)
Net realized gains (losses) on investments (3,407) (1,576) (12,747) (1,138)
Net unrealized gains (losses) on investments (85,989)
 (19,553)
 113,573
 6,123
Increase (decrease) in net assets from operations (810)
 28,139
 97,915
 4,729
 
Changes from principal transactions
Net premiums 99,251 74,071 72,923 19,338
Cost of insurance and administrative expenses (25,791) (12,740) (23,985) (2,744)
Benefit payments - - - -
Surrenders (851) - (811) -
 
Net transfers among divisions (including the loan
     division and guaranteed interest division in the
     general account) 1,818,859 1,104,930 1,578,048 274,101
Other 4,560
 35
 2,865
 405
Increase (decrease) from principal transactions 1,896,028
 1,166,296
 1,629,040
 291,100
 
Total increase (decrease) in net assets 1,895,218 1,194,435 1,726,955 295,829
 
Net assets at beginning of year -
 -
 -
 -
 
Net assets at end of year $1,895,218
 $1,194,435
 $1,726,955
 $295,829

See accompanying notes.

 

Estate Designer   			169

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Pilgrim
Growth
Opportunities
 MagnaCap
 Mid-Cap
Opportunities
 Small Cap
Opportunities
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $      (75) $       625 $      (448) $      (398)
Net realized gains (losses) on investments (190) (1,591) (6,764) (11,992)
Net unrealized gains (losses) on investments 1,324
 3,018
 17,907
 28,841
Increase (decrease) in net assets from operations 1,059
 2,052
 10,695
 16,451
 
Changes from principal transactions
Net premiums 8,387 52,648 24,812 171,078
Cost of insurance and administrative expenses (683) (4,309) (2,748) (7,912)
Benefit payments - - - -
Surrenders - (69) - (176)
Net transfers among divisions (including the loan
     division and guaranteed interest division in
     the general account) 137,795 151,007 256,650 550,115
Other 67
 421
 5,034
 111
Increase (decrease) from principal transactions 145,566
 199,698
 283,748
 713,216
 
Total increase (decrease) in net assets 146,625 201,750 294,443 729,667
 
Net assets at beginning of year -
 -
 -
 -
 
Net assets at end of year $146,625
 $201,750
 $294,443
 $729,667

See accompanying notes.

 

Estate Designer   			170

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2001

Putnam
New
Opportunities
 Voyager
 Growth
and Income
 Small
Cap Value
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $      (587) $      (456) $      (3,794) $     (7,241)
Net realized gains (losses) on investments 2,370 (1,070) (5,484) 2,459
Net unrealized gains (losses) on investments 39,965
 9,229
 59,773
 481,874
Increase (decrease) in net assets from operations 41,748
 7,703
 50,495
 477,092
 
Changes from principal transactions
Net premiums 91,169 475,117 709,343 406,645
Cost of insurance and administrative expenses (5,178) (5,555) (26,279) (50,824)
Benefit payments - - - -
Surrenders (1) (453) (61) (10,308)
Net transfers among divisions (including the loan
     division and guaranteed interest division in
     the general account) 268,515 373,015 2,651,904 5,366,815
Other 1,178
 2,655
 (2,706)
 1,756
Increase (decrease) from principal transactions 355,683
 844,779
 3,332,201
 5,714,084
 
Total increase (decrease) in net assets 397,431 852,482 3,382,696 6,191,176
 
Net assets at beginning of year -
 -
 -
 -
 
Net assets at end of year $397,431
 $852,482
 $3,382,696
 $6,191,176

See accompanying notes.

 

Estate Designer   			171

 

Security Life Separate Account L1

Statement of Changes in Net Assets

Year ended December 31, 2000

NB
Limited
Maturity Bond
 Growth
 Partners
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     682,857 $  1,217,637 $  4,670,619
Net realized gains (losses) on
     investments (281,540) 3,777,374 (5,304,540)
Net unrealized gains (losses) on
     investments 351,484
 (7,971,190)
 294,355
Increase (decrease) in net assets from
     operations 752,801
 (2,976,179)
 (339,566)
 
Changes from principal
     transactions
Net premiums 3,373,191 3,809,287 5,070,248
Cost of insurance and
     administrative charges (422,495) (645,717) (1,341,155)
Benefit payments - - (19,938)
Surrenders (485,003) (434,853) (2,800,785)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 72,092 7,083,628 (2,572,843)
Other 2,737
 32,586
 139,818
Increase (decrease) from principal
     transactions 2,540,522
 9,844,931
 (1,524,655)
 
Total increase (decrease) in net assets 3,293,323 6,868,752 (1,864,221)
 
Net assets at beginning of year 11,200,828
 13,076,154
 29,420,000
 
Net assets at end of year $14,494,151
 $19,944,906
 $27,555,779

See accompanying notes.

 

Estate Designer   			172

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $  9,719,584 $  2,741,533 $  5,883,133 $  2,258,350
Net realized gains (losses) on
     investments (9,976,931) 1,057,836 1,775,571 2,107,246
Net unrealized gains (losses) on
     investments (9,435,613)
 (2,672,195)
 (16,304,212)
 (12,453,495)
Increase (decrease) in net assets from
     operations (9,692,960)
 1,127,174
 (8,645,508)
 (8,087,899)
 
Changes from principal
     transactions
Net premiums 6,777,077 8,256,914 14,199,181 8,282,468
Cost of insurance and
     administrative charges (1,361,117) (1,182,610) (2,244,564) (1,487,898)
Benefit payments (8,499) - - (19,872)
Surrenders (1,213,521) (527,415) (1,866,225) (404,726)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 3,623,099 8,242,898 7,157,011 2,790,151
Other 265,296
 89,303
 135,039
 241,724
Increase (decrease) from principal
     transactions 8,082,335
 14,879,090
 17,380,442
 9,401,847
 
Total increase (decrease) in net assets (1,610,625) 16,006,264 8,734,934 1,313,948
 
Net assets at beginning of year 27,779,755
 17,287,487
 41,383,498
 23,063,660
 
Net assets at end of year $26,169,130
 $33,293,751
 $50,118,432
 $24,377,608

See accompanying notes.

 

Estate Designer   			173

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

Fidelity
Asset
Manager
 Growth
 Overseas
 Money
Market
 Index 500
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $  1,363,966 $  6,180,846 $  3,215,373 $  2,457,580 $      989,611
Net realized gains (losses) on
     investments 8,816 2,581,814 1,800,478 - 6,124,495
Net unrealized gains (losses) on
     investments (2,092,103)
 (17,925,268)
 (13,999,080)
 -
 (24,758,151)
Increase (decrease) in net assets from
     operations (719,321)
 (9,162,608)
 (8,983,229)
 2,457,580
 (17,644,045)
 
Changes from principal
     transactions
Net premiums 4,246,313 16,858,828 10,774,262 102,634,205 49,828,360
Cost of insurance and
     administrative charges (729,175) (2,871,811) (1,545,175) (3,421,123) (8,228,882)
Benefit payments - (8,585) - (1,512,600) (12,997)
Surrenders (523,096) (1,526,139) (1,310,651) (1,580,652) (6,472,537)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (110,602) 6,705,250 9,264,961 (71,323,681) 10,473,533
Other 41
 353,438
 137,428
 (36,325)
 81,243
Increase (decrease) from principal
     transactions 2,883,481
 19,510,981
 17,320,825
 24,759,824
 45,668,720
 
Total increase (decrease) in net assets 2,164,160 10,348,373 8,337,596 27,217,404 28,024,675
 
Net assets at beginning of year 13,590,458
 58,157,830
 34,984,281
 34,797,408
 152,915,766
 
Net assets at end of year $15,754,618
 $68,506,203
 $43,321,877
 $62,014,812
 $180,940,441

See accompanying notes.

 

Estate Designer   			174

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $  1,460,583 $  1,047,730 $       18,429 $   280,099 $     275,489
Net realized gains (losses) on
     investments (314,414) 593,634 (390,743) 256,021 1,194,928
Net unrealized gains (losses) on
     investments (1,435,710)
 (904,246)
 (1,002,431)
 (372,493)
 (3,986,250)
Increase (decrease) in net assets from
     operations (289,541)
 737,118
 (1,374,745)
 163,627
 (2,515,833)
 
Changes from principal
     transactions
Net premiums 4,101,918 5,744,367 2,639,161 2,052,375 4,054,004
Cost of insurance and
     administrative charges (753,096) (1,128,125) (507,500) (326,968) (399,089)
Benefit payments - (12,031) - - -
Surrenders (882,070) (593,452) (303,992) (148,234) (37,709)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (858,136) 588,741 584,364 1,906,098 6,191,646
Other (11,094)
 (21,075)
 38,387
 23,719
 85,868
Increase (decrease) from principal
     transactions 1,597,522
 4,578,425
 2,450,420
 3,506,990
 9,894,720
 
Total increase (decrease) in net assets 1,307,981 5,315,543 1,075,675 3,670,617 7,378,887
 
Net assets at beginning of year 10,386,650
 16,220,553
 9,420,677
 4,141,315
 4,469,216
 
Net assets at end of year $11,694,631
 $21,536,096
 $10,496,352
 $7,811,932
 $11,848,103

See accompanying notes.

 

Estate Designer   			175

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

Van Eck
Worldwide
Hard
Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
 Worldwide
Real
Estate
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $       7,508 $  15,590 $   (31,191) $       7,488
Net realized gains (losses) on
     investments 140,202 (14,783) 87,666 7,144
Net unrealized gains (losses) on
     investments 123,530
 23,588
 (2,508,578)
 137,513
Increase (decrease) in net assets from
     operations 271,240
 24,395
 (2,452,103)
 152,145
 
Changes from principal
     transactions
Net premiums 358,451 329,600 2,190,959 411,834
Cost of insurance and
     administrative charges (106,083) (44,145) (190,748) (43,360)
Benefit payments - - - -
Surrenders (36,625) (12,576) (35,659) (1,389)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (475,702) 298,840 1,965,172 244,536
Other (4,008)
 1,110
 (29,680)
 (1,295)
Increase (decrease) from principal
     transactions (263,967)
 572,829
 3,900,044
 610,326
  
Total increase (decrease) in net assets 7,273 597,224 1,447,941 762,471
 
Net assets at beginning of year 2,306,078
 334,203
 3,114,059
 549,837
 
Net assets at end of year $2,313,351
 $931,427
 $4,562,000
 $1,312,308

See accompanying notes.

 

Estate Designer   			176

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

AIM
Capital
Appreciation
 Government
Securities
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     208,375 $     481,228
Net realized gains (losses) on
     investments 418,127 57,242
Net unrealized gains (losses) on
     investments (2,171,530)
 350,661
Increase (decrease) in net assets from
     operations (1,545,028)
 889,131
 
Changes from principal
     transactions
Net premiums 4,809,190 2,162,787
Cost of insurance and
     administrative charges (550,172) (311,399)
Benefit payments - -
Surrenders (120,337) (249,351)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 44,182,854 6,870,946
Other (1,046,753)
 7,451
Increase (decrease) from principal
     transactions 47,274,782
 8,480,434
 
Total increase (decrease) in net assets 45,729,754 9,369,565
 
Net assets at beginning of year 5,308,922
 7,394,333
 
Net assets at end of year $51,038,676
 $16,763,898

See accompanying notes.

