-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Diq1NQuQm5Q+IfD18/xe2IiYP5vDUpmo8kIBMgc4+Nw92Efq612blC4xcg+CvxK9 JZbPRWAY6ZlGYOY+90NKLA== 0000917677-99-000038.txt : 19990615 0000917677-99-000038.hdr.sgml : 19990615 ACCESSION NUMBER: 0000917677-99-000038 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19990607 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 333-72753 FILM NUMBER: 99641741 BUSINESS ADDRESS: STREET 1: 1290 BROADWAY STREET 2: C/O SECURITY LIFE CENTER CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038601290 MAIL ADDRESS: STREET 1: 1290 BROADWAY CITY: DENVER STATE: CO ZIP: 80203-5699 497 1 VSUL PRINT VERSION Prospectus VARIABLE SURVIVORSHIP UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges, deductions, and refunds beginning on page 51 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. Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. YOUR POLICY o is a flexible premium variable joint and survivor universal life insurance policy; o is issued on two lives on whom insurance coverage may continue, in whole or in part, until both have died; o is issued by Security Life of Denver Insurance Company; o is guaranteed not to lapse during the first five policy years if you meet certain requirements; and o is returnable by you during the free look period or right to examine policy period if you are not satisfied. YOUR POLICY PREMIUM PAYMENTS o are flexible, so the premium amount and frequency may vary; o are allocated to variable investment divisions and the guaranteed interest division, based on your instructions; o are invested in shares of the underlying investment portfolios under each variable division; and o can be invested in up to eighteen investment options over the policy's lifetime. YOUR ACCOUNT VALUE o is the sum of your holdings in the variable divisions, the guaranteed interest division and the loan division; o has no guaranteed minimum cash value under the variable divisions. The value varies with the value of the matching investment portfolio; o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division; and o is subject to various expenses and charges, including possible surrender charges. DEATH PROCEEDS o are paid if the policy is still in force at the second death of the two insured people; o are equal to the death benefit minus outstanding policy loans, accrued loan interest and unpaid charges incurred before the second insured person dies; o are calculated under your choice of options; * Option 1- a fixed minimum death benefit * Option 2- a stated death benefit plus your account value; and o enhanced death benefit corridor option - available with either option 1 or option 2 to increase death benefit coverage based on life expectancy with sufficient funding; and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. DATE OF PROSPECTUS MAY 14, 1999 Form V-91-99 ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc. Insurance Company 1290 Broadway Security Life Center Denver, CO 80203-5699 1290 Broadway (303) 860-2000 Denver, CO 80203-5699 (800) 525-9852 THROUGH ITS: Security Life Separate Account L1 ADMINISTERED BY: Customer Service Center P.O. Box 173888 Denver, CO 80217-3888 (800) 848-6362 - -------------------------------------------------------------------------------- Variable Survivorship 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................8 Your Policy...........................................................8 Free Look Period or Right to Examine Policy Period....................8 Your Policy Premiums..................................................8 Allocation of Net Premiums...................................8 Charges and Deductions................................................9 Deductions from Premium......................................9 Deductions from the Variable Divisions.......................9 Monthly Deductions from Your Account Value...................9 Policy Transaction Fees......................................9 Surrender Charges...........................................10 Fees and Expenses of the Investment Portfolios.......................10 Investment Portfolio Annual Expenses........................11 Variable Divisions...................................................13 Policy Values........................................................13 Your Account Value in the Variable Divisions................14 Transfers of Account Value...........................................14 Special Policy Features..............................................14 Additional Benefits.........................................14 Dollar Cost Averaging.......................................14 Automatic Rebalancing.......................................14 Loans.......................................................14 Partial Withdrawals.........................................14 Persistency Refund..........................................14 Policy Modification, Termination and Continuation Features...........14 Right to Exchange Policy....................................14 Policy Split Option.........................................15 Surrender...................................................15 Lapse.......................................................15 Reinstatement...............................................15 Continuation of Coverage....................................15 Death Benefits.......................................................15 Tax Considerations...................................................15 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION.................................16 Security Life of Denver Insurance Company............................16 Year 2000 Preparedness...............................................16 Security Life Separate Account L1....................................17 Variable Account Structure..................................17 Order of Variable Account Liabilities.......................17 Variable Divisions..........................................17 Investment Portfolios.......................................17 Objectives of the Investment Portfolios..............................18 The Guaranteed Interest Division.....................................22 Maximum Number of Investment Divisions...............................22 DETAILED INFORMATION ABOUT THE VARIABLE SURVIVORSHIP UNIVERSAL LIFE POLICY....23 Applying for a Policy................................................23 Policy Issuance.............................................23 Definition of Life Insurance................................23 Temporary Insurance..................................................23 - -------------------------------------------------------------------------------- Variable Survivorship 3 Premiums ............................................................24 Scheduled Premiums..........................................24 Unscheduled Premium Payments................................24 Minimum Annual Premium......................................24 Special Continuation Period.................................25 Allocation of Net Premiums..................................25 Premium Payments Affect Your Coverage................................25 Modified Endowment Contracts................................26 Death Benefits.......................................................26 Base Death Benefit..........................................27 Death Benefit Options.......................................28 Changes in Death Benefit Options............................28 Enhanced Death Benefit Corridor Option......................29 Changes in Death Benefit Amounts............................29 Guaranteed Minimum Death Benefit............................30 Requirements to Maintain the Guarantee Period...............31 Additional Benefits..................................................32 Adjustable Term Insurance Rider.............................32 Single Life Term Rider......................................33 Special Features.....................................................33 Policy Maturity.............................................33 Policy Split Option.........................................34 Right to Exchange Policy....................................35 Continuation of Coverage....................................35 Policy Values........................................................35 Account Value...............................................35 Net Account Value...........................................35 Cash Surrender Value........................................35 Net Cash Surrender Value....................................36 Determining the Value in the Variable Divisions.............36 How We Calculate Accumulation Unit Values for Each Division.36 Transfers of Account Value...........................................37 Excessive Trading...........................................37 Guaranteed Interest Division Transfers......................37 Dollar Cost Averaging................................................38 Changing Dollar Cost Averaging..............................38 Terminating Dollar Cost Averaging...........................38 Automatic Rebalancing................................................39 Changing Automatic Rebalancing..............................39 Terminating Automatic Rebalancing...........................39 Policy Loans.........................................................39 Loan Repayment..............................................40 Loans and Your Benefits.....................................40 Partial Withdrawals..................................................41 Partial Withdrawals under Death Benefit Option 1............41 Partial Withdrawals under Death Benefit Option 2............41 Stated Death Benefit and Target Death Benefit Reductions....41 Partial Withdrawal Mechanics................................41 Lapse................................................................42 Grace Period................................................42 If You Have the Guaranteed Minimum Death Benefit in Effect..42 Reinstatement........................................................43 Surrender............................................................44 General Policy Provisions............................................44 Free Look Period or Right to Examine Policy Period..........44 - -------------------------------------------------------------------------------- Variable Survivorship 4 Your Policy.................................................45 Age.........................................................45 Ownership...................................................45 Beneficiary(ies)............................................45 Collateral Assignment.......................................46 Incontestability............................................46 Misstatements of Age or Gender..............................46 Suicide.....................................................46 Transaction Processing......................................46 Notification and Claims Procedures..........................47 Telephone Privileges........................................47 Non-participation...........................................47 Distribution of the Policies................................47 Settlement Provisions.......................................48 Administrative Information About the Policy..........................49 Voting Privileges...........................................49 Material Conflicts..........................................50 Right to Change Operations..................................50 Reports to Owners...........................................51 CHARGES, DEDUCTIONS AND REFUNDS...............................................51 Deductions from Premiums.............................................51 Tax Charges.................................................51 Sales Charge................................................52 Daily Deductions from the Variable Account...........................52 Mortality and Expense Risk Charge...........................52 Monthly Deductions from Your Account Value...........................52 Policy Charge...............................................53 Monthly Administrative Charge...............................53 Cost of Insurance Charge....................................53 Guaranteed Minimum Death Benefit Charge.....................54 Charges for Additional Benefits.............................54 Changes in Monthly Charges..................................54 Continuation of Coverage Administrative Fee.................54 Policy Transaction Fees..............................................54 Partial Withdrawals.........................................54 Transfers...................................................54 Illustrations...............................................54 Premium Allocation Change...................................54 Persistency Refund...................................................55 Surrender Charge.....................................................55 Group or Sponsored Arrangements or Corporate Purchasers..............56 Other Charges........................................................57 TAX CONSIDERATIONS............................................................57 Tax Status of the Policy.............................................57 Diversification Requirements.........................................57 Tax Treatment of Policy Death Benefits...............................58 Modified Endowment Contracts.........................................58 Multiple Policies....................................................58 Distributions Other than Death Benefits from Modified Endowment Contracts..........................................................58 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts.......................................59 Investment in the Policy.............................................59 Policy Loans.........................................................59 Section 1035 Exchanges...............................................59 - -------------------------------------------------------------------------------- Variable Survivorship 5 Tax-exempt Policy Owners.............................................59 Changes to Comply with the Law.......................................59 Other................................................................60 ILLUSTRATIONS.................................................................61 ADDITIONAL INFORMATION........................................................65 Directors and Officers...............................................65 Regulation...........................................................68 Legal Matters........................................................68 Legal Proceedings....................................................68 Experts ............................................................68 Registration Statement...............................................68 FINANCIAL STATEMENTS..........................................................69 APPENDIX A...................................................................170 APPENDIX B...................................................................171 APPENDIX C...................................................................172 - -------------------------------------------------------------------------------- Variable Survivorship 6 INDEX OF SPECIAL TERMS The following special terms are used in this prospectus. We explain each term on the page(s) listed in the body of this prospectus and in the summary, if applicable: Account value.................................................................13 Accumulation unit.............................................................36 Accumulation unit value.......................................................36 Adjustable term insurance rider...............................................26 Age...........................................................................23 Base death benefit............................................................27 