 

Estate Designer   			177

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

GCG
Equity
Income
 Growth
 Hard
Assets
 Limited
Maturity
Bond
 Liquid
Asset
 MidCap
Growth
 Research
 Total
Return
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $   - $     90 $   - $  54,281 $      861,303 $   - $   - $     786
Net realized gains (losses) on
     investments - - - - - - - -
Net unrealized gains (losses) on
     investments -
 (168)
 -
 (45,286)
 -
 -
 -
 (550)
Increase (decrease) in net assets from
     operations -
 (78)
 -
 8,995
 861,303
 -
 -
 236
 
Changes from principal
     transactions
Net premiums - - - 868,271 53,113,856 - - -
Cost of insurance and
     administrative charges - - - (3,837) (698,485) - - -
Benefit payments
Surrenders - - - - - - - -
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) - 1,311 - 3,369 (51,270,261) - - 10,297
Other -
 -
 -
 -
 (14,911)
 -
 -
 -
Increase (decrease) from principal
     transactions -
 1,311
 -
 867,803
 1,130,199
 -
 -
 10,297
 
Total increase (decrease) in net assets - 1,233 - 876,798 1,991,502 - - 10,533
 
Net assets at beginning of year -
 -
 -
 -
 -
 -
 -
 -
 
Net assets at end of year $   -
 $1,233
 $   -
 $876,798
 $   1,991,502
 $   -
 $   -
 $10,533

See accompanying notes.

 

Estate Designer   			178

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 2000

Janus
Increase (decrease) in net assets Growth
 Aggressive
Growth
 Worldwide
Growth
 International
Growth
 
Operations
Net investment income (loss) $      (180) $      (218) $        (64) $       597
Net realized gains (losses) on investments (1,546) (86) (7,584) (513)
Net unrealized gains (losses) on investments (15,107)
 (50,478)
 (16,753)
 (16,513)
Increase (decrease) in net assets from operations (16,833)
 (50,782)
 (24,401)
 (16,429)
 
Changes from principal transactions
Net premiums 44,231 197,569 202,866 10,939
Cost of insurance and administrative expenses (1,752) (2,059) (1,621) (2,221)
Benefit payments - - - -
Surrenders - - - -
Net transfers among divisions (including the loan
     division and guaranteed interest division in
     the general account) 216,576 370,746 142,784 430,359
Other 1,419
 9,109
 (208)
 (2,032)
Increase (decrease) from principal transactions 260,474
 575,365
 343,821
 437,045
 
Total increase (decrease) in net assets 243,641 524,583 319,420 420,616
 
Net assets at beginning of year -
 -
 -
 -
 
Net assets at end of year $243,641
 $524,583
 $319,420
 $420,616

See accompanying notes.

 

Estate Designer   			179

 

Security Life Separate Account L1

Statement of Changes in Net Assets

Year ended December 31, 1999

NB
Limited
Maturity Bond
 Growth
 Partners
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     802,897 $     382,777 $     567,027
Net realized gains (losses) on
     investments (293,615) 318,964 532,601
Net unrealized gains (losses) on
     investments (423,477)
 3,714,218
 506,991
Increase (decrease) in net assets from
     operations 85,805
 4,415,959
 1,606,619
 
Changes from principal
     transactions
Net premiums 2,691,658 1,968,259 5,031,635
Cost of insurance and
     administrative charges (532,487) (382,030) (1,258,014)
Benefit payments - - -
Surrenders (1,033,731) (175,255) (320,942)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) (5,610,959) (1,798,195) 1,895,261
Other 22,193
 21,256
 2,199
Increase (decrease) from principal
     transactions (4,463,326)
 (365,965)
 5,350,139
 
Total increase (decrease) in net assets (4,377,521) 4,049,994 6,956,758
 
Net assets at beginning of year 15,578,349
 9,026,160
 22,463,242
 
Net assets at end of year $11,200,828
 $13,076,154
 $29,420,000

See accompanying notes.

 

Estate Designer   			180

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 1999

Alger
American
Small
Capitalization
 American
MidCap
Growth
 American
Growth
 American
Leveraged
AllCap
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $  2,058,314 $  1,547,583 $  2,530,830 $     631,343
Net realized gains (losses) on
     investments 94,825 322,974 2,007,625 2,597,845
Net unrealized gains (losses) on
     investments 5,993,398
 2,015,333
 4,584,649
 4,907,565
Increase (decrease) in net assets from
     operations 8,146,537
 3,885,890
 9,123,104
 8,136,753
 
Changes from principal
     transactions
Net premiums 4,618,903 3,508,936 7,654,291 3,464,401
Cost of insurance and
     administrative charges (957,053) (661,896) (1,597,077) (621,343)
Benefit payments - - - -
Surrenders (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) 1,461,610 1,637,697 4,904,801 5,793,425
Other (6,873)
 (17,173)
 (10,341)
 69,050
Increase (decrease) from principal
     transactions 4,129,847
 4,181,390
 9,356,780
 8,125,578
 
Total increase (decrease) in net assets 12,276,384 8,067,280 18,479,884 16,262,331
 
Net assets at beginning of year 15,503,371
 9,220,207
 22,903,614
 6,801,329
 
Net assets at end of year $27,779,755
 $17,287,487
 $41,383,498
 $23,063,660

See accompanying notes.

 

Estate Designer   			181

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 1999

Fidelity
Asset
Manager
 Growth
 Overseas
 Money
Market
 Index 500
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     714,882 $  3,199,633 $     631,807 $  1,089,493 $       643,366
Net realized gains (losses) on
     investments 122,474 7,459,882 553,230 - 3,223,226
Net unrealized gains (losses) on
     investments 316,538
 3,509,953
 8,740,414
 -
 17,585,537
Increase (decrease) in net assets from
     operations 1,153,894
 14,169,468
 9,925,451
 1,089,493
 21,452,129
 
Changes from principal
     transactions
Net premiums 3,791,052 9,969,268 5,963,624 62,143,060 33,943,409
Cost of insurance and
     administrative charges (604,489) (1,912,531) (1,071,163) (2,273,369) (5,761,157)
Benefit payments - - - (542,037) -
Surrenders (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) (349,280) 4,285,808 788,107 (42,741,942) 20,481,318
Other 3,430
 54,597
 23,794
 (8,230)
 73,191
Increase (decrease) from principal
     transactions 2,199,285
 11,088,220
 4,476,943
 15,295,663
 45,309,268
 
Total increase (decrease) in net assets 3,353,179 25,257,688 14,402,394 16,385,156 66,761,397
 
Net assets at beginning of year 10,237,279
 32,900,142
 20,581,887
 18,412,252
 86,154,369
 
Net assets at end of year $13,590,458
 $58,157,830
 $34,984,281
 $34,797,408
 $152,915,766

See accompanying notes.

 

Estate Designer   			182

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 1999

INVESCO
Total
Return
 Equity
Income
 High Yield
 Utilities
 Small Company
Growth
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     204,816 $     154,625 $   553,193 $     13,269 $   (14,338)
Net realized gains (losses) on
     investments 286,623 506,767 (241,611) 304,911 237,549
Net unrealized gains (losses) on
     investments (923,083)
 965,264
 379,005
 179,598
 1,535,014
Increase (decrease) in net assets from
     operations (431,644)
 1,626,656
 690,587
 497,778
 1,758,225
 
Changes from principal
     transactions
Net premiums 4,580,034 4,374,844 1,987,501 1,127,118 701,226
Cost of insurance and
     administrative charges (764,047) (922,117) (471,532) (198,877) (104,246)
Benefit payments - - - - -
Surrenders (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) (854,496) 643,961 (518,177) 1,491,088 1,377,972
Other (9,279)
 (21,837)
 4,698
 3,264
 6,086
Increase (decrease) from principal
     transactions 2,712,966
 3,740,892
 847,308
 1,602,577
 1,962,313
 
Total increase (decrease) in net assets 2,281,322 5,367,548 1,537,895 2,100,355 3,720,538
 
Net assets at beginning of year 8,105,328
 10,853,005
 7,882,782
 2,040,960
 748,678
 
Net assets at end of year $10,386,650
 $16,220,553
 $9,420,677
 $4,141,315
 $4,469,216

See accompanying notes.

 

Estate Designer   			183

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 1999

Van Eck
Worldwide
Hard
Assets
 Worldwide
Bond
 Worldwide
Emerging
Markets
 Worldwide
Real
Estate
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $       3,939 $    9,896 $    (10,886) $         63
Net realized gains (losses) on
     investments (313,009) (25,853) 410,384 1,622
Net unrealized gains (losses) on
     investments 592,123
 (9,920)
 809,962
 (17,973)
Increase (decrease) in net assets from
     operations 283,053
 (25,877)
 1,209,460
 (16,288)
 
Changes from principal
     transactions
Net premiums 441,045 253,322 416,537 200,716
Cost of insurance and
     administrative charges (86,064) (17,509) (56,532) (13,351)
Benefit payments - - - -
Surrenders (23,325) - (5,545) (4,461)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 602,367 (80,721) 1,091,100 306,489
Other 15,247
 (819)
 (2,117)
 451
Increase (decrease) from principal
     transactions 949,270
 154,273
 1,443,443
 489,844
 
Total increase (decrease) in net assets 1,232,323 128,396 2,652,903 473,556
 
Net assets at beginning of year 1,073,755
 205,807
 461,156
 76,281
 
Net assets at end of year $2,306,078
 $334,203
 $3,114,059
 $549,837

See accompanying notes.

 

Estate Designer   			184

 

Security Life Separate Account L1

Statement of Changes in Net Assets (continued)

Year ended December 31, 1999

AIM
Capital
Appreciation
 Government
Securities
Increase (decrease) in net assets
 
Operations
Net investment income (loss) $     94,178 $   166,577
Net realized gains (losses) on
     investments 92,256 (8,224)
Net unrealized gains (losses) on
     investments 1,257,369
 (220,437)
Increase (decrease) in net assets from
     operations 1,443,803
 (62,084)
 
Changes from principal
     transactions
Net premiums 1,497,094 1,714,474
Cost of insurance and
     administrative charges (216,619) (165,512)
Benefit payments - -
Surrenders (18,584) (582,842)
Net transfers among divisions
     (including the loan division and
     guaranteed interest division in
     the general account) 1,391,719 3,892,482
Other 7,073
 2,098
Increase (decrease) from principal
     transactions 2,660,683
 4,860,700
 
Total increase (decrease) in net assets 4,104,486 4,798,616
 
Net assets at beginning of year 1,204,436
 2,595,717
 
Net assets at end of year $5,308,922
 $7,394,333

See accompanying notes.

 

Estate Designer   			185

 

Security Life Separate Account L1

Notes to Financial Statements

December 31, 2001

1. 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, Variable Survivorship Universal Life, Corporate Benefits Variable Universal Life, Strategic Benefits Variable Universal Life, Asset Portfolio Manager Variable Universal Life, and Estate Designer policies ("Variable Universal Life Policies") offered by the Company. Corporate Benefits Variable Universal Life and Strategic Benefits Variable Universal Life became effective in 2000 and are defined as Class B policies due to their mortality and expense charge structure. Asset Portfolio Manager Variable Universal Life became effective in 2001 and is also defined as a Class B policy. All other Variable Universal Life Policies are defined as Class A policies. The Separate Account may be used to support other variable life policies as the Company offers them. 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, 2001, the Separate Account offered 51 investment divisions (collectively, the "Funds") available to the policyholders, 38 of which invest in an independently managed mutual fund portfolio and 13 of which invest in a mutual fund portfolio managed by an affiliate, either Directed Services, Inc. or ING Pilgrim Investments, LLC.

 

Estate Designer   			186

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

1. Organization (continued)

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 II Asset Manager Service Class Portfolio
     Fidelity Investments VIP Growth Portfolio
     Fidelity Investments VIP Growth Service Class Portfolio
     Fidelity Investments VIP Overseas Portfolio
     Fidelity Investments VIP Overseas Service Class Portfolio
     Fidelity Investments VIP Money Market Portfolio
     Fidelity Investments VIP II Index 500 Portfolio

INVESCO Funds Group, Inc. ("INVESCO"):
     INVESCO VIF Total Return Portfolio
     INVESCO VIF Equity Income Portfolio
     INVESCO VIF High Yield Portfolio
     INVESCO VIF Utilities Portfolio
     INVESCO VIF Small Company Growth Portfolio

Van Eck Associates Corporation ("Van Eck"):
     Van Eck Worldwide Hard Assets Portfolio
     Van Eck Worldwide 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

 

Estate Designer   			187

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

1. Organization (continued)

Portfolio Managers/Portfolios (Funds) (continued)

Directed Services, Inc. ("GCG"):
     GCG Trust - Equity Income Portfolio
     GCG Trust - Growth Portfolio
     GCG Trust - Hard Assets Portfolio
     GCG Trust - Limited Maturity Bond Portfolio
     GCG Trust - Liquid Asset Portfolio
     GCG Trust - MidCap Growth Portfolio
     GCG Trust - Research Portfolio
     GCG Trust - Total Return Portfolio
     GCG Trust - Fully Managed Portfolio

Janus Aspen Series Funds ("Janus"):
     Growth Portfolio
     Aggressive Growth Portfolio
     Worldwide Growth Portfolio
     International Growth Portfolio

M Fund, Inc. ("M"):
     Brandes International Equity Fund
     Clifton Enhanced U.S. Equity Fund
     Frontier Capital Appreciation Fund
     Turner Core Growth Fund

ING Pilgrim Investments, LLC ("Pilgrim"):
     VP Growth Opportunities Portfolio
     VP MagnaCap Portfolio
     VP MidCap Opportunities Portfolio
     VP SmallCap Opportunities Portfolio

Putnam Investment Management, LLC ("Putnam"):
     Putnam VT New Opportunities Fund - Class 1B Shares
     Putnam VT Voyager Fund - Class 1B Shares
     Putnam VT Growth and Income Fund - Class 1B Shares
     Putnam VT Small Cap Value Fund - Class 1B Shares

Effective May 1, 2001, 16 new divisions became available to the policyholders for investment in the following funds:

Fidelity Management & Research Company ("Fidelity"):
   Fidelity Investments VIP II Asset Manager Service Class Portfolio
   Fidelity Investments VIP Growth Service Class Portfolio
   Fidelity Investments VIP Overseas Service Class Portfolio

 

Estate Designer   			188

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

1. Organization (continued)

Portfolio Managers/Portfolios (Funds)

Directed Services, Inc. ("GCG"):
     GCG Trust - Fully Managed Portfolio

M Fund, Inc. ("M"):
     Brandes International Equity Fund
     Clifton Enhanced U.S. Equity Fund
     Frontier Capital Appreciation Fund
     Turner Core Growth Fund

ING Pilgrim Investments, LLC ("Pilgrim"):
     VP Growth Opportunities Portfolio
     VP MagnaCap Portfolio
     VP Mid-Cap Opportunities Portfolio
     VP SmallCap Opportunities Portfolio

Putnam Investment Management, LLC ("Putnam"):
     Putnam VT New Opportunities Fund - Class 1B Shares
     Putnam VT Voyager Fund - Class 1B Shares
     Putnam VT Growth and Income Fund - Class 1B Shares
     Putnam VT Small Cap Value Fund - Class 1B Shares

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.

2. 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.

 

Estate Designer   			189

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes that follow:

Investment Valuation

The investments in shares of the Funds are valued at the closing net asset value (fair 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

For FirstLine, FirstLine II, Strategic Advantage, Strategic Advantage II, Variable Survivorship and Estate Designer policies (Class A Policies), 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.

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, 2001, 2000, and 1999 were $5,129,482, $4,508,171, and $2,908,885, respectively.

For the Corporate Benefits, Strategic Benefits and Asset Portfolio Manager policies (Class B Policies), mortality and expense charges result in the redemption of units rather than a deduction in the daily computation of unit values.

For Corporate Benefits policies, a monthly deduction, at an annual rate of .20% of the account value, is charged. For Strategic Benefits policies, a monthly deduction, at an annual rate of .85%, .60% and .05% of the account value, is charged during policy years 1 through 10, 11 through 20, and 21 and later, respectively. For Asset Portfolio Manager

 

Estate Designer   			190

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

2. Summary of Significant Accounting Policies (continued)

policies, a monthly deduction, at an annual rate of .90% and .45% of the account value, is charged during policy years 1 through 10 and 11 through 20, respectively. There is no mortality and expense charge after year 20 for Asset Portfolio Manager policies. Total mortality and expense charges for these policies for the years ended December 31, 2001 and 2000 were $180,487 and $42,000, respectively, and are included in the Statements of Changes in Net Assets as cost of insurance and administrative charges.

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.

3. Related Party Transactions

For the year ended December 31, 2001, management fees were paid indirectly to Directed Services, Inc., an affiliate of the Company, in its capacity as investment manager to GCG Trust. The Fund's advisory agreement provided for a fee at an annual rate of .94% of the average net assets of the Equity Income, Hard Assets and Fully Managed Portfolios, .99% of the average net assets of the Growth Portfolio, .54% of the average net assets of the Limited Maturity Bond and Liquid Assets Portfolios, and .88% of the average net assets of the MidCap, Research and Total Return Portfolios. In addition, management fees were paid to ING Pilgrim Investments, LLC, an affiliate of the Company, in its capacity as investment advisor to Pilgrim Variable Products Trust. The Fund's advisory agreement provides for a fee at an annual rate of .75% of the average net assets of the fund for all available Pilgrim funds.

4. 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, surrenders, transfers to other divisions, and charges by the Company for certain costs of insurance and administrative charges. The cost of insurance and administrative charges for the years ended December 31, 2001, 2000, and 1999 were $42,185,259, $30,552,382, and $20,649,015, respectively. Dividends made by the Funds are reinvested in the Funds.

 

Estate Designer   			191

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

4. Investments (continued)

For the year ended December 31, 2001, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:

Fund
 Beginning
of Year
 Purchases
 Sales
 End
of Year
Neuberger Berman Management Inc.:
     Limited Maturity Bond $  14,317,177 $  16,032,595 $    (8,123,234) $  22,226,538
     Growth 23,675,702 13,235,073 (19,037,677) 17,873,098
     Partners 26,760,069 36,952,816 (32,848,817) 30,864,068
 
Fred Alger Management, Inc.:
     American Small Capitalization 29,017,464 8,297,454 (10,700,161) 26,614,757
     American MidCap Growth 32,585,413 64,242,356 (54,197,808) 42,629,961
     American Growth 57,519,366 20,336,843 (10,835,418) 67,020,791
     American Leveraged AllCap 30,403,675 42,943,940 (50,121,218) 23,226,397
 
Fidelity Management & Research Co.:
     Asset Manager 16,794,005 14,332,044 (10,475,832) 20,650,217
     Asset Manager SC - 322,411 (16,181) 306,230
     Growth 76,947,214 39,615,539 (46,633,643) 69,929,110
     Growth SC - 287,237 (89,156) 198,081
     Overseas 47,778,416 46,281,254 (53,978,530) 40,081,140
     Overseas SC - 167,184 (7,553) 159,631
     Money Market 62,301,092 192,352,515 (159,578,401) 95,075,206
     Index 500 171,986,004 65,277,579 (19,047,917) 218,215,666
 
INVESCO Funds Group, Inc.:
     Total Return 13,758,395 6,344,012 (3,015,012) 17,087,395
     Equity Income 20,783,337 16,814,165 (6,420,880) 31,176,622
     High Yield 11,975,324 6,514,465 (4,278,473) 14,211,316
     Utilities 7,691,761 5,505,966 (2,273,953) 10,923,774
     Small Company Growth 14,096,290 8,908,835 (5,540,403) 17,464,722
 
Van Eck Associates Corporation:
     Worldwide Hard Assets 2,041,764 1,423,526 (1,616,549) 1,848,741
     Worldwide Bond 913,802 1,357,384 (996,529) 1,274,657
     Worldwide Emerging Markets 6,215,858 2,432,742 (3,556,064) 5,092,536
     Worldwide Real Estate 1,192,797 2,513,282 (1,001,214) 2,704,865
 
AIM Advisors, Inc.:
     Capital Appreciation 51,815,173 12,645,062 (47,723,642) 16,736,593
     Government Securities 16,599,323 59,154,458 (50,443,395) 25,310,386
 
Directed Services, Inc. (GCG):
     Equity Income - 9,309 (2,710) 6,599
     Growth 1,401 15,498 (13,340) 3,559
     Hard Assets - - - -
     Limited Maturity Bond 922,084 56,179,956 (422,776) 56,679,264
     Liquid Asset 1,991,502 20,343,574 (14,503,017) 7,832,059
     MidCap Growth - 519,237 (75,414) 443,823
     Research - 6,638 (3,364) 3,274
     Total Return 11,083 55,089 (10,523) 55,649
      Fully Managed - 4,099,609 (105,180) 3,994,429
 
Janus Funds:
     Growth 258,748 3,804,930 (594,196) 3,469,482
     Aggressive Growth 575,061 2,113,468 (539,347) 2,149,182
     Worldwide Growth 336,173 4,062,782 (987,267) 3,411,688
     International Growth 437,129 6,516,625 (1,470,766) 5,482,988

 

Estate Designer   			192

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

4. Investments (continued)

Fund
 Beginning
of Year
 Purchases
 Sales
 End
of Year
M Fund, Inc.:
     Brandes $           - $    2,037,956 $         (56,749) $    1,981,207
     Clifton - 1,236,044 (22,056) 1,213,988
     Frontier - 2,640,008 (1,026,625) 1,613,383
     Turner - 297,108 (7,402) 289,706
 
ING Pilgrim Investments, LLC:
     Growth Opportunities - 149,725 (4,425) 145,300
     MagnaCap - 225,971 (27,239) 198,732
     Mid-Cap Opportunities - 341,325 (64,789) 276,536
     Small Cap Opportunities - 829,924 (129,098) 700,826
 
Putnam Investment Management, LLC:
     New Opportunities - 401,002 (43,537) 357,465
     Voyager - 855,651 (12,397) 843,254
     Growth and Income - 3,491,353 (168,430) 3,322,923
     Small Cap Value -
 5,926,722
 (205,186)
 5,721,536
Total $741,702,602
 $796,028,221
 $(622,932,132)
 $914,798,691

Aggregate proceeds from sales of investments for the year ended December 31, 2001, were $537,462,983.

5. 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.

6. 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 the Separate Account financial statements.