Beneficiary(ies)..............................................................15 Cash surrender value..........................................................13 Customer service center........................................................2 Continuation of coverage......................................................35 Death proceeds................................................................28 Free look period..............................................................44 General account...............................................................17 Guarantee period..............................................................31 Guarantee period annual premium...............................................31 Guaranteed interest division..................................................22 Guaranteed minimum death benefit..............................................30 Initial premium...............................................................23 Insured.......................................................................23 Investment date...............................................................23 Investment division...........................................................22 Joint equivalent age..........................................................45 Loan division.................................................................13 Minimum annual premium........................................................24 Monthly processing date.......................................................25 Net account value.............................................................36 Net amount at risk............................................................13 Net cash surrender value......................................................36 Net premium................................................................8, 25 Owner......................................................................8, 45 Partial withdrawal............................................................25 Policy.....................................................................8, 17 Policy date...................................................................23 Policy loan...................................................................39 Portfolios................................................................13, 17 Rider.....................................................................14, 32 Scheduled benefits............................................................24 Scheduled premium.............................................................24 Segment.......................................................................30 Special continuation period...................................................25 Stated death benefit..........................................................23 Surrender charge..............................................................13 Surrender target premium......................................................55 Target death benefit..........................................................32 Target premium................................................................55 Total death benefit...........................................................32 Transaction date..............................................................36 Valuation date................................................................14 Valuation period..........................................................14, 37 Variable account..............................................................17 Variable division(s)..........................................................17 Younger insured person's 100th birth date.....................................45 - -------------------------------------------------------------------------------- Variable Survivorship 7 POLICY SUMMARY THIS SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT POINTS ABOUT YOUR POLICY. THE POLICY IS MORE FULLY DESCRIBED IN THE ATTACHED, COMPLETE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY. "WE," "US," "OUR," AND THE "COMPANY" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE POLICY OWNER. THE OWNER IS THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO MAY EXERCISE ALL RIGHTS OVER THE POLICY AND RECEIVE THE POLICY BENEFITS DURING THE INSURED PEOPLE'S LIFETIMES. ANY STATE VARIATIONS ARE COVERED IN A SPECIAL POLICY FORM FOR USE IN THAT STATE. THIS PROSPECTUS PROVIDES A GENERAL DESCRIPTION OF THE POLICY. YOUR ACTUAL POLICY AND ANY RIDERS ARE THE CONTROLLING DOCUMENTS. IF YOU WOULD LIKE TO REVIEW A COPY OF THE POLICY AND RIDERS, CONTACT OUR CUSTOMER SERVICE CENTER. YOUR POLICY Your policy provides life insurance protection on the lives of two insured people. It is issued based on both insured people's lives and insurance coverage may continue, in whole or in part, until both have died. The policy includes the basic policy, applications, and any riders or endorsements. As long as the policy remains in force, we pay a death benefit at the second death 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 also surrender your policy for its net cash surrender value. At the policy anniversary nearest the younger insured person's 100th birth date, the policy can be surrendered or continued under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 35. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy and return it for a refund of premiums paid or the account value, as specified by state law, if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 44. YOUR POLICY PREMIUMS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; o sufficient to keep your policy in force; and o as necessary to continue certain benefits. On your application, you choose how much and how often you want to pay premiums. Depending on your choices, it may not be enough to keep your policy or certain riders in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 24. ALLOCATION OF NET PREMIUMS This policy has premium-based charges which are subtracted from your payments. We add the balance, or the net premium, to your policy based on your investment instructions. You may allocate the net premiums among one or more variable divisions, the guaranteed interest division, or both. You may not invest in more than eighteen investment divisions, including the guaranteed interest division, over the life of your policy. We apply net premium payments we have received from you to your policy after we: o receive your initial premium; o have the information we require; o approve your policy application; and o issue your policy. You need to allocate your premiums to your investment choices in percentages that are whole numbers and which total 100%. SEE ALLOCATION OF NET PREMIUMS, PAGE 25. - -------------------------------------------------------------------------------- Variable Survivorship 8 CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUM We make the following deductions from each premium payment you make: 1. Tax charges -- We currently deduct a charge of 2.5% of premiums for state and local taxes. We currently deduct a charge of 1.5% of each premium to cover our estimated cost of the federal income tax treatment of deferred acquisition costs. SEE TAX CHARGES, PAGE 51. 2. Sales charge -- We deduct a percentage of each premium to cover a portion of our expenses in selling your policy. This charge is based on the length of time since your policy or a segment became effective. Sales Charge Percentage ----------------------- To Segment Above Segment Segment Target Target Year Premium Premium ---- ------- ------- 1 - 5 5.5% 2% 6 + 2% 2% SEE DEDUCTIONS FROM PREMIUMS, PAGE 51. DEDUCTIONS FROM THE VARIABLE DIVISIONS We assess a mortality and expense risk charge of 0.75% per year or 0.002055% per day against the variable divisions. This charge compensates us for mortality and expense risks under the policies. SEE DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT, PAGE 52. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct the following charges from your account value at the beginning of each policy month: 1. Policy charge -- $15 per month for the first ten policy years and $9 per month for each policy year after the tenth. 2. Monthly administrative charge-- A charge of no less than $0.07 and no more than $0.095 per $1,000 for the first ten policy years. We charge $0.023 per $1,000 for each policy year after the tenth. The exact per $1,000 charge for your policy is based on the insured people's issue ages and policy duration. 3. Cost of insurance charge -- Based on the net amount at risk on the lives of the insured people. The amount of this charge may differ for: o each segment of the base death benefit; and o the adjustable term insurance rider. 4. Guaranteed minimum death benefit (if applicable) -- $0.005 per $1,000 of stated death benefit per month. 5. Charges for additional benefits -- The cost of additional benefits you choose. The adjustable term insurance rider charge is included in the cost of insurance charge. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 52. POLICY TRANSACTION FEES We deduct policy transaction fees from your account value at the time of the transaction. The following are the current transaction fees. SEE POLICY TRANSACTION FEES, PAGE 54. 1. Partial withdrawal fee -- $25. 2. Transfer fee -- We allow twelve free transfers among investment divisions per policy year. For each transfer beyond that, a $25 fee applies. 3. Illustrations -- You may request one free illustration per policy year. For each illustration beyond that, a $25 fee may apply. 4. Premium Allocation Change - You may make five free premium allocation changes per policy year. For each premium allocation change beyond that, a $25 fee applies. 5. Continuation of Coverage - We will charge a one-time $400 administrative fee at the policy anniversary nearest the younger insured person's 100th birth date to activate continued coverage. - -------------------------------------------------------------------------------- Variable Survivorship 9 SURRENDER CHARGES During the first nine years of your policy or an additional segment, we assess a surrender charge if you: o surrender the policy; o reduce the stated death benefit (other than by changing the death benefit option); o let your policy lapse; or o take a partial withdrawal which reduces your stated death benefit. The surrender charge is a percentage of your target premium. It depends upon the insured people's ages at the policy date. SEE SURRENDER CHARGE, PAGE 55. FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS The variable account purchases shares of the investment portfolios at net asset value. This price reflects investment management fees and other direct expenses that are deducted from the portfolio assets. The following table describes these investment management fees and other direct expenses of the investment portfolios. The fees and expenses are shown in both gross amounts and net amounts shown after any expenses or fees have been absorbed by the investment portfolio advisers. - -------------------------------------------------------------------------------- Variable Survivorship 10
INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS) /1/ Fees and Investment Total Expenses Total Net Management Other Portfolio Waived or Portfolio Portfolio Fees Expenses Expenses Reimbursed Expenses AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67% NA 0.67% AIM V.I. Government Securities Fund 0.50% 0.26% 0.76% NA 0.76% THE ALGER AMERICAN FUND Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.11%/2/ 0.96% NA 0.96% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% NA 0.84% Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% NA 0.89% FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.59% 0.09% 0.68% NA 0.68%/4/ VIP Money Market Portfolio 0.20% 0.10% 0.30% NA 0.30% VIP Overseas Portfolio 0.74% 0.17% 0.91% NA 0.91%/4/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Asset Manager Portfolio 0.54% 0.10% 0.64% NA 0.64%/4/ VIP II Index 500 Portfolio 0.24% 0.11% 0.35% 0.07% 0.28%/5/ INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly VIF-Industrial Income Portfolio) 0.75% 0.42% 1.17%/3/ 0.24%/6/ 0.93% INVESCO VIF-High Yield Fund 0.60% 0.47% 1.07% NA 1.07% INVESCO VIF-Small Company Growth Fund 0.75% 11.92% 12.67%/3/ 10.80%/7/ 1.87% INVESCO VIF-Total Return Fund 0.75% 0.49% 1.24%/3/ 0.23%/8/ 1.01% INVESCO VIF-Utilities Fund 0.60% 1.24% 1.84%/3/ 0.76%/9/ 1.08% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Growth Portfolio 0.83% 0.09% 0.92% NA 0.92% Limited Maturity Bond Portfolio 0.65% 0.11% 0.76% NA 0.76% Partners Portfolio 0.78% 0.06% 0.84% NA 0.84% VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% 0.15% 1.15% NA 1.15% Worldwide Emerging Markets Fund 1.00% 0.61% 1.61%/3/ 0.31%/10/ 1.30% Worldwide Hard Assets Fund 1.00% 0.20% 1.20%/3/ NA/11/ 1.20% Worldwide Real Estate Fund 1.00% 4.32% 5.32%/3/ 4.43%/12/ 0.89%
/1/ The preceding portfolio expense information was provided to us by the portfolios, and we have not independently verified such information. These portfolio expenses are not direct charges against division assets or reduction from contract values; rather these portfolio expenses are taken into consideration in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the divisions. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. /2/ Included in other expenses of the Alger American Leveraged AllCap Portfolio is 0.03% of interest expense. /3/ Certain expenses of the Fund are being voluntarily absorbed by the Funds. - -------------------------------------------------------------------------------- Variable Survivorship 11 /4/ A Portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total portfolio expenses presented in the table would have been 0.66% for Growth Portfolio, 0.89% for Overseas portfolio and 0.63% for Asset Manager Portfolio. /5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' total portfolio expenses would have been 0.35%. /6/ Certain expenses of the VIF-Equity Income Fund (formerly VIF-Industrial Income Fund) are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.18% and 0.93% respectively. This commitment can be changed at any time following consultation with the board of directors. /7/ Certain expenses of the VIF-Small Company Growth Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses" were 1.12% and 1.87% respectively. This commitment can be changed at any time following consultation with the board of directors. /8/ Certain expenses of the VIF-Total Return Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Total Return Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.42% and 1.17% respectively. This commitment can be changed at any time following consultation with the board of directors. /9/ Certain expenses of the VIF-Utilities Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Utilities Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.48% and 1.08% respectively. This commitment can be changed at any time following consultation with the board of directors. /10/ Van Eck Associates Corporation (the "Advisor") absorbed expenses exceeding 1.50% of the Fund's average daily net assets. Due to this arrangement, the actual expenses incurred were "Total Portfolio Expenses" of 1.50% as of December 31, 1998. Effective May 13, 1999, the Adviser has voluntarily agreed to limit the Worldwide Emerging Markets Fund's total annual operating expenses to 1.30% of the Fund's average daily net assets. /11/ The Fund's "Other Expenses" were reduced by a fee arrangement based on cash balances left on deposit with the custodian and a directed brokerage arrangement where the Fund directs certain portfolio trades to a broker that, in turn, pays a portion of the Fund's expenses. Due to this arrangement the actual expenses incurred were "Other Expenses" of 0.16% and "Total Portfolio Expenses" of 1.16%. /12/ Van Eck Associates Corporation (the "Advisor") waived its management fees and assumed certain expenses for the period January 1, 1998 to February 28, 1998. The Advisor also assumed expenses exceeding 1.00% of the Fund's average daily net assets for the period March 1,1998 to December 31, 1998. The Fund's expenses were also reduced by a fee arrangement based on cash balances left on deposit with the custodian and a directed brokerage arrangement where the fund directs certain portfolio trades to a broker that, in turn, pays a portion of the Fund's expenses. Due to this arrangement the actual expenses incurred were "Investment Management Fees" of 0.00%, "Other Expenses" of 0.89% and "Total Portfolio Expenses" of 0.89%. /13/ Neuberger Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. The figures reported under "Investment Management and Administration Fees" include the aggregate of the administration fees paid by the Portfolio and the management fees paid by its corresponding Series. Similarly, the "Other Expenses" includes all other expenses of the Portfolio and its corresponding Series. See "Expenses" in the Trust's Prospectus. Expenses may reflect expense reimbursement. NBMI has undertaken to reimburse certain operating expenses, including compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. - -------------------------------------------------------------------------------- Variable Survivorship 12 VARIABLE DIVISIONS Any amount you direct into the guaranteed interest division is credited with interest at a fixed rate set by us. If you invest in any of the following variable divisions, depending on market conditions, you may make or lose money. The variable divisions are described in the prospectuses for the underlying investment portfolios. Each variable division investment portfolio has its own investment objective. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 18. AIM VARIABLE INSURANCE FUNDS AIM V.I. Capital Appreciation Fund AIM V.I. Government Securities Fund THE ALGER AMERICAN FUND Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND & VARIABLE INSURANCE PRODUCTS FUND II VIP Growth Portfolio VIP Money Market Portfolio VIP Overseas Portfolio VIP II Asset Manager Portfolio VIP II Index 500 Portfolio INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund (formerly, INVESCO VIF- Industrial Income Portfolio) INVESCO VIF-High Yield Fund INVESCO VIF-Small Company Growth Fund INVESCO VIF-Total Return Fund INVESCO VIF-Utilities Fund NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman AMT Growth Portfolio Neuberger Berman AMT Limited Maturity Bond Portfolio Neuberger Berman AMT Partners Portfolio VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Bond Fund Van Eck Worldwide Emerging Markets Fund Van Eck Worldwide Hard Assets Fund Van Eck Worldwide Real Estate Fund POLICY VALUES Your policy account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable division. If you have outstanding policy loans, your account value includes the amount in the loan division. The loan division is part of our general account specifically designed to hold money used as collateral for loans and loan interest. The general account contains all of our assets other than those held in the variable account, or our other separate accounts. Your account value reflects: o net premiums; o deductions for charges; o the investment performance of the amounts you have in the variable divisions; o interest earned on the amount you have in the guaranteed interest division; o interest earned and charged on the amount you have in the loan division; and o partial withdrawals. We subtract charges and partial withdrawals you take from your account value. You make a partial withdrawal when you withdraw part of your net cash surrender value. Partial withdrawals may reduce the amount of base death benefit which may trigger a surrender charge. We may deduct a surrender charge from your account value in the event of: o surrender; o policy lapse; o requested reductions in the stated death benefit; or o certain partial withdrawals. SEE SURRENDER CHARGE, PAGE 10. Your cash surrender value is equal to your account value minus any surrender charge. Your net cash surrender value is equal to the cash surrender value minus outstanding policy loans and accrued loan interest, if any. Your net account value is equal to the account value minus outstanding policy loans and accrued loan interest, if any. - -------------------------------------------------------------------------------- Variable Survivorship 13 YOUR ACCOUNT VALUE IN THE VARIABLE DIVISIONS Accumulation units are the way we measure value in the variable divisions. Accumulation unit value is the value of a unit of a variable division on the valuation date. Each variable division has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISIONS, PAGE 36. On each valuation date, we determine the accumulation unit values. The accumulation unit value for each variable division reflects the investment performance of the matching investment portfolio during the valuation period. The valuation period is the time beginning at 4:00 p.m. Eastern time on a valuation date and ending at 4:00 p.m. Eastern time on the next valuation date. Each accumulation unit value reflects asset-based charges under the policy, and the expenses of the investment portfolios. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 36. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions or to the guaranteed interest division per policy year. We charge $25 for each transfer over twelve you make in a policy year. This charge does not apply to any automatic rebalancing or dollar cost averaging transfers: they are free. There are restrictions on transfers to or from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 37. SPECIAL POLICY FEATURES ADDITIONAL BENEFITS You may attach certain additional benefits to your policy by rider. A rider changes benefits under your policy. In most cases, we deduct a monthly charge from your account value for these benefits. SEE ADDITIONAL BENEFITS, PAGE 32. DOLLAR COST AVERAGING You may choose dollar cost averaging on your application or complete a customer service form. Dollar cost averaging is a systematic plan of transferring account values to selected investment divisions. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 38. AUTOMATIC REBALANCING You may choose automatic rebalancing on your policy. Automatic rebalancing periodically reallocates your net account value among the investment divisions to maintain your specified distribution of account value among those divisions. Automatic rebalancing is free. SEE AUTOMATIC REBALANCING, PAGE 39. LOANS You may take loans against your policy's net cash surrender value. We charge an annual loan interest rate of 3.75%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. Beginning in your eleventh policy year, where permitted by law, we may include amounts in the loan division for calculation of your policy's persistency refund. SEE POLICY LOANS, PAGE 39. PARTIAL WITHDRAWALS You may withdraw part of your net cash surrender value any time after your first policy year. You may make only one partial withdrawal per policy year. Partial withdrawals may reduce the death benefit and will reduce your account value. Surrender charges may apply. SEE PARTIAL WITHDRAWALS, PAGE 41. PERSISTENCY REFUND After your tenth policy anniversary, where permitted by state law, we credit your account value with a persistency refund on every monthly processing date. SEE PERSISTENCY REFUND, PAGE 55. POLICY MODIFICATION, TERMINATION AND CONTINUATION FEATURES RIGHT TO EXCHANGE POLICY For 24 months after the policy date you can exchange your policy for a guaranteed policy, unless state law requires differently. The right to exchange your policy is free. SEE RIGHT TO EXCHANGE POLICY, PAGE 35. - -------------------------------------------------------------------------------- Variable Survivorship 14 POLICY SPLIT OPTION You may split your policy into two separate life insurance policies each insuring the life of one insured person under certain circumstances. This split may occur upon divorce between the two insured people, business dissolution, or a possible adverse future change in the tax law, unless state law requires otherwise. The policy split option is free. SEE POLICY SPLIT OPTION, PAGE 34. SURRENDER You may surrender your policy for its net cash surrender value at any time while an insured person is living. We calculate your net cash surrender value on the valuation date we receive your request and policy at our customer service center. All insurance coverage ends on the date we receive your request. You must return your policy or a lost policy form to us. SEE SURRENDER, PAGE 44. LAPSE In general, insurance coverage continues as long as your policy's net cash surrender value is enough to pay the monthly deductions. However, your policy and its riders are guaranteed not to lapse during the first five years of your policy if the conditions of the special continuation period have been met. SEE LAPSE, PAGE 42. REINSTATEMENT You may reinstate your policy and its riders within five years of its lapse if you still own the policy and the insured people meet the same underwriting requirements as were met at policy issue. You will need to give proof of insurability as at policy issue. You will also need to pay required reinstatement premiums. If the guaranteed minimum death benefit lapses and you do not correct it, this feature terminates. Once it terminates, you cannot reinstate this feature. We will reinstate any policy loans existing when coverage ended, with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 43. CONTINUATION OF COVERAGE At the policy anniversary nearest younger insured person's 100th birth date, you may choose to let the continuation of coverage feature become effective. If the continuation of coverage feature becomes effective, we will deduct a one-time administrative fee of $400 and keep your policy in force. SEE CONTINUATION OF COVERAGE, PAGE 35. DEATH BENEFITS At the second death of the two insured people, we pay death proceeds to the beneficiary(ies) if your policy is still in force. The beneficiary(ies) is(are) the person or people you name to receive the death proceeds. The death proceeds equal the base death benefit plus amounts payable by rider, minus the amount of any outstanding policy loan and accrued loan interest. Based on the death benefit option you have chosen, the base death benefit varies. The base death benefit does not include any adjustable term insurance rider you may have on your policy. The target death benefit includes any adjustable term insurance rider you may have on your policy plus your base death benefit. The total death benefit is at least equal to or greater than your target death benefit. The minimum target death benefit to issue your policy is $250,000. If you have an adjustable term rider the minimum stated death benefit to issue a policy is $100,000. However, we may lower this minimum for group or sponsored arrangements, or corporate purchasers. The death benefit at issue may vary from the stated death benefit plus adjustable term insurance coverage for some 1035 exchanges. SEE DEATH BENEFIT, PAGE 26. You may change your base death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 29. 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 57. - -------------------------------------------------------------------------------- Variable Survivorship 15 Assuming the policy qualifies as a life insurance contract, under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. In addition to the events listed above, if your policy is a modified endowment contract, loans against or secured by the policy may cause income taxation. A penalty tax may be imposed on a distribution from a modified endowment contract as well. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 58. You should consult a qualified legal or tax adviser before you purchase your policy. INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. At the close of 1998, the company and its consolidated subsidiaries had over $174.3 billion of life insurance in force. As of December 31, 1998, our total assets were over $10.0 billion, and our shareholder's equity was over $926 million. We have a complete line of life insurance products, including: o annuities; o individual life; o group life; o pension products; and o market life reinsurance. Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"). ING is one of the world's three largest diversified financial services organizations. ING is headquartered in Amsterdam, The Netherlands. It has consolidated assets over $461.8 billion on a Dutch (modified U.S.) generally accepted accounting principles basis, as of December 31, 1998. The principal underwriter and distributor for our policies is ING America Equities, Inc. ING America Equities is a stock corporation organized under the laws of the State of Colorado in 1993. It is a wholly owned subsidiary of Security Life and is a registered broker-dealer with the SEC and the NASD. ING America Equities, Inc. is located at 1290 Broadway, Denver, Colorado 80203-5699. YEAR 2000 PREPAREDNESS Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management projects information processing and delivery systems to have a Year 2000 readiness interim target completion date of June 29, 1999 with a final completion date of December 31, 1999. The Year 2000 problem originates from the predominant use in computer programs of a two-digit field to capture the year, for example 99 instead of 1999. When we reach the year 2000 many of these programs will assume the year 00 is actually 1900 rather than 2000. This incorrect assumption can lead to erroneous results, false calculations or system failures. This is not only a computer problem, but also applies to other machinery or equipment containing computer chips which calculate dates for correct performance, the so-called "embedded systems." That is why errors, ranging from telephone shutdown to other services may occur as well. This potential risk is often referred to as the "Millennium Bug" or the "Year 2000 problem." The problem is made more complex by the many lines of code that can be affected in a single system, the number of systems required to support business activities and the interdependence of both the internal and external systems involved in exchanging data. This is particularly true for the financial services industry, where information is at the heart of the business and which depends heavily on the uninterrupted transfer of data world-wide, bank-to-bank and with clearing houses, exchanges and - -------------------------------------------------------------------------------- Variable Survivorship 16 agencies. If the potential problems are not addressed, this could in some cases result in business system failure. From a financial perspective, this could, for instance, lead to incorrect interest calculations or over/under payments. A project plan has been implemented and our project team has analyzed and remediated our in-house source code. We completed the remediation in December, 1998. The project plan covers Security Life, ING America Equities, Inc., Midwestern United Life Insurance Company, and First ING Life Insurance Company of New York. We will follow our normal project management methodology including communication with senior management on a monthly and as-needed basis. Our targeted completion date is scheduled for June 29, 1999, but there is no assurance that Security Life will be successful, or that interaction with other service providers will not impact our services at that time. Security Life has completed an inventory and assessment of all vendor products. We are in the process of verifying that each vendor product is Year 2000 ready. Funds have been allocated for the 1999 efforts, and we believe we have sufficient resources to ensure Year 2000 processing capabilities. SECURITY LIFE SEPARATE ACCOUNT L1 VARIABLE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "variable account") on November 3, 1993, under Colorado's insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940. The SEC does not supervise our management of the variable account or Security Life. The variable account is a separate investment account. It is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We keep the variable account assets separate from our general account and other separate accounts. We may offer other variable life insurance contracts with different benefits and charges that invest in the variable account. We do not discuss these contracts in this prospectus. The variable account may invest in other securities not available for the policy described in this prospectus. The general account contains all of our assets other than those held in the variable account (variable divisions) or other separate accounts. The company owns all the assets in the variable account. We credit gains to or charge losses against the variable account without regard to performance of other investment accounts. ORDER OF VARIABLE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against variable account assets equal to its reserves and other liabilities. This means that in the event we were ever to become insolvent, the variable account assets will be used first to pay variable account policy claims. Only if assets remain in the variable account after these claims have been satisfied can these assets be used to pay other policy owners and our creditors. The variable account may have liabilities from assets credited to other variable life policies offered by the variable account. If the assets of the variable account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. VARIABLE DIVISIONS The variable account has several divisions. Each division invests in shares of a matching investment portfolio. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. Each investment portfolio has its own investment objective. These investment portfolios are not available directly to individual investors. They are only available as the underlying investments for variable annuity and variable life insurance contracts and certain pension accounts. INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who is not associated with us. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life - -------------------------------------------------------------------------------- Variable Survivorship 17 insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the variable account. There are certain risks with mixed and shared funding, and with selling shares to qualified pension and retirement plans. See the investment portfolios' prospectuses. OBJECTIVES OF THE INVESTMENT PORTFOLIOS Each investment portfolio has a different investment objective that it tries to achieve by following its own investment strategy. The objectives and policies of each investment portfolio affect its return and its risks. With this prospectus, you must receive the current prospectus for each investment portfolio. We summarize the investment objectives for each investment portfolio here. You should read each investment portfolio prospectus. Certain investment portfolios offered under this policy have investment objectives and policies similar to other funds managed by the portfolio's investment adviser. The investment results of a portfolio may be higher or lower than those of other funds managed by the same adviser. There is no assurance, and no representation is made, that the investment results of any investment portfolio will be comparable to those of another fund managed by the same investment adviser. Some investment portfolio advisers (or their affiliates) may pay us compensation for servicing, administration or other expenses. Currently, these advisers include A I M Advisors, Inc.; Fidelity Investments(R); Fred Alger Management, Inc.; INVESCO Funds Group, Inc.; Neuberger Berman Management Inc.; and Van Eck Global. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers may pay us more than others. AIM VARIABLE INSURANCE FUNDS, INC. AIM Variable Insurance Funds, Inc. is a registered, open-end, series, management investment company. A I M Advisors, Inc., ("AIM") serves as each fund's investment adviser. AIM has acted as an investment adviser since its organization in 1976. Today, AIM, together with its subsidiaries, advises or manages over 110 investment portfolios encompassing a broad range of investment objectives. AIM V.I. Capital Appreciation Fund -- seeks growth of capital through investment in common stocks, with emphasis on medium- and small-sized growth companies. AIM V.I. Government Securities Fund -- seeks to achieve high current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the United States Government. THE ALGER AMERICAN FUND The Alger American Fund is a registered investment company organized on April 6, 1988. It is a multi-series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has provided investment advisory services since 1964. Alger American Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on growing companies that generally have broad product lines, markets, financial resources and depth of management. Under normal circumstances, the portfolio invests primarily in equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio -- seeks long-term capital appreciation. Under normal circumstances, the portfolio invests in the equity securities of companies of any size which demonstrate promising growth potential. The portfolio can leverage, that is, borrow money, to buy additional securities. By borrowing money, the portfolio has the potential to increase its returns if the increase in the value - -------------------------------------------------------------------------------- Variable Survivorship 18 of the securities purchased exceeds the cost of borrowing, including interest paid for the money borrowed. Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on midsize companies with promising growth potential. Under normal circumstances, the portfolio invests primarily in equity securities of companies having a market capitalization within the range of companies in the S&P(R) MidCap 400 Index. Alger American Small Capitalization Portfolio -- seeks long-term capital appreciation. The portfolio focuses on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund ("VIP" established November 13, 1981) and Variable Insurance Products Fund II ("VIP II" established March 21, 1988) are open-end, diversified, management investment companies. These funds are organized as Massachusetts business trusts. Fidelity Management & Research Company ("FMR") manages and provides investment and other services to the funds named here. However, Bankers Trust Company also provides sub-advisory services for VIP II Index 500 Portfolio. FMR is the management arm of Fidelity Investments(R), which was established in 1946, and is one of America's largest mutual fund managers. VIP Growth Portfolio -- seeks capital appreciation. FMR's principal investment strategies include: o Investing primarily in common stocks. o Investing in companies that it believes have above-average growth potential (stocks of these companies are often called "growth" stocks). o Investing in domestic and foreign issuers. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP Money Market Portfolio -- seeks as high a level of current income as is consistent with the preservation of capital and liquidity. FMR's principal investment strategies include: o Investing in U.S. dollar-denominated money market securities, including U.S. Government securities and repurchase agreements, and entering into reverse repurchase agreements. o Investing more than 25% of total assets in the financial services industry. o Investing in compliance with industry- standard requirements for money market funds for the quality, maturity and diversification of investments. VIP Overseas Portfolio -- seeks long-term growth of capital. FMR's principal investment strategies include: o Investing at least 65% of total assets in foreign securities. o Investing primarily in common stocks. o Allocating investments across countries and regions considering the size of the market in each country and region relative to the size of the international market as a whole. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP II Asset Manager Portfolio -- seeks high total return with reduced risk over the long term by allocating its assets among stocks, bonds, and short-term instruments. FMR's principal investment strategies include: o Allocating the fund's assets among stocks, bonds, and short-term and money market instruments. o Maintaining a neutral mix over time of 50% of assets in stocks, 40% of assets in bonds, and 10% of assets in short-term and money market instruments. o Adjusting allocation among asset classes gradually within the following ranges: stock class (30 - 70%), bond class (20 - 60%), and short-term/money market class (0 - 50%). - -------------------------------------------------------------------------------- Variable Survivorship 19 o Investing in domestic and foreign issuers. o Analyzing an issuer using fundamental and/or quantitative factors and evaluating each security's current price relative to estimated long-term value in selecting instruments. VIP II Index 500 Portfolio -- seeks investment results that correspond to the total return of common stocks publicly traded in the United States as represented by the S&P(R) 500. Bankers Trust Company ("BT")'s principal investment strategies include: o Investing at least 80% of assets in common stocks included in the S&P(R) 500. o Lending securities to earn income for the fund. INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company. It was organized as a Maryland corporation on August 19, 1993. It is currently made up of ten diversified investment portfolios. Five of these investment portfolios are described here. INVESCO Funds Group, Inc. is the Fund's investment adviser. As the adviser, it is mostly responsible for providing the portfolios with investment management, various administrative services, and supervising the Fund's daily business affairs. INVESCO Capital Management, Inc. sub-advises the Total Return Fund. "VIF" refers to INVESCO Variable Investment Fund. INVESCO Distributors, Inc. ("IDI"), provides distribution services for the INVESCO Variable Investment Funds, Inc. INVESCO VIF-Equity Income Fund (Formerly, INVESCO VIF-Industrial Income Portfolio) -- seeks high current income, with growth of capital as a secondary objective. The fund normally invests at least 65% of its assets in dividend-paying common and preferred stocks, although in recent years that percentage has been somewhat higher. Stocks held by the fund generally are expected to produce a relatively high level of income and a consistent, stable return. Although it focuses on the stocks of larger companies with a strong record of paying dividends, the fund also may invest in companies that have not paid regular dividends. The fund's equity investments are limited to stocks that can be traded easily in the United States; it may, however, invest in foreign securities in the form of American Depository Receipts (ADRs). The rest of the fund's assets are invested in debt securities, generally corporate bonds that are rated investment grade or better. The fund also may invest up to 15% of its assets in lower-grade debt securities commonly known as "junk bonds," which generally offer higher interest rates, but are riskier investments than investment grade securities. INVESCO VIF-High Yield Fund -- seeks to provide a high level of current income. It invests substantially all of its assets in lower- rated debt securities, commonly called "junk bonds," and preferred stock, including securities issued by foreign companies. Although these securities carry with them higher risks, they generally provide higher yields-- and therefore higher income--than higher-rated debt securities. INVESCO VIF-Small Company Growth Fund -- seeks investment growth over the long term. The fund normally invests at least 80% of its assets in equity securities of companies with market capitalizations of $1 billion or less. INVESCO uses a bottom-up investment approach to the fund's investment portfolio, focusing on companies that are in the developing stages of their life cycles. Using this approach, INVESCO tries to identify companies that it believes are undervalued in the marketplace, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer the potential for accelerated earnings growth due to rapid growth of sales, new products, management changes, or structural changes in the economy. The prices of securities issued by these small companies tend to rise and fall more rapidly than those of more established companies. The remainder of the fund's assets can be invested in a wide range of securities that may or may not be issued by small companies. In addition to equity securities, the fund can invest in foreign securities and debt securities, including so-called "junk bonds." - -------------------------------------------------------------------------------- Variable Survivorship 20 INVESCO VIF-Total Return Fund -- seeks to provide high total return through both growth and current income. It normally invests at least 30% of its assets in common stocks of companies with a strong history of paying regular dividends and 30% of its assets in debt securities. Debt securities include obligations of the United States Government and government agencies. The remaining 40% of the fund is allocated among these and other investments at INVESCO's discretion, based upon current business, economic and market conditions. INVESCO VIF-Utilities Fund -- seeks capital appreciation and income. The fund normally invests at least 80% of its assets in companies doing business in the utilities economic sector. The remainder of the fund's assets are not required to be invested in the utilities economic sector. The fund is aggressively managed. Although the fund can invest in debt securities, it primarily invests in equity securities that INVESCO believes will rise in price faster than other investments, as well as options and other investments whose value is based upon the values of equity securities. NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman Advisers Management Trust (the "Trust,") is a registered, open-end management investment company. It was organized as a Delaware business trust on May 23, 1994. The Trust is made up of separate portfolios ("Portfolios"), each of which invests all of its net investable assets in a matching series ("Series") of Advisers Managers Trust ("Managers Trust"). Managers Trust is a diversified, open-end management investment company organized as a New York common law trust on May 24, 1994. This master feeder structure is different from that of many other investment companies which directly purchase and manage their own securities portfolios. Neuberger Berman Management Incorporated acts as investment manager to Managers Trust. Neuberger Berman, LLC is the sub-adviser. The investments for the Portfolio are managed by the same portfolio manager(s) who manage one or more other mutual funds that have similar names, investment objectives and investment styles as the Portfolio. You should be aware that the Portfolio is likely to differ from the other mutual funds in size, cash flow pattern and tax matters. Accordingly, the holdings and performance of the Portfolio can be expected to vary from those of the other mutual funds. Shares of the separate Portfolios of Neuberger Berman Advisers Management Trust are sold only through the currently effective prospectus and are not available to the general public. Shares of the AMT Portfolios may be purchased only by life insurance companies to be used with their separate accounts which fund variable annuity and variable life insurance policies. Neuberger Berman Growth Portfolio -- seeks growth of capital. It invests mainly in common mid-capitalization securities. The portfolio managers currently focus on the securities of mid-capitalization companies. The