 

Estate Designer   			193

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

7. 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   			194

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units

The following schedule summarizes the changes in divisional units for the year ended December 31, 2001:

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
Neuberger Berman Management Inc.:
     Limited Maturity Bond:
          Class A 1,085,190.344 1,045,198.635 (567,147.556) 1,563,241.423
          Class B - 39,896.374 (359.294) 39,537.080
     Growth:
          Class A 755,032.816 311,758.151 (361,192.503) 705,598.464
          Class B - 11,345.968 (606.281) 10,739.687
     Partners:
          Class A 1,131,357.503 1,568,221.555 (1,336,548.288) 1,363,030.770
          Class B 727.044 23,517.646 (4,143.962) 20,100.728
Fred Alger Management, Inc.:
     American Small Capitalization:
          Class A 1,351,105.091 577,510.162 (461,821.507) 1,466,793.746
          Class B 55,669.122 23,760.919 (9,462.424) 69,967.617
     American MidCap Growth:
          Class A 1,022,948.192 1,556,445.842 (1,196,019.057) 1,383,374.977
          Class B 4,581.526 75,622.900 (18,741.738) 61,462.688
     American Growth:
          Class A 1,795,058.476 521,744.175 (341,082.820) 1,975,719.831
          Class B 11,503.557 88,623.404 (22,531.324) 77,595.637
     American Leveraged AllCap:
          Class A 602,197.766 1,198,050.602 (1,116,960.389) 683,287.979
          Class B - 19,058.289 (6,050.840) 13,007.449
Fidelity Management & Research Co.:
     Asset Manager:
          Class A 878,584.296 797,077.552 (506,252.369) 1,169,409.479
          Class B - - - -
     Asset Manager SC:
          Class A - - - -
          Class B - 33,326.844 (1,617.003) 31,709.841
     Growth:
          Class A 2,222,867.138 1,366,077.784 (1,224,747.547) 2,364,197.375
          Class B 40,727.108 52,498.684 (13,693.893) 79,531.899
     Growth SC:
          Class A - - - -
          Class B - 34,313.597 (9,911.676) 24,401.921
     Overseas:
          Class A 2,586,286.303 2,177,085.766 (2,121,386.326) 2,641,985.743
          Class B 83,750.568 1,146,564.856 (1,097,502.418) 132,813.006
     Overseas SC:
          Class A - - - -
          Class B - 20,601.104 (820.154) 19,780.950
     Money Market:
          Class A 4,689,569.461 13,960,590.422 (11,728,889.223) 6,921,270.660
          Class B - - - -
     Index 500:
          Class A 6,025,479.633 2,088,847.553 (640,685.026) 7,473,642.160
          Class B 704,951.502 1,144,484.205 (468,821.820) 1,380,613.887

 

Estate Designer   			195

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
INVESCO Funds Group, Inc.:
     Total Return:
          Class A 698,007.347 369,494.546 (143,489.958) 924,011.935
          Class B - 10,927.328 (717.750) 10,209.578
     Equity Income:
          Class A 782,880.410 631,606.668 (263,303.863) 1,151,183.215
          Class B 23,197.396 71,926.115 (7,887.735) 87,235.776
     High Yield:
          Class A 680,080.798 355,220.262 (235,412.128) 799,888.932
          Class B 2,293.135 32,831.757 (3,085.422) 32,039.470
     Utilities:
          Class A 341,947.485 276,491.273 (108,705.909) 509,732.849
          Class B - 18,077.726 (2,310.190) 15,767.536
     Small Company Growth:
          Class A 658,499.168 587,799.602 (242,868.178) 1,003,430.592
          Class B 2,459.473 30,120.748 (3,154.822) 29,425.399
Van Eck Associates Corporation:
     Worldwide Hard Assets:
          Class A 214,971.664 134,747.414 (169,156.819) 180,562.259
          Class B - 2,106.991 (2,073.654) 33.337
     Worldwide Bond:
          Class A 91,236.724 130,440.835 (95,280.789) 126,396.770
          Class B 42.100 1,117.318 (64.089) 1,095.329
     Worldwide Emerging Markets:
          Class A 543,314.421 312,104.213 (303,529.272) 551,889.362
          Class B 36,043.266 6,974.541 (6,873.296) 36,144.511
     Worldwide Real Estate:
          Class A 131,207.896 245,639.719 (108,349.895) 268,497.720
          Class B 395.373 2,455.453 (438.100) 2,412.726
AIM Advisors, Inc.:
     Capital Appreciation:
          Class A 647,483.811 669,232.630 (226,860.447) 1,089,855.994
          Class B 3,435,424.363 388,220.093 (3,739,734.644) 83,909.812
     Government Securities:
          Class A 1,022,213.843 1,260,915.549 (161,413.134) 2,121,716.258
          Class B 469,535.280 3,886,873.106 (4,321,807.397) 34,600.989

 

Estate Designer   			196

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
Directed Services, Inc. (GCG):
     Equity Income:
          Class A - - - -
          Class B - 854.189 (254.649) 599.540
     Growth:
          Class A - - - -
          Class B 103.679 1,795.458 (1,454.408) 444.729
     Hard Assets:
          Class A - - - -
          Class B - - - -
     Limited Maturity Bond:
          Class A - - - -
          Class B 80,478.798 4,566,682.226 (36,766.122) 4,610,394.902
     Liquid Asset:
          Class A - - - -
          Class B 183,932.621 1,825,152.883 (1,312,595.378) 696,490.126
     MidCap Growth:
          Class A - 49,121.910 (5,893.817) 43,228.093
          Class B - 4,280.346 (669.297) 3,611.049
     Research:
          Class A - - - -
          Class B - 695.207 (330.915) 364.292
     Total Return:
          Class A - - - -
          Class B 908.365 4,516.482 (858.859) 4,565.988
     Fully Managed:
          Class A - 364,090.050 (8,568.178) 355,521.872
          Class B - 13,951.015 (908.204) 13,042.811
Janus Aspen Series Funds:
      Growth:
          Class A 29,430.276 501,373.539 (65,944.938) 464,858.877
          Class B - 38,268.403 (1,543.184) 36,725.219
      Aggressive Growth:
          Class A 53,752.789 423,956.081 (63,360.054) 414,348.816
          Class B 22,786.649 24,389.033 (9,917.571) 37,258.111
      Worldwide Growth:
          Class A 19,710.545 529,913.890 (106,123.101) 443,501.334
          Class B 17,011.166 32,317.343 (8,725.744) 40,602.765
      International Growth:
          Class A 42,106.076 873,051.635 (172,736.551) 742,421.160
          Class B 6,269.387 36,401.788 (5,327.353) 37,343.822
M Funds, Inc.:
      Brandes:
          Class A - 204,545.454 (5,464.046) 199,081.408
          Class B - 784.937 (7.984) 776.953
      Clifton:
          Class A - 122,178.139 (1,972.168) 120,205.971
          Class B - 62.763 (14.276) 48.487
      Frontier:
          Class A - 266,555.787 (102,847.448) 163,708.339
          Class B - 577.431 (26.884) 550.547
      Turner:
          Class A - 31,628.530 (591.817) 31,036.713
          Class B - 149.469 (27.349) 122.120

 

Estate Designer   			197

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
ING Pilgrim Investments, LLC:
      Growth Opportunities:
          Class A - 17,239.756 (356.196) 16,883.560
          Class B - 216.814 (121.360) 95.454
      MagnaCap:
          Class A - 20,405.686 (2,299.681) 18,106.005
          Class B - 2,912.749 (362.083) 2,550.666
      Mid-Cap Opportunities:
          Class A - 36,205.316 (6,619.454) 29,585.862
          Class B - 2,680.580 (195.151) 2,485.429
      Small Cap Opportunities:
          Class A - 72,852.493 (8,843.292) 64,009.201
          Class B - 14,975.057 (3,717.243) 11,257.814
Putnam Investment Management, LLC:
      New Opportunities:
          Class A - 43,206.982 (4,559.798) 38,647.184
          Class B - 3,398.550 (486.058) 2,912.492
      Voyager:
          Class A - 87,155.745 (1,144.534) 86,011.211
          Class B - 3,590.085 (15.143) 3,574.942
      Growth and Income:
          Class A - 338,965.181 (8,609.502) 330,355.679
          Class B - 21,861.287 (8,180.208) 13,681.079
      Small Cap Value:
          Class A - 543,246.905 (18,289.938) 524,956.967
          Class B - 10,434.457 (389.190) 10,045.267

 

Estate Designer   			198

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

The following schedule summarizes the changes in divisional units for the year ended December 31, 2000:

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
Neuberger Berman Management Inc.:
     Limited Maturity Bond:
          Class A 889,159.604 504,777.566 (308,746.826) 1,085,190.344
          Class B - - - -
     Growth:
          Class A 434,338.368 585,182.288 (264,487.840) 755,032.816
          Class B - - - -
     Partners:
          Class A 1,212,133.448 1,779,259.060 (1,860,035.005) 1,131,357.503
          Class B - 776.829 (49.785) 727.044
Fred Alger Management, Inc.:
     American Small Capitalization:
          Class A 1,055,757.484 2,800,960.511 (2,505,612.904) 1,351,105.091
          Class B - 55,711.543 (42.421) 55,669.122
     American MidCap Growth:
          Class A 576,738.314 560,214.726 (114,004.848) 1,022,948.192
          Class B - 4,663.845 (82.319) 4,581.526
     American Growth:
          Class A 1,257,371.637 778,072.130 (240,385.291) 1,795,058.476
          Class B - 11,643.541 (139.984) 11,503.557
     American Leveraged AllCap:
          Class A 425,281.099 336,729.473 (159,812.806) 602,197.766
          Class B - - - -
Fidelity Management & Research Co.:
     Asset Manager:
          Class A 722,717.906 310,205.974 (154,339.584) 878,584.296
          Class B - - - -
     Growth:
          Class A 1,676,236.646 2,952,178.456 (2,405,547.964) 2,222,867.138
          Class B - 40,990.125 (263.017) 40,727.108
     Overseas:
          Class A 1,716,617.627 1,467,555.053 (597,886.377) 2,586,286.303
          Class B - 83,821.190 (70.622) 83,750.568
     Money Market:
          Class A 2,763,648.297 18,979,254.070 (17,053,332.906) 4,689,569.461
          Class B - - - -
     Index 500:
          Class A 4,772,484.597 1,767,429.327 (514,434.291) 6,025,479.633
          Class B - 714,452.306 (9,500.804) 704,951.502

 

Estate Designer   			199

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
INVESCO Funds Group, Inc.:
     Total Return:
          Class A 602,187.614 257,125.735 (161,306.002) 698,007.347
          Class B - - - -
     Equity Income:
          Class A 621,047.937 283,695.785 (121,863.312) 782,880.410
          Class B - 23,229.266 (31.870) 23,197.396
     High Yield:
          Class A 536,863.946 285,666.502 (142,449.650) 680,080.798
          Class B - 2,314.001 (20.866) 2,293.135
     Utilities:
          Class A 189,409.984 190,914.332 (38,376.831) 341,947.485
          Class B - - - -
     Small Company Growth:
          Class A 212,503.210 609,134.460 (163,138.502) 658,499.168
          Class B - 2,483.692 (24.219) 2,459.473
Van Eck Associates Corporation:
     Worldwide Hard Assets:
          Class A 236,972.429 53,067.697 (75,068.462) 214,971.664
          Class B - - - -
     Worldwide Bond:
          Class A 33,114.078 77,355.439 (19,232.793) 91,236.724
          Class B - 51.386 (9.286) 42.100
     Worldwide Emerging Markets:
          Class A 228,819.195 390,868.355 (76,373.129) 543,314.421
          Class B - 36,097.306 (54.040) 36,043.266
     Worldwide Real Estate:
          Class A 64,967.173 103,195.970 (36,955.247) 131,207.896
          Class B - 439.384 (44.011) 395.373
AIM Advisors, Inc.:
     Capital Appreciation:
          Class A 323,846.032 377,520.848 (53,883.069) 647,483.811
          Class B - 3,435,588.521 (164.158) 3,435,424.363
     Government Securities:
          Class A 715,905.149 682,457.548 (376,148.854) 1,022,213.843
          Class B - 469,546.296 (11.016) 469,535.280

 

Estate Designer   			200

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
of Year
Directed Services, Inc. (GCG):
     Equity Income:
          Class A - - - -
          Class B - - - -
     Growth:
          Class A - - - -
          Class B - 103.679 - 103.679
     Hard Assets:
          Class A - - - -
          Class B - - - -
     Limited Maturity Bond:
          Class A - - - -
          Class B - 80,478.798 - 80,478.798
     Liquid Asset:
          Class A - - - -
          Class B - 5,018,488.796 (4,834,556.175) 183,932.621
     MidCap Growth:
          Class A - - - -
          Class B - - - -
     Research:
          Class A - - - -
          Class B - - - -
     Total Return:
          Class A - - - -
          Class B - 908.365 - 908.365
Janus Aspen Series Funds:
      Growth:
          Class A - 37,656.545 (8,226.269) 29,430.276
          Class B - - - -
      Aggressive Growth:
          Class A - 53,792.856 (40.067) 53,752.789
          Class B - 22,786.649 - 22,786.649
      Worldwide Growth:
          Class A - 33,160.748 (13,450.203) 19,710.545
          Class B - 17,011.166 - 17,011.166
      International Growth:
          Class A - 43,058.359 (952.283) 42,106.076
          Class B - 6,269.387 - 6,269.387

 

Estate Designer   			201

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

8. Summary of Changes in Units (continued)

The following schedule summarizes the changes in divisional units for the year ended December 31, 1999:

Division
 Outstanding
at Beginning
of Year
 Increase
for Payments
Received
 (Decrease) for
Withdrawals
and Other
Deductions
 Outstanding
at End
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   			202

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
Neuberger Berman Management Inc.:
     Limited Maturity Bond
 
          2001 1,603 $10.58 to $22,975 5.37% 0% to 8.01%
$14.43 .75%
          2000 * $13.36 * * * *
 
     Growth
 
          2001 716 $8.50 to $13,020 50.01% 0% to (30.66)%
$18.32 .75%
          2000 * $26.42 * * * *
 
     Partners
 
          2001 1,383 $9.69 to $32,191 4.12% 0% to (3.61)% to
$23.47 .75% (2.81)%
          2000 * $9.97 to * * * *
$24.35
 
Fred Alger Management, Inc.:
     American Small Capitalization
 
          2001 1,537 $6.80 to $19,928 .05% 0% to (30.10)% to
$13.26 .75% (29.53)%
          2000 * $9.65 to * * * *
$18.97
  
     American MidCap Growth
 
          2001 1,445 $12.57 to $42,563 46.27% 0% to (7.02)% to
$30.21 .75% (6.40)%
          2000 * $13.43 to * * * *
$32.49
 
     American Growth
 
          2001 2,053 $8.98 to $48,752 12.91% 0% to (12.74)% to
$24.32 .75% (11.61)%
          2000 * $10.16 to * * * *
$27.87
 
     American Leveraged AllCap
 
          2001 696 $9.45 to $23,276 3.72% 0% to (16.30)%
$33.88 .75%
          2000 * $40.48 * * * *
 
Fidelity Management & Research Co.:
     Asset Manager
 
          2001 1,201 $16.97 $20,156 4.74% .75% (5.35)%
          2000 * $17.93 * * * *
 
     Asset Manager SC
 
          2001 32 $9.90 $314 - 0% -
          2000 * * * * * *

 

Estate Designer   			203

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights (continued)

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
 
     Growth
 
          2001 2,444 $8.93 to $39,751 7.38% 0% to (18.45)% to
24.97 .75% (17.62)%
          2000 * $10.84 to * * * *
$30.62
 
     Growth SC
 
          2001 24 $8.58 $209 - 0% -
          2000 * * * * * *
 
     Overseas
 
          2001 2,775 $8.18 to $35,065 13.45% 0% to (21.63)% to
$12.86 .75% (21.19)%
          2000 * $10.38 to * * * *
$16.41
 
     Overseas SC
 
          2001 19 $7.63 $151 - 0% -
          2000 * * * * * *
 
     Money Market
 
          2001 6,921 $13.70 $94,833 3.88% .75% 3.63%
          2000 * $13.22 * * * *
 
     Index 500
 
          2001 8,854 $8.85 to $200,404 1.05% 0% to (12.72)% to
$25.18 .75% (12.12%)
          2000 * $10.07 to * * * *
$28.85
 
INVESCO Funds Group, Inc.:
     Total Return
 
          2001 934 $9.97 to $15,247 2.57% 0% to (2.15)%
$16.39 .75%
          2000 * $16.75 * * * *
 
     Equity Income
 
          2001 1,238 $9.82 to $29,102 1.59% 0% to (9.75)% to
$24.54 .75% (8.99)%
          2000 * $10.79 to * * * *
$27.19
 
     High Yield
 
          2001 832 $7.72 to $10,708 10.78% 0% to (15.06)% to
$13.08 .75% (14.88)%
          2000 * $9.07 to * * * *
$15.40
 
     Utilities
 
          2001 526 $7.05 to $7,928 1.02% 0% to (32.91)%
$15.33 .75%
          2000 * $22.85 * * * *

 

Estate Designer   			204

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights (continued)

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
 
     Small Company Growth
          2001 1,033 $10.77 to $14,861 - 0% to (19.32)% to
$14.49 .75% (18.53)%
          2000 * $13.22 to * * * *
$17.96
 
Van Eck Associates Corporation:
     Worldwide Hard Assets
 
          2001 181 $8.91 to $1,727 1.15% 0% to (11.06)%
$9.57 .75%
          2000 * $10.76 * * * *
 
     Worldwide Bond
 
          2001 127 $9.52 to $1,225 3.92% 0% to (5.78)% to
$9.61 .75% (4.99)%
          2000 * $10.02 to * * * *
$10.20
     Worldwide Emerging Markets
 
          2001 588 $7.65 to $4,516 - 0% to (2.55)% to
$8.12 .75% (1.81)%
          2000 * $7.85 to * * * *
$8.27
 
     Worldwide Real Estate
 
          2001 271 $10.42 to $2,826 1.98% 0% to 4.51% to
$11.55 .75% 5.29%
          2000 * $9.97 to * * * *
$10.97
 
AIM Advisors, Inc.:
     Capital Appreciation
 
          2001 1,174 $9.30 to $12,831 7.26% 0% to (23.83)% to
$11.06 .75% (23.27)%
          2000 * $12.12 to * * * *
$14.52
 
     Government Securities
 
          2001 2,156 $11.81 to $25,665 1.35% 0% to 5.40% to
$11.90 .75% 6.11%
          2000 * $11.13 to * * * *
$11.29
 
Directed Services, Inc. (GCG):
     Equity Income
 
          2001 1 $10.76 $6 8.25% 0% -
          2000 * * * * * *
 
     Growth
 
          2001 - $8.29 $4 - 0% (30.28)%
          2000 * $11.89 * * * *

 

Estate Designer   			205

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights (continued)

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
 
     Hard Assets
 
          2001 - - - - - -
          2000 * * * * * *
 
     Limited Maturity Bond
 
          2001 4,610 $11.86 $54,671 16.29% 0% 8.91%
          2000 * $10.89 * * * *
 
     Liquid Assets
 
          2001 696 $11.25 $7,832 3.74% 0% 3.88%
          2000 * $10.83 * * * *
 
     MidCap Growth
 
          2001 46 $9.68 to $465 1.85% 0% to -
$13.04 .75%
          2000 * * * * * *
 
     Research
 
          2001 - $8.78 $3 4.55% 0% -
          2000 * * * * * *
 
     Total Return
 
          2001 5 $11.65 $53 13.37% 0% 0.430%
          2000 * $11.60 * * * *
 
     Fully Managed
 
          2001 369 $10.60 to $3,909 9.39% 0% to -
$10.66 .75%
          2000 * * * * * *
 
Janus Aspen Series Funds:
     Growth
 
          2001 501 $6.17 to $3,099 0.24% 0% to (25.48)%
$6.23 .75%
          2000 * $8.28 * * * *
 
     Aggressive Growth
 
          2001 452 $4.11 to $1,858 - 0% to (40.00)% to
$4.15 .75% (39.50)%
          2000 * $6.85 to * * * *
$6.86
 
     Worldwide Growth
 
          2001 484 $6.68 to $3,235 0.37% 0% to (23.13)% to
$6.74 .75% (22.62)%
          2000 * $8.69 to * * * *
$8.71

 

Estate Designer   			206

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights (continued)

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
 
     International Growth
 
          2001 780 $6.59 to $5,140 0.87% 0% to (24.17)% to
$6.67 .75% (23.42)%
          2000 * $8.69 to * * * *
$8.71
 
M Fund, Inc.:
     Brandes International Equity
 
          2001 200 $9.48 to $1,895 13.21% 0% to -
$9.54 .75%
          2000 * * * * * *
 
     Clifton Enhanced US Equity
 
          2001 120 $9.93 to $1,194 11.25% 0% to -
$9.98 .75%
          2000 * * * * * *
 
     Frontier Capital Appreciation
 
          2001 164 $10.51 to $1,727 0.03% 0% to -
$10.57 .75%
          2000 * * * * * *
 
     Turner Core Growth
 
          2001 31 $9.49 to $296 0.26% 0% to -
$9.55 .75%
          2000 * * * * * *
 
ING Pilgrim Investment, LLC:
     Growth Opportunities
 
          2001 17 $8.64 to $147 - 0% to -
$8.68 .75%
          2000 * * * * * *
 
     MagnaCap
 
          2001 21 $9.76 to $202 1.09% 0% to -
$9.80 .75%
          2000 * * * * * *
 
     Mid-Cap Opportunities
 
          2001 32 $9.18 to $294 - 0% to -
$9.18 .75%
          2000 * * * * * *
 
     Small Cap Opportunities
 
          2001 75 $9.69 to $730 0.17% 0% to -
$9.74 .75%
          2000 * * * * * *

 

Estate Designer   			207

 

Security Life Separate Account L1

Notes to Financial Statements (continued)

9. Financial Highlights (continued)

At December 31,
 For the Year Ended December 31,
Division
 Units (000s)
 Unit Fair Value
Lowest to Highest
 Net Assets
(000s)
 Investment
Income Ratio
 Expense Ratio
Lowest to
Highest
 Total Return
Lowest to
Highest
 
Putnam Investment Management, LLC:
     New Opportunities
 
          2001 42 $9.56 to $397 - 0% to -
$9.61 .75%
          2000 * * * * * *
 
     Voyager
 
          2001 90 $9.51 to $852 - 0% to -
$9.57 .75%
          2000 * * * * * *
 
     Growth and Income
 
          2001 344 $9.83 to $3,383 - 0% to -
$9.89 .75%
          2000 * * * * * *
 
Small Cap Value
 
          2001 535 $11.57 to $6,191 - 0% to -
$11.66 .75%
          2000 * * * * * *

* Not applicable</R>

 

Estate Designer   			208

 

APPENDIX A

Factors for the
Guideline Premium/Cash Value Corridor Test
For a Life Insurance Policy

Attained Age of Younger Insured Factor Attained Age of Younger Insured Factor Attained Age of Younger Insured Factor Attained Age of Younger 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

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   			209

 

APPENDIX B

Performance Information

The following hypothetical performance demonstrates 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 performance is 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, tobacco non-user male, age 50 and a preferred, tobacco non-user 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 and Deductions, page 54.

Past performance is not an indication of future results. Actual investment results may be more or less than those shown in the hypothetical illustrations.