managers use a growth-oriented investment approach. A growth-oriented approach seeks stocks of companies that are fast-growing in emerging or rapidly evolving industries. Neuberger Berman Limited Maturity Bond Portfolio -- seeks the highest available current income consistent with liquidity and low risk to principal; total return is secondary goal. The Limited Maturity Bond Portfolio invests mainly in investment-grade bonds and other debt securities from U.S. Government and corporate issuers. These may include mortgage-and asset-backed securities. The portfolio may invest up to 10% of its net assets, measured at the time of investment, in below investment grade fixed income securities, or comparable unrated securities. The Limited Maturity Bond Portfolio maintains an average portfolio duration of four years or less. However, the series may invest in securities of any duration. Neuberger Berman Partners Portfolio -- seeks growth of capital. The Portfolio invests mainly in common stocks of mid- to large-capitalization companies. Its investment program seeks securities believed to be undervalued based on strong fundamentals, - -------------------------------------------------------------------------------- Variable Survivorship 21 including low price to earnings ratio, consistent cash flow, and the company's track record through all points of the market cycle. VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is an open-end management investment company organized as a business trust under the laws of the Commonwealth of Massachusetts on January 7, 1987. On April 12, 1995, Van Eck Investment Trust changed its name to Van Eck Worldwide Insurance Trust. Van Eck Associates Corporation serves as investment adviser and manager to the funds. Van Eck Worldwide Bond Fund -- seeks high total return--income plus capital appreciation--by investing globally, primarily in a variety of debt securities. Van Eck Worldwide Emerging Markets Fund -- seeks long term capital appreciation by investing in equity securities in emerging markets around the world. Van Eck Worldwide Hard Assets Fund -- seeks long term capital appreciation by investing primarily in "hard asset securities." Income is a secondary consideration. Hard assets include: o precious metals; o natural resources; o real estate; and o commodities. Van Eck Worldwide Real Estate Fund -- seeks high total return by investing in equity securities of companies that own significant real estate or principally do business in real estate. THE GUARANTEED INTEREST DIVISION You may allocate all or a part of the net premiums and transfers of your net account value into the guaranteed interest division. The guaranteed interest division is part of our general account which guarantees principal. It pays interest at a fixed rate that we declare. The general account supports our non-variable insurance and annuity obligations. We have not registered interests in the guaranteed interest division under the Securities Act of 1933. Also, we have not registered the guaranteed interest division or the general account as an investment company under the Investment Company Act of 1940 (because of exemptive and exclusionary provisions). This means that the general account, the guaranteed interest division and its interests are generally not subject to regulation under these Acts. The SEC staff has not reviewed the disclosures included in this prospectus relating to the general account and the guaranteed interest division. These disclosures, however, may be subject to certain requirements of the federal securities law regarding accuracy and completeness of statements made in this prospectus. The amount you have in the guaranteed interest division is the sum of net premiums you allocate to that division, plus transfers you made to the guaranteed interest division, plus interest earned. Amounts you transfer out of or withdraw from the guaranteed interest division reduce this amount. It is also reduced by deductions for charges from your account value allocated to the guaranteed interest division. We declare the interest rate that applies to all amounts in the guaranteed interest division. These interest rates are never less than the minimum guaranteed interest rate of 3% and will be in effect for periods of at least twelve months. Interest compounds daily at an effective annual rate that equals the declared rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT DIVISIONS You may invest in a total of eighteen divisions over the lifetime of your policy. Investment divisions include the variable and the guaranteed interest divisions, but not the loan division. The loan division does not count toward the eighteen division maximum. As an example, if you have had funds in seventeen variable divisions and the guaranteed interest division (or eighteen variable divisions), these are the only divisions to which you may later add or transfer funds. You may want to use fewer divisions in the early years of your policy, so that you can invest in other divisions in the future. Further, if you invest in - -------------------------------------------------------------------------------- Variable Survivorship 22 eighteen variable divisions, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE VARIABLE SURVIVORSHIP UNIVERSAL LIFE POLICY This prospectus describes our standard Variable Survivorship Universal Life insurance policy. There may be differences in the policy because of state requirements where we issue your policy. We will describe any such differences in your policy. The illustrations beginning on page 61 show how the Variable Survivorship policies work. APPLYING FOR A POLICY You purchase a Variable Survivorship policy by submitting an application to us. On the policy date, the joint equivalent age of the two insured people must be no older than age 85. The insured people are the two people on whose lives we issue the policy. The insured people share some relationship and commonly include, among others: husband and wife; business partners; parent and child; grandparent and grandchild; and siblings. Upon the second death of the insured people we pay the death proceeds. Age is each insured person's age on the birthday nearest the policy date plus the number of completed policy years since the policy date. The individual age of each insured person must be no more than 90 years of age on the policy date. There is no maximum age difference between the two insured people. We may back-date the policy up to six months to allow either or both of the insured people to give proof of a younger age for the purposes of your policy. POLICY ISSUANCE Before we issue a policy or apply your net premium to the investment divisions, we require satisfactory evidence of insurability of both insured people and payment of your initial premium. This evidence may include a medical examination and completion of all underwriting and issue requirements. The investment date is the first date we apply the net premium payments we have received from you to your policy. Your initial premium is the premium we must receive before coverage can begin. The initial premium is the first premium we receive and apply to your policy. It must be at least equal to the sum of the scheduled premiums which are due from your policy date through your investment date. If you have a policy with no adjustable term insurance rider, your stated death benefit may be no less than $250,000. If you choose to have an adjustable term insurance rider, your stated death benefit may be as little as $100,000, as long as your target death benefit is at least $250,000. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 29. We may reduce the minimum stated 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 stated death benefit. The policy date as shown on your policy schedule determines: o monthly processing dates; o policy months; o policy years; and o policy anniversaries. It is not affected by the date you receive the policy. The policy date may be different from the date we receive your first premium payment. If the policy date is earlier, we charge monthly deductions from the policy date. DEFINITION OF LIFE INSURANCE We apply a test to make sure that your policy meets the federal 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 57. TEMPORARY INSURANCE If you apply and qualify, we may issue temporary insurance in an amount equal to the face amount of insurance for which you applied. The maximum amount of temporary insurance for binding limited life insurance coverage is $3 million, which includes any in force coverage with us. This temporary insurance is in force as long as you meet all requirements. - -------------------------------------------------------------------------------- Variable Survivorship 23 Coverage begins when: 1. you have completed and signed our binding limited life insurance coverage form; 2. we receive and accept a premium payment of at least your scheduled premium (selected on your application); and 3. part I of the application is completed. Binding limited life insurance coverage ends on the earliest of: o the date we return your premiums; o five days after we mail notice of termination to the address on your application; o the date your policy coverage starts; o the date we refuse to issue you a policy based on your application; or o 90 days after you sign our binding limited life insurance coverage form. There is no death benefit under the temporary insurance agreement if: o there is a material misrepresentation in your answers on the binding limited life insurance coverage form; o there is a material misrepresentation in statements on your application; o the person or persons intended to be the insured people die by suicide or self- inflicted injury; or o the bank does not honor your premium check. PREMIUMS You may choose the amount and frequency of premium payments, within limits. SCHEDULED PREMIUMS Your premiums are flexible. You may select your scheduled premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a monthly, quarterly, semiannual, or annual basis. You are not required to pay the scheduled premium. Alternatively, you may choose to pay your premium by electronic funds transfer each month. This option is not available for your initial premium. The financial institution that makes your electronic funds transfer may charge for this service. You can change the amount of your scheduled premium within our minimum and maximum limits at any time. If you fail to pay your scheduled premium or if you change the amount of your scheduled premium, your policy performance will be affected. During the special continuation period, your scheduled premium should not be less than the minimum annual premium shown in your policy. If you want the guaranteed minimum death benefit, your scheduled premium should not be less than the guarantee period annual premium shown in your policy. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however, we will return all or part of premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you send us notice acknowledging the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 58 AND CHANGES TO COMPLY WITH THE LAW, PAGE 59. If you have an outstanding policy loan and you make an unscheduled payment, we will consider this payment a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take out the tax and sales charges which apply to premium payments. MINIMUM ANNUAL PREMIUM You must pay a minimum annual premium during your first five policy years to qualify for the special continuation period. Your minimum annual premium is based on: o each insured person's age, gender, premium class and any rating; o the stated death benefit of your policy; and o any additional benefits you select. Your minimum annual premium is shown in the schedule pages of your policy. We may reduce the minimum annual premium for group, or sponsored arrangements or for corporate purchasers. - -------------------------------------------------------------------------------- Variable Survivorship 24 SPECIAL CONTINUATION PERIOD The special continuation period is during the first five policy years. Under the special continuation period, we guarantee that your policy will not lapse, regardless of its net cash surrender value, if on a monthly processing date: o the sum of all premiums you have paid, minus partial withdrawals that you have taken, minus policy loans that you have taken, including accrued loan interest is greater than or equal to; o the minimum monthly premiums for each policy month, starting with the first month of your policy through the current policy monthly processing date. On the monthly processing date, we deduct the monthly deductions from your account value. The minimum monthly premium is one-twelfth of the minimum annual premium. During the first five years of your policy, if there is not enough net cash surrender value to pay the monthly deductions and you have satisfied our requirements, we do not permanently waive certain charges. Instead, we continue to deduct these charges. This deduction may result in your policy having a negative net cash surrender value, unless you pay enough premium to prevent this. The negative balance is your unpaid monthly deductions owing. At the end of the special continuation period to avoid lapse of your policy, you must pay enough premium to bring the net cash surrender value to zero plus the amount that covers your estimated monthly deductions for the following two months. SEE LAPSE, PAGE 42. ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we take premium-based charges from your premium payment. We add the net premium to your account value according to your instructions. We apply net premiums we have received from you to your policy after: a) we receive the amount of premium required for your insurance coverage to begin; b) all issue requirements have been met and received by our customer service center; c) we approve your policy application; and d) your policy is issued. All amounts you designated for the guaranteed interest division will be allocated to that division. If your state requires return of your premium during the free look period, we invest amounts you have designated for the variable divisions into the Fidelity VIP Money Market Division until 15 days after we issue your policy (deemed delivery time, plus a typical free look period which varies by state). If your state provides for return of account value during the free look period and for premium payments after the end of the free look period, we invest amounts you designated for the variable divisions directly into your selected investment portfolios. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 44. We allocate premium payments received after we apply your initial net premium payment to your policy on the valuation date of receipt. We always use your most recent premium allocation instructions. Your instructions must specify percentages that are whole numbers totaling 100%. You may invest in a maximum of eighteen divisions over the lifetime of your policy. This eighteen investment division maximum includes the variable divisions and the guaranteed interest division, but not the loan division. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 22. You may make five free premium allocation changes per year. After the five free premium allocation changes, we charge you $25 for each additional allocation change per policy year. The $25 fee is withdrawn from each investment division pro rata to the amount in each division. PREMIUM PAYMENTS AFFECT YOUR COVERAGE Unless you have the guaranteed minimum death benefit feature or are in the special continuation period, your coverage lasts only as long as your net cash surrender value is enough to pay the monthly charges and your cash surrender value is more than your outstanding policy loan plus accrued loan interest. If this happens, your policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 42, AND GRACE PERIOD, PAGE 42. If you pay your minimum annual premium each year during the first five policy years, we guarantee your policy and riders will not lapse during the special continuation period, regardless of your net cash - -------------------------------------------------------------------------------- Variable Survivorship 25 surrender value. SEE SPECIAL CONTINUATION PERIOD, PAGE 25. Under the guaranteed minimum death benefit, the base death benefit portion of your policy remains effective until the end of the guarantee period. The guaranteed minimum death benefit feature does not apply to riders which can lapse and terminate during the guarantee period. You must meet all conditions of the guarantee. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. MODIFIED ENDOWMENT CONTRACTS There are special federal income tax rules for distributions from certain life insurance policies known as "modified endowment contracts." These rules apply to distributions such as policy loans, surrenders, and partial withdrawals. Whether or not these rules apply depends upon whether or not the premiums you paid are greater than the "seven-pay" limit. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 58. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. DEATH BENEFITS You can decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance base coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available under your Variable Survivorship policy. When we issue your policy, we base the initial insurance coverage on the instructions in your application. The initial death benefit is the stated death benefit amount. You can add an adjustable term insurance rider or single life term rider for additional insurance coverage. The stated death benefit is the permanent element of your policy. The adjustable term insurance rider is the term insurance element of your policy. As a Variable Survivorship policy, your policy has a joint nature to the death benefits. This means that we do not pay death proceeds until the second death of the insured people. Your death benefit is calculated as of the date of the second death of the insured people. The adjustable term insurance rider acts as a bridge. It provides term insurance coverage which automatically adjusts to fill the gap between your total death benefit and your base death benefit depending on which death benefit option you choose. If you have a policy with no term rider, your stated death benefit may be no less than $250,000. If you choose to have an adjustable term insurance rider, your stated death benefit may be as low as $100,000, as long as your target death benefit is at least $250,000. We do not guarantee coverage provided by the adjustable term insurance rider under the guaranteed minimum death benefit. It may be to your economic advantage to include part of your insurance coverage under the adjustable term insurance rider. Both the cost of insurance under the adjustable term insurance rider and the cost of insurance for the base death benefit are deducted monthly from your account value and generally increase with the age of the insured people. Use of the adjustable term insurance rider may reduce sales compensation. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 32. - -------------------------------------------------------------------------------- Variable Survivorship 26 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES AND NO REQUESTED OR SCHEDULED INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT.
OPTION 1 OPTION 2 ===================== ============================================= ================================================= STATED DEATH The amount of policy death benefit at The amount of policy death benefit at issue, BENEFIT issue, not including rider coverage. This not including rider coverage. This amount amount stays level throughout the life of stays level throughout the life of the contract. the contract. BASE DEATH The greater of the stated death benefit, or The greater of the stated death benefit, plus BENEFIT the account value multiplied by the death the account value or the account value benefit corridor factor. multiplied by the death benefit corridor factor. TARGET DEATH Stated death benefit plus adjustable term Stated death benefit plus adjustable term BENEFIT insurance rider benefit. This amount insurance rider benefit. This amount remains remains level throughout the life of the level throughout the life of the policy. policy. TOTAL DEATH This is the total death proceeds. It is the This is the total death proceeds. It is the BENEFIT greater of the target death benefit or the greater of the target death benefit plus the base death benefit. account value or the base death benefit. ADJUSTABLE The adjustable term insurance rider benefit The adjustable term insurance rider benefit is TERM is the total death benefit minus base death the total death benefit minus the base death INSURANCE benefit, but it will not be less than zero. If benefit, but it will not be less than zero. If the RIDER BENEFIT the account value multiplied by the death account value multiplied by the death benefit benefit corridor factor is greater than the corridor factor is greater than the stated death stated death benefit, the adjustable term benefit plus the account value, the adjustable insurance benefit will be decreased. It term insurance rider benefit will be decreased. will be decreased so that the sum of the It will be decreased so that the sum of the base death benefit and the adjustable term base death benefit and the adjustable term insurance rider benefit is not greater than insurance rider benefit is not greater than the the target death benefit. If the base death target death benefit plus the account value. If benefit becomes greater than the target the base death benefit becomes greater than death benefit, then the adjustable term the target death benefit plus the account insurance rider benefit is zero. value, then the adjustable term insurance rider benefit is zero.
BASE DEATH BENEFIT Your base death benefit can be different from your stated death benefit as a result of: o your choice of death benefit option; o your choice of the enhanced death benefit corridor option; o a change in your death benefit option; o increases to satisfy the federal income tax law definition of life insurance; o partial withdrawals; o increases or decreases in the stated death benefit; or o a transaction which causes the base death benefit to change. As long as your policy is in force, we will pay the death proceeds to your beneficiary(ies) at the date of the second death of the insured people. The beneficiary(ies) is(are) the person (people) you name - -------------------------------------------------------------------------------- Variable Survivorship 27 to receive the death proceeds from your policy. The death proceeds are: o your base death benefit; plus o any rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges due before the second death of the insured people. There could be outstanding policy charges if the date of the second death of the insured people happens while your policy is in the grace period or in the five-year special continuation period. DEATH BENEFIT OPTIONS You have a choice of two death benefit options in addition to the enhanced death benefit corridor option: option 1 or option 2 (described below). Your choice may result in your having a base death benefit, which is greater than your stated death benefit. Your death benefit is calculated as of the date of the second death of the insured people. You may change your death benefit option after the policy date and before the continuation of coverage feature begins. You may not change your enhanced death benefit corridor option. You must choose whether or not you want the enhanced death benefit corridor option before we issue your policy. SEE CHANGES IN DEATH BENEFIT OPTION 1 OR 2, PAGE 28. Under death benefit option 1, your base death benefit is the greater of: 1. your stated death benefit on the date of the second death of the insured people; or 2. your account value on the date of the second death of the insured people multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B depending on whether or not you elect the enhanced death benefit option. Under death benefit option 2, your base death benefit is the greater of: 1. your stated death benefit plus your account value on the date of the second death of the insured people; or 2. your account value on the date of the second death of the insured people multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A or B depending on whether or not you elect the enhanced death benefit option. Under option 1 positive investment performance is generally reflected in a reduced net amount at risk. This lowers your policy's total cost of insurance charges. Option 1 offers insurance coverage that is a set amount with potentially lower cost of insurance charges over time. You should choose option 2 if you want to have investment performance reflected in your insurance coverage. Federal income tax law requires that your death benefit be at least as much as your account value multiplied by a factor defined by law. This factor is based on: o the younger insured person's age; and o the guideline premium/cash value corridor test for the federal income tax law definition of life insurance; and o the enhanced death benefit corridor option, if elected. We will adjust your policy to continue to qualify as life insurance under the federal income tax laws in existence at the time the policy was issued. CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option 1 or 2 after the policy date and before the continuation of coverage feature. Your death benefit option change is effective on your next monthly anniversary after we accept and approve your requested change, so long as at least five days remain before your monthly anniversary. If fewer than five days remain before your monthly anniversary, your death benefit option change is effective on your next monthly anniversary. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. We may ask you to return your policy to our customer service center so that we can note the change in your schedule. A death benefit option change applies to your entire stated or base death benefit. Changing your death benefit option may reduce or increase your target death benefit, as well as your stated death benefit. We may not allow you to change the death benefit option if it reduces the target or stated death benefit below the minimum we require to issue your policy. - -------------------------------------------------------------------------------- Variable Survivorship 28 On the effective date of your option change, your stated death benefit is changed as follows: Change Change Stated Death Benefit From To Following Change: ---- -- ----------------- Option 1 Option 2 your stated death benefit before the change minus your gross account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your gross account value as of the effective date of the change. We increase or decrease your stated death benefit to keep the net amount at risk the same on the date you change your death benefit option. Additionally, there is no change to the amount of term insurance if you have an adjustable term insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 53. If you change your death benefit option, we adjust the stated death benefit for each of your segments by allocating your account value to each benefit segment. For example, if you change from death benefit option 1 to option 2, your stated death benefit is decreased by the amount of your account value allocation to that segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to that segment. We do not impose a surrender charge for any decrease in your stated death benefit due to your changing your death benefit option. There is no change to the target premium. SEE SURRENDER CHARGE, PAGE 55. Death benefit option 2 is not available during the continuation of coverage period. If you select this on your policy, it automatically converts to death benefit option 1 upon the policy anniversary nearest the younger insured person's 100th birth date. ENHANCED DEATH BENEFIT CORRIDOR OPTION You may elect, at any time prior to the issuance of your policy, the enhanced death benefit corridor option. This option generally provides an opportunity for an increased death benefit on the lives of the insured people at certain ages. Under death benefit option 1 and 2 to calculate your base death benefit value, the account value is multiplied by a factor shown in Appendix A or B depending on whether or not you elect this option. The result of this calculation is the base death benefit if it exceeds the stated death benefit. Under the enhanced death benefit corridor option, we calculate the base death benefit using the factors shown on Appendix B-Enhanced. SEE DEATH BENEFIT OPTIONS, PAGE 28. There is no separate charge for this feature. However, the same account value may generate a higher base death benefit under policies with this option than on policies not electing the option. Cost of insurance charges are based on the net amount at risk, which is the difference between the account value and the base death benefit. Therefore, as a result of the increased death benefit, the cost of insurance charges may be higher for policies electing this option. Your registered representative/agent can provide you with a personalized illustration to show the difference between a policy with this option and one without it. If your policy does not have sufficient account value, electing this option may have no effect on the base death benefit. Adding this option to your policy does not affect the operation of your policy's riders, including the adjustable term insurance rider. When the base death benefit is more than the stated death benefit, transactions which reduce your account value (such as a partial withdrawal) also reduce the death benefit. The dollar reduction to the death benefit under these circumstances is greater for policies with the enhancement option than on those without the option. Once elected, this option cannot be deleted from your policy. You may lose the benefit of this option if your account value falls below the minimum level needed to keep it in effect. Once elected, this option continues as long as coverage on the original insured people continues. CHANGES IN DEATH BENEFIT AMOUNTS You may want to increase the target or stated death benefit under your policy. You may do this while your policy is in force and before the policy anniversary when the joint equivalent age of the insured people is 85. Contact our customer service center to request an increase or decrease in your policy death benefit. The request is effective as of the next monthly processing date after we receive your request and approve it, unless there are underwriting or other requirements which must be met before your request - -------------------------------------------------------------------------------- Variable Survivorship 29 is effective. Any requested change in your coverage must be for at least $1,000. After we approve your request, we will send you a new schedule page for your policy which includes the: o stated death benefit; o benefit under applicable riders; o guaranteed cost of insurance rates of each segment; o new surrender charge; and o target death benefit schedule. Keep the new schedule with your policy. We may ask you to send your policy to us so that we can note the change in your schedule. We may not approve a requested change because it will disqualify your policy as life insurance under the applicable federal income tax law. If we disapprove a change for any reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS, PAGE 57. If your policy does not have an adjustable term insurance rider, your stated death benefit may be no less than $250,000. If you choose to have an adjustable term insurance rider, your stated death benefit may be as low as $100,000 as long as your target death benefit is at least $250,000. There may be tax consequences as a result of a decrease in your death benefit, as well as a possible surrender charge. SEE TAX STATUS OF THE POLICY, PAGE 57 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 58. Requested reductions in the death benefit will first be applied to decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide subsequent decreases in stated death benefit among your benefit segments pro rata unless state law requires differently. You must provide satisfactory evidence that the insured people are still insurable in order to increase your death benefit. Unless you tell us differently, we assume any request you make for an increase in your target death benefit is also a request for an increase to the stated death benefit. Thus, the amount of your adjustable term insurance rider will not change. You may change the target death benefit only once in a policy year. The initial, or first segment, is the stated death benefit on the effective date of the policy. An increase in the stated death benefit (other than one caused by an option change) will cause a new segment to be created. The segment year begins on the segment effective date and ends one year later. The following may apply to each new segment: o a new minimum annual premium during the first five years of your policy; o a new sales charge; o new surrender charges; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. A requested increase in your stated death benefit creates a new segment. Once we create a new segment, it is permanent unless state law requires differently. If an option change causes the stated death benefit to increase, no new segment is created. Instead, the size of each existing segment(s) is(are) changed. If it causes the stated death benefit to decrease, each segment is decreased. To determine the applicable sales charge, premiums you pay after an increase are applied to your policy segments in the same proportion as the target premium for each segment bears to the sum of the target premium for all segments. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total stated death benefit. GUARANTEED MINIMUM DEATH BENEFIT Usually, how long your policy remains in force depends on your policy's net cash surrender value. Your coverage lasts only as long as your net cash surrender value is enough to pay the monthly charges and your cash surrender value is more than your outstanding policy loan and accrued loan interest. Your account value and the length of time your policy remains in force depend on: 1. timing and amount of any premium payments; 2. the investment performance of the variable divisions; 3. the interest you earn in the guaranteed interest division; - -------------------------------------------------------------------------------- Variable Survivorship 30 4. the amount of your monthly charges; 5. partial withdrawals you take; and 6. loan activity you may have. The guaranteed minimum death benefit may only be put in force at the issue of your policy. This option extends the period that your policy's stated death benefit remains in effect even if the variable divisions have poor investment performance. It has a guarantee period that lasts until the policy anniversary nearest the younger insured person's 100th birth date, so long as you have met all requirements. The guaranteed minimum death benefit coverage does not apply to any riders, including the adjustable term insurance rider. Therefore, if your net cash surrender value is not enough to pay the deductions as they come due on your policy and if your policy is no longer in the special continuation period, only the stated death benefit portion of your coverage is guaranteed to stay in force. All riders will end. The guaranteed minimum death benefit feature is not available in some states. If you choose the guaranteed minimum death benefit feature, we currently charge the guaranteed rate of $0.005 per $1,000 of your stated death benefit each month during the guarantee period. REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD To qualify for the guaranteed minimum death benefit you must pay an annual premium higher than the minimum annual premium. This higher premium is called the guarantee period annual premium. The guarantee period monthly premium is equal to one-twelfth of the guarantee period annual premium. Your net account value must also meet certain diversification requirements. Your guarantee period annual premium is based on a percentage of the guideline level premium, which is calculated under the federal tax laws. Your guideline level annual premium depends on: o your policy's target death benefit; o each insured person's age, gender, premium class and underwriting characteristics; o the death benefit option you chose; o additional rider coverage on your policy; and o other additional benefits on your policy. At each monthly processing date we test to see if you have paid enough premium to keep your guarantee in place. We calculate: o actual premiums paid; minus o the amount of any partial withdrawals you make; minus o policy loans you take with accrued loan interest. This amount must equal or exceed; o the sum of the guarantee period monthly premium payments for each policy month starting with your first policy month through the end of the policy month that begins on the current monthly processing date. You must continually meet the requirements of the guarantee period for this feature to remain in effect. We show the guarantee period annual premium on your policy schedule. If your policy benefits increase, the guarantee period annual premium increases. If your policy fails to meet this test on any monthly processing date, the guarantee period ends, and thus the guaranteed minimum death benefit lapses. The guarantee period ends if your net account value on any monthly processing date is not diversified as follows: 1. you must invest your net account value in at least five investment divisions; and 2. you may invest no more than 35% of your net account value in any one division. Your policy will continue to meet the diversification requirements if: 1. you have automatic rebalancing and you meet the two diversification tests listed above; or 2. you have dollar cost averaging which results in transfers into at least four additional investment divisions with no more than 35% of any transfer directed to any one division. SEE DOLLAR COST AVERAGING, PAGE 38, AND AUTOMATIC REBALANCING, PAGE 39. If you fail to satisfy either the premium test or the diversification test and you do not correct it, this feature terminates. If you choose the guaranteed minimum death benefit, you must make sure your policy satisfies the premium test and diversification test. Once it terminates, you cannot reinstate the guaranteed minimum death benefit feature. The - -------------------------------------------------------------------------------- Variable Survivorship 31 guarantee period annual premium then no longer applies to your policy. ADDITIONAL BENEFITS Your policy may include additional benefits, which we attach by rider. A rider changes benefits under your policy and may or may not add an additional cost to your policy. If applicable, we deduct a monthly charge from your account value for each rider you choose. You may cancel these rider benefits at any time. If you choose any of these benefits your policy will include the details. Not all riders are available for all policies. You may schedule your term rider coverage to increase or decrease at issue. If you want to increase your scheduled benefits after issue of your rider, new guidelines may apply. Scheduled benefits are the kind and amount of benefits you choose under your policy over a stated period of time. Periodically we may offer other riders than those listed here. You should contact your registered representative for a complete list of the riders now available. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 58, FOR INFORMATION ON THE POSSIBLE TAX EFFECTS OF ADDING OR CANCELING THESE BENEFITS. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider. The amount we pay is the term death benefit in force at the time of the second death of the two people. As the name suggests, the adjustable term insurance rider adjusts over time. You specify a target death benefit when you apply for this rider. The target death benefit can be level or can be scheduled to change at the beginning of any policy year. We generally restrict your target death benefit to an amount not more than four times your stated death benefit at issue. Under certain circumstances, we will be willing to allow you to specify a target death benefit of up to eight times your stated death benefit during the first four policy years. After this four-year period, the normal target death benefit maximum would apply. The death benefit for the adjustable term insurance rider is the difference between your total death benefit and your base death benefit. The death benefit automatically adjusts daily as your base death benefit changes. Total death benefit depends on which death benefit option is in effect: OPTION 1: If option 1 is in effect, the total death benefit is the greater of: a. the target death benefit, or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. OPTION 2: If option 2 is in effect, the total death benefit is the greater of: a. the target death benefit plus the account value; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. For example, under option 1, assume your base death benefit increases as a result of an increase in your account value. The adjustable term insurance rider adjusts to provide death proceeds equal to your total death benefit in each year: Base Death Total Death Adjustable Term Benefit Benefit Insurance Rider Amount ------- ------- ---------------------- $201,500 $250,000 $48,500 202,500 250,000 47,500 202,250 250,000 47,750 It is possible that the amount of your adjustable term insurance may be zero if your base death benefit increases enough. Using the same example, if the base death benefit under your policy grew to $250,000 or more, the adjustable term insurance would be zero. The adjustable term insurance can never be less than zero. Even when the adjustable term insurance is reduced to zero, your rider remains in effect until you remove it from your policy. Therefore, if later the base death benefit is reduced below your target death benefit, the adjustable term insurance rider amount reappears to maintain the total death benefit. You may change the target death benefit schedule after it is issued, based on our rules. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 29. - -------------------------------------------------------------------------------- Variable Survivorship 32 We may deny any future, scheduled increases to your target death benefit if you cancel a scheduled change, or if you ask for an unscheduled decrease in your target death benefit. Partial withdrawals, changes from death benefit option 1 to death benefit option 2, and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 41 AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 28. There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a monthly cost of insurance charge from your account value. The cost of insurance for this rider is calculated as the monthly cost of insurance rate for the rider coverage multiplied by the adjustable term death benefit in effect that month. The cost of insurance rates will be determined by us from time to time. They will be based on the issue ages, genders and premium classes of the insured people, as well as the length of time since your policy date. The monthly guaranteed maximum cost of insurance rates for this rider will be in the policy. SEE COST OF INSURANCE CHARGE, PAGE 53. There are no sales or surrender charges for this coverage. This means that an increase in your target death benefit which does not increase your stated death benefit does not increase the total surrender charge for your policy. Further, a decrease in your adjustable term insurance rider coverage does not cause a surrender charge to be assessed. If the target death benefit schedule is increased by you after the rider is issued, we use the same rates for the entire coverage for this rider. These rates are based on the original premium classes even though satisfactory new evidence of insurability is given to us for the increased schedule. SINGLE LIFE TERM RIDER This rider provides a benefit upon the death of one of the primary insured people under your policy. You may choose to add a single life term rider to just one insured person; or, you may add two single life term riders: one for each insured person under your policy. You may add this rider when your policy is issued or at a later time. The insured person must be insurable according to our rules. We will issue the single life term rider for an insured person who is age 85 or younger. Coverage may continue under this rider until the earlier of when: o the insured person covered by this rider reaches age 100; o the continuation of coverage provision becomes effective o the guaranteed minimum death benefit, if applicable, terminates this rider; or o the insured person covered by this rider dies. SEE CONTINUATION OF COVERAGE, PAGE 35 and GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. The minimum amount of coverage for each single life term rider is $1,000. The maximum coverage for an insured person under this rider is subject to our underwriting determinations. We can schedule the death benefit for your single life term rider when we issue it. You may increase or decrease coverage under this rider. Your request for an increase or decrease in coverage is effective as of the next monthly processing date after we approve your request, unless there are underwriting or other requirements which must be met before your request is effective. Any requested change in your coverage must be for at least $1,000. If you schedule or request an increase after issue, the insured person under this rider will again 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 covered by this rider. The charge for this rider is deducted on each monthly processing date. It is charged as a cost per each $1,000 of the net amount at risk under this rider. See the schedule pages attached to your policy for information on your actual cost. There are no surrender charges for decreases in the amount of coverage under the single life term rider. SPECIAL FEATURES POLICY MATURITY You can surrender your policy at anytime. At the policy anniversary nearest the younger insured person's 100th birth date if you do not want the continuation of coverage feature, you may surrender the policy for the net account value. Your policy then ends. Some part of this payment may be taxable. You should consult your tax adviser. - -------------------------------------------------------------------------------- Variable Survivorship 33 POLICY SPLIT OPTION Provided certain circumstances in your policy are met, you may exchange your policy for a single life insurance policy on each person insured. The policy split option has its own insurability requirements which my be met at or before the time your policy is split. Evidence of insurability on an insured person is required to make this exchange if: o there is n overall increase in death benefit amounts; and o neither single life policy coverage is greater than 50% of the original death benefit. On the effective date of the exchange, the available death benefit under your policy will be divided between the two single life insurance policies. The maximum amount you may allocate to each single life policy without underwriting is 50% of your available death benefit amount. The sum of the face amounts for the two single life insurance policies may not be more than the total death benefit amount under your original policy. You are not required to use the maximum death benefit amount available for either insured