 

Estate Designer   			210

 

<R>HYPOTHETICAL ILLUSTRATIONS
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user 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 - Series I
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -10.91% 132,271 132,271 1,000,000
12/31/01 -23.28% 109,004 109,004 1,000,000
AIM V.I. Government Securities Fund - Series I
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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 7.73% 62,239 62,239 1,000,000
12/31/99 -1.32% 70,947 70,947 1,000,000
12/31/00 10.12% 88,749 88,749 1,000,000
12/31/01 6.41% 105,424 105,424 1,000,000
Alger American Growth Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 12.38% 13,070 11,770 1,000,000
12/31/93 22.47% 28,392 27,092 1,000,000
12/31/94 1.45% 39,000 37,700 1,000,000
12/31/95 36.37% 65,092 65,092 1,000,000
12/31/96 13.35% 84,801 84,801 1,000,000
12/31/97 25.75% 118,743 118,743 1,000,000
12/31/98 48.07% 189,821 189,821 1,000,000
12/31/99 33.74% 266,879 266,879 1,000,000
12/31/00 -14.78% 235,024 235,024 1,000,000
12/31/01 -11.81% 215,317 215,317 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			211

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user 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 Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -24.83% 97,708 97,708 1,000,000
12/31/01 -15.93% 89,967 89,967 1,000,000
Alger American MidCap Growth Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 9.18% 160,052 160,052 1,000,000
12/31/01 -6.52% 158,724 158,724 1,000,000
Alger American Small Capitalization Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 3.55% 12,111 10,811 1,000,000
12/31/93 13.28% 25,244 23,944 1,000,000
12/31/94 -4.38% 33,816 32,516 1,000,000
12/31/95 44.31% 61,491 61,491 1,000,000
12/31/96 4.18% 74,168 74,168 1,000,000
12/31/97 11.39% 93,354 93,354 1,000,000
12/31/98 15.53% 118,841 118,841 1,000,000
12/31/99 43.42% 185,164 185,164 1,000,000
12/31/00 -27.20% 141,623 141,623 1,000,000
12/31/01 -29.51% 106,613 106,613 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			212

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
Fidelity VIP Asset Manager SM Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 11.71% 12,997 11,697 1,000,000
12/31/93 21.23% 28,025 26,725 1,000,000
12/31/94 -6.09% 35,818 34,518 1,000,000
12/31/95 16.96% 52,046 52,046 1,000,000
12/31/96 14.60% 70,899 70,899 1,000,000
12/31/97 20.65% 97,249 97,249 1,000,000
12/31/98 15.05% 122,794 122,794 1,000,000
12/31/99 11.09% 147,640 147,640 1,000,000
12/31/00 -3.87% 151,372 151,372 1,000,000
12/31/01 -4.15% 154,454 154,454 1,000,000
Fidelity VIP Growth Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 9.32% 12,738 11,438 1,000,000
12/31/93 19.37% 27,300 26,000 1,000,000
12/31/94 -0.02% 37,362 36,062 1,000,000
12/31/95 35.36% 62,404 62,404 1,000,000
12/31/96 14.71% 82,764 82,764 1,000,000
12/31/97 23.48% 114,091 114,091 1,000,000
12/31/98 39.49% 172,341 172,341 1,000,000
12/31/99 37.44% 250,425 250,425 1,000,000
12/31/00 -10.96% 231,038 231,038 1,000,000
12/31/01 -17.67% 197,712 197,712 1,000,000
Fidelity VIP Index 500 Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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 22.71% 66,438 66,438 1,000,000
12/31/97 32.82% 101,248 101,248 1,000,000
12/31/98 28.31% 142,126 142,126 1,000,000
12/31/99 20.52% 182,364 182,364 1,000,000
12/31/00 -9.30% 174,080 174,080 1,000,000
12/31/01 -12.09% 161,457 161,457 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

 

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HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			214

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
Fidelity VIP Money Market Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 3.90% 12,149 10,849 1,000,000
12/31/93 3.23% 23,117 21,817 1,000,000
12/31/94 4.25% 34,594 33,294 1,000,000
12/31/95 5.87% 45,769 45,769 1,000,000
12/31/96 5.41% 58,597 58,597 1,000,000
12/31/97 5.51% 72,082 72,082 1,000,000
12/31/98 5.46% 86,156 86,156 1,000,000
12/31/99 5.17% 101,481 101,481 1,000,000
12/31/00 6.30% 118,729 118,729 1,000,000
12/31/01 4.18% 134,163 134,163 1,000,000
Fidelity VIP Overseas Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 -10.72% 10,563 9,263 1,000,000
12/31/93 37.35% 28,328 27,028 1,000,000
12/31/94 1.72% 39,036 37,736 1,000,000
12/31/95 9.74% 52,303 52,303 1,000,000
12/31/96 13.15% 70,283 70,283 1,000,000
12/31/97 11.56% 89,194 89,194 1,000,000
12/31/98 12.81% 111,369 111,369 1,000,000
12/31/99 42.55% 173,461 173,461 1,000,000
12/31/00 -19.07% 148,096 148,096 1,000,000
12/31/01 -21.21% 124,296 124,296 1,000,000
The GCG Trust Fully Managed Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 6.23% 12,402 11,102 1,000,000
12/31/93 7.59% 24,328 23,028 1,000,000
12/31/94 -7.27% 31,975 30,675 1,000,000
12/31/95 20.80% 49,165 49,165 1,000,000
12/31/96 16.36% 68,668 68,668 1,000,000
12/31/97 15.27% 90,332 90,332 1,000,000
12/31/98 5.89% 105,697 105,697 1,000,000
12/31/99 6.92% 123,924 123,924 1,000,000
12/31/00 21.97% 163,506 163,506 1,000,000
12/31/01 9.92% 190,462 190,462 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

 

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HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
The GCG Trust Mid-Cap Growth Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/99 79.05% 20,340 19,040 1,000,000
12/31/00 8.18% 32,981 31,681 1,000,000
12/31/01 -23.62% 33,043 31,743 1,000,000
ING Partners, Inc. ING UBS Tactical Asset Allocation Portfolio - I Class
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
This fund is too new for experience to be shown
ING Partners, Inc. ING Van Kampen Comstock Portfolio - I Class
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
This fund is too new for experience to be shown
ING Income Shares ING VP Bond Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/95 10.94% 12,914 11,614 1,000,000
12/31/96 1.30% 23,469 22,169 1,000,000
12/31/97 8.30% 36,287 34,987 1,000,000
12/31/98 8.14% 48,580 48,580 1,000,000
12/31/99 -0.74% 57,914 57,914 1,000,000
12/31/00 9.64% 74,184 74,184 1,000,000
12/31/01 8.75% 91,132 91,132 1,000,000
ING Variable Portfolios, Inc. ING VP Index Plus LargeCap Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/97 33.89% 15,411 14,111 1,000,000
12/31/98 31.60% 33,508 32,208 1,000,000
12/31/99 24.30% 53,921 52,621 1,000,000
12/31/00 -9.41% 56,467 56,467 1,000,000
12/31/01 -13.62% 57,092 57,092 1,000,000
ING Variable Portfolios, Inc. ING VP Index Plus MidCap Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/98 24.30% 14,367 13,067 1,000,000
12/31/99 15.81% 28,383 27,083 1,000,000
12/31/00 19.91% 45,943 44,643 1,000,000
12/31/01 -1.32% 53,742 53,742 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

 

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HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
ING Variable Portfolios, Inc. ING VP Index Plus SmallCap Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/98 -1.35% 11,579 10,279 1,000,000
12/31/99 10.79% 24,122 22,822 1,000,000
12/31/00 9.82% 37,497 36,197 1,000,000
12/31/01 2.41% 47,207 47,207 1,000,000
ING Variable Products Trust ING VP Growth Opportunities Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/01 -38.57% 7,554 6,254 1,000,000
ING Variable Products Trust ING VP MagnaCap Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/01 -10.44% 10,593 9,293 1,000,000
ING Variable Products Trust ING VP MidCap Opportunities Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/01 -32.92% 8,163 6,863 1,000,000
ING Variable Products Trust ING VP SmallCap Opportunities Portfolio - Class R Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/95 21.39% 14,050 12,750 1,000,000
12/31/96 13.61% 27,502 26,202 1,000,000
12/31/97 15.81% 43,386 42,086 1,000,000
12/31/98 17.30% 61,012 61,012 1,000,000
12/31/99 141.03% 171,327 171,327 1,000,000
12/31/00 1.09% 182,186 182,186 1,000,000
12/31/01 -29.15% 135,155 135,155 1,000,000
INVESCO VIF-Core Equity Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 4.87% 105,507 105,507 1,000,000
12/31/01 -8.97% 104,499 104,499 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

 

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HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
INVESCO VIF-Health Sciences Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/98 42.85% 16,387 15,087 1,000,000
12/31/99 4.86% 27,880 26,580 1,000,000
12/31/00 30.54% 49,298 47,998 1,000,000
12/31/01 -12.59% 50,454 50,454 1,000,000
INVESCO VIF-High Yield Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -11.68% 69,764 69,764 1,000,000
12/31/01 -14.93% 67,431 67,431 1,000,000
INVESCO VIF-Small Company Growth Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -14.98% 46,572 45,272 1,000,000
12/31/01 -18.54% 44,779 44,779 1,000,000
INVESCO VIF-Total Return Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -2.17% 74,847 74,847 1,000,000
12/31/01 -1.47% 83,161 83,161 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

 

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HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
INVESCO VIF-Utilities Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 5.28% 105,241 105,241 1,000,000
12/31/01 -32.41% 77,275 77,275 1,000,000
Janus Aspen Aggressive Growth Portfolio Service Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/94 16.19% 13,484 12,184 1,000,000
12/31/95 27.28% 30,000 28,700 1,000,000
12/31/96 7.33% 42,927 41,627 1,000,000
12/31/97 12.29% 57,870 57,870 1,000,000
12/31/98 33.33% 90,296 90,296 1,000,000
12/31/99 1.22% 100,988 100,988 1,000,000
12/31/00 -31.78% 75,119 75,119 1,000,000
12/31/01 -39.59% 51,441 51,441 1,000,000
Janus Aspen Growth Portfolio Service Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/94 2.58% 12,006 10,706 1,000,000
12/31/95 29.92% 28,698 27,398 1,000,000
12/31/96 17.73% 45,490 44,190 1,000,000
12/31/97 21.84% 65,943 65,943 1,000,000
12/31/98 34.71% 102,036 102,036 1,000,000
12/31/99 42.50% 159,030 159,030 1,000,000
12/31/00 -14.75% 143,132 143,132 1,000,000
12/31/01 -24.90% 114,790 114,790 1,000,000
Janus Aspen International Growth Portfolio Service Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/95 23.15% 14,242 12,942 1,000,000
12/31/96 34.07% 32,565 31,265 1,000,000
12/31/97 17.22% 49,797 48,497 1,000,000
12/31/98 16.14% 67,796 67,796 1,000,000
12/31/99 78.93% 139,042 139,042 1,000,000
12/31/00 -16.14% 124,157 124,157 1,000,000
12/31/01 -23.43% 101,992 101,992 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			219

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
Janus Aspen Worldwide Growth Portfolio Service Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/94 1.47% 11,885 10,585 1,000,000
12/31/95 27.25% 27,972 26,672 1,000,000
12/31/96 28.21% 48,549 47,249 1,000,000
12/31/97 20.90% 69,101 69,101 1,000,000
12/31/98 27.13% 100,245 100,245 1,000,000
12/31/99 62.98% 179,085 179,085 1,000,000
12/31/00 -15.99% 157,771 157,771 1,000,000
12/31/01 -22.62% 129,538 129,538 1,000,000
Neuberger Berman AMT Growth Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 9.54% 12,761 11,461 1,000,000
12/31/93 6.79% 24,535 23,235 1,000,000
12/31/94 -4.99% 32,936 31,636 1,000,000
12/31/95 31.73% 54,925 54,925 1,000,000
12/31/96 9.14% 70,612 70,612 1,000,000
12/31/97 29.01% 103,663 103,663 1,000,000
12/31/98 15.53% 130,667 130,667 1,000,000
12/31/99 50.40% 211,869 211,869 1,000,000
12/31/00 -11.66% 195,397 195,397 1,000,000
12/31/01 -30.36% 142,506 142,506 1,000,000
Neuberger Berman AMT Limited Maturity Bond Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 5.18% 12,288 10,988 1,000,000
12/31/93 6.63% 23,998 22,698 1,000,000
12/31/94 -0.15% 34,041 32,741 1,000,000
12/31/95 10.94% 47,379 47,379 1,000,000
12/31/96 4.31% 59,647 59,647 1,000,000
12/31/97 6.74% 74,042 74,042 1,000,000
12/31/98 4.39% 87,307 87,307 1,000,000
12/31/99 1.48% 99,059 99,059 1,000,000
12/31/00 6.78% 116,701 116,701 1,000,000
12/31/01 8.78% 137,924 137,924 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			220

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
Neuberger Berman AMT Partners Portfolio
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 0.70% 93,483 93,483 1,000,000
12/31/01 -2.83% 99,985 99,985 1,000,000
Pioneer Mid Cap Value VCT Portfolio - Class I Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/96 15.03% 13,358 12,058 1,000,000
12/31/97 24.69% 29,249 27,949 1,000,000
12/31/98 -4.02% 37,756 36,456 1,000,000
12/31/99 13.13% 52,499 52,499 1,000,000
12/31/00 18.00% 73,551 73,551 1,000,000
12/31/01 6.49% 88,569 88,569 1,000,000
Pioneer Small Cap Value VCT Portfolio - Class I Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/01 -31.68% 8,297 6,997 1,000,000
Putnam VT Growth and Income Fund - Class IB Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/99 -1.47% 11,566 10,266 1,000,000
12/31/00 7.92% 23,505 22,205 1,000,000
12/31/01 -6.39% 31,505 30,205 1,000,000
Putnam VT New Opportunities Fund - Class IB Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/99 69.10% 19,252 17,952 1,000,000
12/31/00 -26.20% 21,975 20,675 1,000,000
12/31/01 -30.14% 22,663 21,363 1,000,000
Putnam VT Small Cap Value Fund - Class IB Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/00 24.44% 14,382 13,082 1,000,000
12/31/01 18.13% 28,953 27,653 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			221

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user Female Age 50 Preferred Risk Class Death Benefit Option 1
Stated Death Benefit $1,000,000 Annual Premium $13,000
Putnam VT Voyager Fund - Class IB Shares
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/99 58.01% 18,041 16,741 1,000,000
12/31/00 -16.54% 23,734 22,434 1,000,000
12/31/01 -22.41% 26,431 25,131 1,000,000
Van Eck Worldwide Bond Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 -5.25% 11,156 9,856 1,000,000
12/31/93 7.79% 23,039 21,739 1,000,000
12/31/94 -1.32% 32,712 31,412 1,000,000
12/31/95 17.30% 48,581 48,581 1,000,000
12/31/96 2.53% 59,842 59,842 1,000,000
12/31/97 2.38% 71,193 71,193 1,000,000
12/31/98 12.75% 91,158 91,158 1,000,000
12/31/99 -7.82% 93,451 93,451 1,000,000
12/31/00 1.88% 105,645 105,645 1,000,000
12/31/01 -5.11% 109,816 109,816 1,000,000
Van Eck Worldwide Emerging Markets Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 -41.87% 40,930 40,930 1,000,000
12/31/01 -1.69% 49,879 49,879 1,000,000
Van Eck Worldwide Hard Assets Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/92 -4.09% 11,282 9,982 1,000,000
12/31/93 64.83% 35,019 33,719 1,000,000
12/31/94 -4.78% 42,917 41,617 1,000,000
12/31/95 10.99% 57,183 57,183 1,000,000
12/31/96 18.04% 79,065 79,065 1,000,000
12/31/97 -1.67% 87,121 87,121 1,000,000
12/31/98 -30.93% 66,552 66,552 1,000,000
12/31/99 21.00% 93,294 93,294 1,000,000
12/31/00 11.41% 115,411 115,411 1,000,000
12/31/01 -10.45% 112,286 112,286 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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   			222

 

HYPOTHETICAL ILLUSTRATIONS (continued)
Tobacco Non-user Male Age 50 Preferred Risk Class Guideline Premium Test
Tobacco Non-user 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 Ended: Annual Total Return* Cash Surrender Value Account Value Death 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
12/31/00 18.71% 36,056 34,756 1,000,000
12/31/01 5.34% 47,067 47,067 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.</R>

 

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M Funds Supplement
Dated May 1, 2002, to
The Prospectus dated May 1, 2002, for
ESTATE DESIGNER VARIABLE UNIVERSAL LIFE
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICIES
issued by
Security Life of Denver Insurance Company
and
Security Life Separate Account L1

This Supplement adds certain information contained in your Prospectus dated May 1, 2002. Please read it carefully and keep it with your Prospectus for future reference.

Investment Portfolios. Five additional investment portfolios are available under your Policy: Brandes International Equity Fund, Business Opportunity Value Fund, Clifton Enhanced U. S. Equity Fund, Frontier Capital Appreciation Fund, and Turner Core Growth Fund. For a more complete description of the portfolios' investments, risks, costs and expenses, please see the accompanying prospectus for each portfolio.

The following information is added to the "Investment Portfolio Annual Expenses" on pages
7 - 8, the "Investment Portfolio Objectives" on pages 16 - 24 and Appendix B, "Hypothetical Illustrations" on pages 211 - 222:

* * * * * * * * * * * * * * * * *

Portfolio Management Fees 12b-1 Fees Other Expenses Total Portfolio Expenses Fees and Expenses Waived or Reimbursed Total Net Portfolio Expenses
M Fund, Inc.
Brandes International Equity Fund 0.75% N/A 0.27% 1.02% 0.01% 1.01%
Business Opportunity Value Fund 0.65% N/A 0.54% 1.19% 0.29% 0.90%
Clifton Enhanced U. S. Equity Fund 0.38% N/A 0.40% 0.78% 0.14% 0.64%
Frontier Capital Appreciation Fund 0.90% N/A 0.25% 1.15% 0.00% 1.15%
Turner Core Growth Fund 0.45% N/A 0.45% 0.90% 0.20% 0.70%

INVESTMENT PORTFOLIO OBJECTIVES

Variable Investment Option Investment Company/ Adviser/ Manager/ Sub-Adviser Investment Objective
Brandes International Equity Fund Investment Company:
M Fund, Inc.
Investment Adviser:
M Financial Investment Advisers, Inc.
Sub-Adviser:
Brandes Investment Partners, LP		 Seeks to provide long-term capital appreciation through investing mainly in equity securities of foreign issuers, including common stocks, preferred stocks and securities that are convertible into common stocks.
Business Opportunity Value Fund Investment Company:
M Fund, Inc.
Investment Adviser:
M Financial Investment Advisers, Inc.
Sub-Adviser:
Iridian Asset Management LLC		 Seeks to provide long-term capital appreciation through investing primarily in equity securities of U.S. issuers in the large-to-medium-capitalization segments of the U.S. stock market.
Clifton Enhanced U. S. Equity Fund Investment Company:
M Fund, Inc.
Investment Adviser:
M Financial Investment Advisers, Inc.
Sub-Adviser:
The Clifton Group		 Seeks to provide above-market total return through investing in futures contracts on the Standard & Poor's 500 Composite Stock Price Index with the goal of earning a return equal to the Index. Since Futures Contracts do not require cash outlays, all of the Fund's assets are invested in a "cash" portfolio of high quality debt instruments designed to add small incremental return above that of the Index (and to meet margin requirements).
Frontier Capital Appreciation Fund Investment Company:
M Fund, Inc.
Investment Adviser:
M Financial Investment Advisers, Inc.
Sub-Adviser:
Frontier Capital Management Company, LLC		 Seeks to provide maximum capital appreciation through investing in common stock of U.S. companies of all sizes with emphasis on stocks of companies with capitalizations that are consistent of those companies found in the Russell 2500.
Turner Core Growth Fund Investment Company:
M Fund, Inc.
Investment Adviser:
M Financial Investment Advisers, Inc.
Sub-Adviser:
Turner Investment Partners, Inc.		 Seeks to provide long-term capital appreciation through investing mainly in common stocks of U.S. companies that show strong earnings growth potential.

Appendix B

HYPOTHETICAL ILLUSTRATIONS

M Fund, Inc. Brandes international Equity Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/97 2.26% 11,971 10,671 1,000,000
12/31/98 15.37% 25,534 24,234 1,000,000
12/31/99 47.86% 52,299 50,999 1,000,000
12/31/00 4.88% 63,772 63,772 1,000,000
12/31/01 -12.77% 63,985 63,985 1,000,000
 
M Fund, Inc. Business Opportunity Value Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
 
This fund is too new for experience to be shown
 
M Fund, Inc. Clifton Enhanced U. S. Equity Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/97 32.68% 15,279 13,979 1,000,000
12/31/98 23.69% 31,380 30,080 1,000,000
12/31/99 26.07% 52,015 50,715 1,000,000
12/31/00 -9.96% 54,417 54,417 1,000,000
12/31/01 -13.02% 55,721 55,721 1,000,000
 
M Fund, Inc. Frontier Capital Appreciation Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/97 22.13% 14,131 12,831 1,000,000
12/31/98 1.68% 24,782 23,482 1,000,000
12/31/99 44.17% 49,935 48,635 1,000,000
12/31/00 7.66% 62,951 62,951 1,000,000
12/31/01 -1.00% 71,887 71,887 1,000,000
 
M Fund, Inc. Turner Core Growth Fund
Year Ended: Annual Total Return* Cash Surrender Value Account Value Death Benefit
12/31/97 28.32% 14,804 13,504 1,000,000
12/31/98 34.56% 33,433 32,133 1,000,000
12/31/99 40.11% 60,582 59,282 1,000,000
12/31/00 -11.15% 61,248 61,248 1,000,000
12/31/01 -23.60% 54,061 54,061 1,000,000

The assumptions underlying these values are described in Performance Information, page 210.

* 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.

* * * * * * * * * * * * * * * * *

 

 

 

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 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

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 expense, 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 expenses actually and reasonably incurred in connection with actions where such persons have been successful on the merits or otherwise in defense of such actions.

Consistent with applicable law, the corporation's bylaws provide as follows:

Section 1. Non-Derivative Actions. The corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation or is or was serving at the request of the corporation (whether or not as a representative of the corporation) as a director, officer, employee, (for example, acting in a fiduciary capacity for welfare benefit plans including but not limited to Employees' Retirement Plan, Savings Incentive Plan, Group Medical Plan, Prescription Drug Program, Group Term Life Insurance, Group Dental Plan, Travel Accident Plan or Deferred Compensation Plan, et al.), or fiduciary of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorney fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit, or proceeding if he acted in good faith and in a manner he reasonably believed to in 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. The termination of any action, suit, or proceeding by judgment, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent shall not of Itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and, with respect to any original criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful.

Section 2. Derivative Actions. The corporation shall indemnify any person who was or is a party or is a party to or is threatened to be made a party to any threatened, pending, or completed action or suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation or is or was serving at the request of the corporation (whether or not as a representative of the corporation) as a director, officer, employee, (for example, acting in a fiduciary capacity for welfare benefit plans including but not limited to Employees' Retirement Plan, Savings Incentive Plan, Group Medical Plan, Prescription Drug Program, Group Term Life Insurance, Group Dental Plan, Travel Accident Plan or Deferred Compensation Plan, et al.), or fiduciary of another corporation, partnership, joint venture, trust, or other enterprise against expenses (including attorney fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed, to be in the best interests or the corporation; but no indemnification shall be made in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought determines upon application that, despite the adjudication of liability, but in view or all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which such court deems proper.

Section 3. Expenses. To the extent that a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation shall be successful on the merits in defense of any action, suit, or proceeding referred to in Section 1 or Section 2 of this Article VIII or in defense of any claim, issue, or matter therein, he shall be indemnified by the corporation against expenses (including attorney fees) actually and reasonably incurred by him in connection therewith.

Section 4. Authorization. Any indemnification under Section 1 or Section 2 of this Article VIII (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or, if such a quorum is not obtainable or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the Stockholder.

Section 5. Advance Payment of Expenses. Expenses (including attorney fees) incurred in defending a civil or criminal action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding as authorized in Section 4 Of this Article VIII upon receipt of an undertaking by or on behalf of the director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary to repay such amount unless it is ultimately determined that he is entitled to be indemnified by the corporation as authorized in this Article VIII.

Section 6. Non-Exclusivity and Continuance. The indemnification provided by this Article VIII shall not be deemed exclusive of any other rights to which any person indemnified may be entitled under the Articles of Incorporation, any agreement, insurance policy, vote of the Stockholder or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing, both as to action in his official capacity and as to action in another capacity while holding such office. Any indemnity otherwise payable under this Article VIII on account of any specific loss or expense shall be reduced by the amount of any insurance proceeds paid or payable to the person to be indemnified on account of the same loss or expense if such insurance is provided by the corporation or any of its affiliates. The indemnification provided by this Article VIII shall continue as to a person who has ceased to be a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary with regard to acts or omissions of such person occurring or alleged to have occurred while the person was so engaged, and shall inure to the benefit of heirs, executors, and administrators of such a person.

Section 7. Application of this Article. The provisions of this Article VIII shall apply to all actions, suits or proceedings described in Section 1 or Section 2 arising or alleged to arise out of any acts or omissions on the part of any person referred to in Section 1 or Section 2 occurring or alleged to occur prior to the adoption of this Article VIII or at any time while it remains in force.

Section 8. Exclusions. No indemnification is provided under this Article VIII for unsalaried persons under contract with the corporation in sales-capacities such as General Agents, Agents and Brokers. Except as expressly provided in this Article VIII, no indemnity is provided for persons performing services to the corporation as independent contractors.

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 precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.

UNDERTAKING REQUIRED BY SECTION 26(E)(2)(A) OF THE INVESTMENT
COMPANY ACT OF 1940, AS AMENDED

Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company.

CONTENTS OF REGISTRATION STATEMENT

This Registration Statement comprises the following papers and documents;

      The facing sheet.
 
Cross-Reference table.
 
The prospectus.
 
A supplement.
 
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:
      Kimberly J. Smith (See Exhibit 2.).
      Lawrence D. Taylor (See Exhibit 6.).
Ernst & Young LLP (See Exhibit 7.).

     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.21
(ii)      Amendment to Security Life of Denver Insurance Company Distribution Agreement.8
(iii) Amendment to Security Life of Denver Insurance Company Distribution Agreement.16
(iv) Amendment to Security Life of Denver Insurance Company Distribution Agreement.17
(v) Amendment to Security Life of Denver Insurance Company Distribution Agreement.23
(vi) First Amendment to Security Life of Denver Insurance Company Distribution Agreement.23
(b) Specimen Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule.11
(i)      Compensation Schedule 14
(c) Commission Schedule for Policies.11
(d) Form of IIG Master Sales and Supervisory Agreement.14
(4) Not Applicable.
(5) (a) Specimen Estate Designer Universal Life Insurance Policy (Form No.2506(JTVUL)- 5/00).18
(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
(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
(i) Amendments to Articles of Incorporation through November 12, 2001. 23
(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) Participation Agreement among Security Life of Denver Insurance Company, The GCG Trust and Directed Services, Inc. 23
(ix) Participation Agreement among M Fund, Inc., M Financial Advisers, Inc. and Security Life of Denver Insurance Company.17
(x) Participation Agreement among Security Life of Denver Insurance Company, Pilgrim Variable Products Trust and ING Pilgrim Investments, LLC.23
(xi) Participation Agreement among Security Life of Denver Insurance Company, Putnam Variable Trust and Putnam Retail Management, Inc.19
(xii) Form of Participation Agreement among Security Life of Denver Insurance Company, ING Variable Partners, Inc., Aetna Life Insurance and Annuity Company, and ING Financial Advisers, LLC.23
(xiii) Form of Participation Agreement among Security Life of Denver Insurance Company, ING Income Shares, Inc., ING Variable Portfolios, Inc. and Aeltus Investment Management, Inc.23
(xiv) Form of Participation Agreement among Security Life of Denver Insurance Company, Pioneer Variable Contracts Trust, Pioneer Investment Management, Inc. and Pioneer Funds Distributor, Inc.23
(b) (i)      First Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Investment Trust and Van Eck Associates Corporation.3
(ii)      Second Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Worldwide Insurance Trust and Van Eck Associates Corporation.3
(iii)      Assignment and Modification Agreement between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, Advisers Managers Trust and Security Life of Denver Insurance Company.3
(iv)      First Amendment to Participation Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company.1
(v)      First Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.1
(vi)      Second Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.1
(vii)      First Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.1
(viii)      Second Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.1
(ix)      First Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.1
(x)      Third Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.8
(xi)      Third Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.8
(xii)      Fourth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Company.23
(xiii)      Fourth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.23
(xiv)      Amendment No. 2 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc.23
(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.23
(xxi)      Sixth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.23
(xxii)      Fifth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.11
(xxiii)      Seventh Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.12
(xxiv)      Seventh Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.15
(xxv)      Eighth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.15
(xxvi)      Addendum to Fund Participation Agreement among Security Life of Denver Insurance Company, Neuberger Berman Advisers Management Trust, Advisers Managers Trust and Neuberger Berman Management Inc.15
(xxvii)      Fund Participation Agreement between Janus Aspen Series and Security Life of Denver Insurance Company.15
(xxviii) Amendment to Janus Aspen Series Fund Participation Agreement.16
(xxix) Amendment No. 5 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc.16
(xxx) Amendment to Participation Agreement among Security Life of Denver Insurance Company, The GCG Trust and Directed Services, Inc.16
(xxxi) Sixth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.23
(xxxii) Eighth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.17
(xxxiii) Ninth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.17
(xxxiv) Amendment to Participation Agreement among M Fund, Inc., M Financial Advisers, Inc. and Security Life of Denver Insurance Company.17
(xxxv) Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.19
(xxxvi) Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.19
(xxxvii) Form of Amendment to Participation Agreement among Security Life of Denver Insurance Company, The GCG Trust and Directed Services, Inc.17
(xxxviii)   Amendment to Participation Agreement among M Fund, Inc., M Financial Advisers, Inc. and Security Life of Denver Insurance Company.17
(xxxix) Second Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.23
(xxxx) Third Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.23
(xxxxi) Amendment No. 1 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc.23
(xxxxii) Amendment to Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company.23
(xxxxiii) Addendum to Alger Sales Agreement.6
(xxxxiv) Amendment No. 6 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc.20
(xxxxv) Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.20
(xxxxvi) Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.20
(xxxxvii) Seventh Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc.20
(xxxxviii) Amendment to Janus Aspen Series Fund Participation Agreement.20
(xxxxix) Amendment to Participation Agreement among Security Life of Denver Insurance Company, Pilgrim Variable Products Trust and ING Pilgrim Securities, Inc.20
(l) Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.23
(li) Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.23
(lii) Amendment to Participation Agreement among M Fund, Inc., M Financial Advisers, Inc. and Security Life of Denver Insurance Company.23
(liii) Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company.23
(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
a. Amendment No. 1 to Expense Allocation Agreement between A I M Advisors, Inc., A I M Distributors, Inc. and Security Life of Denver.20
(iii)      Service Agreement between INVESCO Funds Group, Inc. and Security Life of Denver Insurance Company.7
a. First Amendment to Service Agreement between Security Life of Denver Insurance Company and INVESCO Funds Group, Inc.23
b. Amendment to Service Agreement between Security Life of Denver Insurance Company and INVESCO Funds Group, Inc.23
(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.23
(vi)      Side Letter between Van Eck Worldwide Insurance Trust and Security Life of Denver.7
(vii)      Distribution and Shareholder Services Agreement between Janus Distributors, Inc. and Security Life of Denver Insurance Company.23
(viii) Administrative and Shareholder Service Agreement between Directed Services, Inc. and Security Life of Denver Insurance Company.17
(ix) Administrative and Shareholder Service Agreement between ING Pilgrim Group, LLC and Security Life of Denver Insurance Company.20
(x) Letter of Agreement between Security Life of Denver and Janus Capital Corporation.20
(9) Not Applicable.
(10) (a) Specimen Estate Designer Life Insurance Application with Binding Limited Life Insurance Coverage Form (Form No. Q2006-9/97).11
(i) Investment Feature Selection Form (Form No. V-153-00 rev. 5/1/02).23
(ii) Investment Feature Selection Form (Form No. V-174-01 rev. 5/1/02).23
(b) Specimen Application for Life Insurance Fixed and Variable Products (Form No. 110945).23
(11)   Issuance, Transfer and Redemption Procedures Memorandum.18
 
2. Opinion and consent of Kimberly J. Smith as to securities being registered.
 
3. Not Applicable.
 
4. Not Applicable.
 
5 Not Applicable.
 
6. Opinion and consent of Lawrence D. Taylor.
 
7. Consent of Ernst & Young LLP.
 
8. Powers of Attorney.22

_______________

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 No. 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).
 
12   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 April 27, 2000 (File No. 333-34402).
 
13 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 April 7, 2000 (File No. 333-34404).
 
14 Incorporated herein by reference to Post-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on April 27, 2000 (File No. 333-34404).
 
15 Incorporated herein by reference to the Post-Effective Amendment No. 13 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 13, 2000 (File No. 33-74190).
 
16 Incorporated herein by reference to the Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on January 30, 2001 (File No. 333-50278).
 
17 Incorporated herein by reference to the Post-Effective Amendment No. 14 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 19, 2001 (File No. 33-74190).
 
18 Incorporated herein by reference to Post-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account Ll, filed with the Securities and Exchange Commission on April 20, 2001 (File No. 333-34404).
 
19 Incorporated herein by reference to the Form S-6 Initial Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on November 15, 2001 (File No. 333-73464).
 
20 Incorporated herein by reference to the Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on December 19, 2001 (File No. 333-73464).
 
21 Incorporated herein by reference to the Form S-6 Initial Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 10, 2001 (File No. 333-72753).
 
22 Incorporated herein by reference to the Post-Effective Amendment No. 1 to the Form S-2 Registration Statement of ING Life Insurance and Annuity Company, as filed with the Securities and Exchange Commission on April 5, 2002 (File No. 333-60016).
 
23 Incorporated herein by reference to the Post-Effective Amendment No. 15 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 9, 2002 (File No. 33-74190).

 

SIGNATURES

Pursuant to the requirements of the Securities Act of 1933, Security Life of Denver Insurance Company and the Registrant, Security Life Separate Account L1, certify that they meet all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under Securities Act of 1933 and have duly caused this Post-Effective Amendment No. 3 to the Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 11th day of April, 2002.

SECURITY LIFE OF DENVER INSURANCE COMPANY
(Depositor)
 
 
BY: /s/ Chris D. Schreier*
Chris D. Schreier
President

 

 

SECURITY LIFE SEPARATE ACCOUNT L1
(Registrant)
 
 
BY: /s/ Chris D. Schreier*
Chris D. Schreier
President

Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 3 to the Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated.

/s/ Chris D. Schreier*
Chris D. Schreier
President
 
 
/s/ Robert C. Salipante*
Robert C. Salipante
Chief Executive Officer, Director
 
 
/s/ Wayne R. Huneke*
Wayne R. Huneke
Chief Financial Officer, Director
 
 
/s/ Thomas J. McInerney*
Thomas J. McInerney, Director
 
 
/s/ P. Randall Lowery*
P. Randall Lowery, Director
 
/s/ Mark A. Tullis*
Mark A. Tullis, Director
 
 
/s/ David Wheat*
David Wheat, Chief Accounting Officer
 
 
* BY:   /s/ J. Neil McMurdie
J. Neil McMurdie
Attorney-in-Fact
April 11, 2002

 



EXHIBIT INDEX

Exhibit No. Description of Exhibit
 
2. Opinion and Consent of Kimberly J. Smith as to securities being registered.
 
6. Opinion and Consent of Lawrence D. Taylor.
 
7. Consent of Ernst & Young LLP.