person. You may split your policy to provide coverage of more than 50% of the total death benefit under your original policy for one insured person. To do so, you must provide proof that the insured person is insurable at the time of the policy split. For coverage of 50% or less of the total death benefit under your original policy, you do not need to provide proof of insurability. Unless state law requires otherwise, you may use the policy split option if: a) there is a final divorce decree regarding the marriage of the two insured people; b) there is a change to the federal estate tax law which results in either: i) removal of the unlimited marital deduction provision; or ii) a reduction in the current maximum federal estate tax of at least a 50% reduction after your policy date; or c) there is a dissolution of business carried on or owned by the two insured people. You must send us written notice of your election to split your policy under the policy split option within 180 days of the occurrence of these stated events. You must provide satisfactory evidence that the contingent event has occurred. The effective date of the exchange is the first monthly processing date after we have approved your policy exchange. The insurance under the two individual life insurance policies will start on the effective date of your exchange only if both insured people are alive on that date. The new single life insurance policies will not provide insurance coverage until that time. If either insured person is not alive on that date, your exchange is void. All terms and conditions under the new policies apply once your policy is split. Consult your new single life insurance policies upon split. The premiums under each new policy will be based on each insured person's age, gender and premium class at the time of the split of your policy. Premiums will be due for each new policy under the terms of the new policy as of the effective date of the exchange. The surrender value of the old policies will be allocated to the new policies on the effective date of the exchange in the same proportion that the face amount was divided between the two single life insurance policies, unless we agree to a different allocation. If this allocation would cause an increase in the face amount of either new single life insurance policy, we may limit the amount of surrender value you may apply to each new policy. Any remaining surrender value will be paid to you in cash, and may be taxable. Any loan on your policy will be divided and transferred to each new single life insurance policy in the same proportion as your cash value is allocated. Any remaining outstanding loan balance must be paid in cash before the effective date of the exchange. Any person or entity to which you have assigned your policy must agree to the exchange. Any assignment of your policy will apply to each new single life insurance policy. If you have a single life term insurance rider on your policy at the date of the policy split, you may have a term insurance rider insuring the same insured person if such a rider is available on the new policy. Any other riders on new policies are subject to the availability of the riders under the new policy and new proof of insurability of the insured people. Your right to split your policy into two single life insurance policies ends on the earliest of: a) the policy anniversary nearest the younger insured person's 100th birth date; or b) the first death of the insured people; c) the end of your policy grace period; or d) the termination or surrender of your policy. - -------------------------------------------------------------------------------- Variable Survivorship 34 Exercising the policy split option may be treated as a taxable transaction. Moreover, the two single life insurance policies that result from a policy split could be treated as a modified endowment contract. SEE TAX CONSIDERATIONS, PAGE 57. You should consult a tax adviser when exercising the policy split option. RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy to a guaranteed policy, unless state law requires differently. To do this, we transfer the amount you have in the variable divisions to the guaranteed interest division. We allocate all of your future net premiums only to the guaranteed interest division. We do not allow any future payments or transfers to the variable divisions when you exercise this right. We will not charge you for the transfer to make this exchange. SEE THE GUARANTEED INTEREST DIVISION, PAGE 22. CONTINUATION OF COVERAGE The continuation of coverage feature allows insurance coverage to continue in force beyond the policy anniversary nearest the younger insured person's 100th birth date. If you choose to allow the continuation of coverage feature to become effective, we: o transfer your net account value (excluding the amount in the loan division) into the guaranteed interest division; o charge a one-time $400 administrative fee to your policy to cover future expenses; o terminate all riders; o convert death benefit option 2 to death benefit option 1, if applicable; and o terminate investment features such as dollar cost averaging and automatic rebalancing. At the policy anniversary nearest the younger insured person's 100th birth date, if you have then in effect, an adjustable term insurance rider, the target death benefit becomes the stated death benefit. All riders, including the adjustable term insurance rider, then terminate. If you have no adjustable term insurance rider coverage, your stated death benefit is unchanged. You may make no further premium payments. Your insurance coverage continues in force until the second death of the insured people, unless the policy lapses or is surrendered. However, we deduct no further cost of insurance charges. Your monthly deductions also cease when continuation of coverage begins. SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 54. Your net account value may not be transferred into the variable divisions after the policy anniversary nearest the younger insured person's 100th birth date. During the continuation of coverage period, you may take policy loans or partial withdrawals from your policy. If we are paying a persistency refund on the guaranteed interest division, and your policy is in the continuation of coverage period, we credit you with the persistency refund. SEE PERSISTENCY REFUND, PAGE 55. If you have outstanding policy loans, interest continues to accrue. If you fail to make sufficient loan payments or loan interest payments, it is possible that the loan plus accrued interest may become greater than your account value and cause your policy to lapse. To avoid this, you may repay loans and make loan interest payments during the continuation of coverage period. However, we will not accept any additional premium payments. If you wish to stop coverage after the continuation of coverage feature begins, you may surrender your policy and receive the net account value. There is no surrender charge after the policy anniversary nearest the younger insured person's 100th birth date. All normal consequences of surrender apply. SEE SURRENDER, PAGE 44, AND SURRENDER CHARGE, PAGE 55. The continuation of coverage feature may not be available in all states. If a state has approved this feature, it is an automatic feature and you do not need to take any action to activate it. The tax consequences of coverage continuing beyond the younger insured's person's 100th birth date are uncertain. You should consult a tax adviser as to those consequences. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable - -------------------------------------------------------------------------------- Variable Survivorship 35 divisions, and the loan division. Your account value reflects: o net premiums; o deductions for charges; o partial withdrawals; o investment performance of the variable divisions; o interest earned on the amount you have in the guaranteed interest division; and o interest earned on the amounts you have in the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loans and accrued loan interest. CASH SURRENDER VALUE Your cash surrender value is your account value minus any surrender charge. NET CASH SURRENDER VALUE Your net cash surrender value is your cash surrender value minus the amount of your outstanding policy loans and accrued loan interest. DETERMINING THE VALUE IN THE VARIABLE DIVISIONS The amounts included in the variable divisions are measured by accumulation units and accumulation unit values. The value of a variable division is the accumulation unit value for that division times the number of accumulation units you own in that division. Each variable division has a different accumulation unit value. You purchase accumulation units of a division whenever you allocate premium or make transfers to that division. This includes transfers from the loan division. We redeem accumulation units from the variable divisions: o when you take a partial withdrawal; o when amounts are transferred from a variable division (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o for surrender charges; o on surrender; and o to pay the death benefit upon the second death of the insured people. We calculate the number of variable division accumulation units purchased or redeemed by: 1. dividing the dollar amount of your transaction by: 2. the division's accumulation unit value calculated at the close of business on the valuation date of the transaction. The accumulation unit value is the value of an accumulation unit determined as of each valuation date. The accumulation unit value of each division varies with the investment performance of the matching portfolio. It reflects: o investment income; o realized and unrealized capital gains and losses; o investment portfolio expenses; and o daily mortality and expense risk charges we take from the variable account. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION, PAGE 36. The date of a transaction is the date we receive your premium, an acceptable request or other transaction request at our customer service center, so long as the date of receipt is a valuation date. Each valuation date ends at 4:00 p.m. Eastern time. We use the accumulation unit value which is next calculated after we receive your premium or transaction request and we use the number of accumulation units attributable to your policy on the date of receipt. We take monthly deductions from your account value as of the monthly processing date. If your monthly processing date is not a valuation date, the monthly deduction is processed on the next valuation date. The value of amounts allocated to the variable divisions goes up or down depending on investment performance. For amounts in the variable divisions, there is no guaranteed minimum cash value. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine accumulation unit values for the variable divisions on each valuation date. We generally set the accumulation unit value for a division at $10 on the date when the division is first - -------------------------------------------------------------------------------- Variable Survivorship 36 opened and begins accepting amounts. After that, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the accumulation experience factor for that division for the valuation period. Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and ends at 4:00 p.m. Eastern time on the next valuation date. We calculate an accumulation experience factor for each investment division every valuation date as follows: 1. We take the share value of the underlying portfolio shares in the division as reported to us by the investment portfolio managers as of the close of business on that valuation date. 2. We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes from this amount. 3. We divide the remaining amount by the value of the shares in the underlying investment portfolio for the variable division at the close of business on the previous valuation date. 4. We then subtract a charge for the mortality and expense risk which we assume under your policy. The daily charge is .002055% of the accumulation unit value. This is an annual rate of .75% of the accumulation unit value. If the previous day was not a valuation date, the charge is multiplied by the additional number of days since the prior valuation date. The result of these calculations is the accumulation experience factor for the valuation period. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable divisions, or the guaranteed interest division, in each policy year. You may not make transfers until after your free look period ends if your state requires a refund of premium during the free look period. We do not limit your number of transfers, but we charge a $25 fee for each transfer that you make after the first twelve in each policy year. We do not include transfers for automatic rebalancing or dollar cost averaging toward your twelve free transfers. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. You may not make transfers during the continuation of coverage period. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one division or be transferred to one division as long as the total amount you transfer is at least $100. However, if the amount remaining in a variable division is less than $100 when you make a transfer request, we transfer the entire amount out of that division. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses. Thus, we limit excessive transfer activity. Excessive transfers may cause: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o the investment portfolios to have large asset swings that decrease their ability to provide maximum investment return to all policyowners. In response to excessive trading, we may place restrictions or refuse transfers made by third-party agents acting on behalf of owners such as a market timing service. We will refuse or place restrictions on transfers when we determine, in our sole discretion, that transfers are harmful to the investment portfolios, or to policyowners as a whole. GUARANTEED INTEREST DIVISION TRANSFERS You may transfer from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary are deemed to occur on your policy anniversary. A request received by us within 30 days after your policy anniversary is effective as - -------------------------------------------------------------------------------- Variable Survivorship 37 of the valuation date we receive it. Transfer requests made at any other time will not be processed. Transfers from the guaranteed interest division are limited to the largest of: o 25% of your guaranteed interest division balance at the time of your first transfer or withdrawal out of it in that policy year; o the sum of the amounts you have transferred and withdrawn from the guaranteed interest division in the prior policy year; or o $100. Transfers of your account value into the guaranteed interest division are not restricted. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either the Fidelity VIP Money Market Portfolio, or the Neuberger Berman AMT Limited Maturity Bond Portfolio, you can elect dollar cost averaging. The main goal of dollar cost averaging is to protect your policy values from short-term price changes. DOLLAR COST AVERAGING DOES NOT ASSURE A PROFIT NOR DOES IT PROTECT YOU AGAINST A LOSS IN A DECLINING MARKET. This systematic plan of transferring account values is intended to reduce the risk of investing too much when the price of an investment portfolio's shares is high. It also reduces the risk of investing too little when the price of an investment portfolio's shares is low. Since you transfer the same dollar amount to other divisions each period, you purchase more units in a division if the unit value is low, and you purchase fewer units if the unit value is high. You may add dollar cost averaging to your policy at any time. The first dollar cost averaging date must be at least five days after we receive your dollar cost averaging request. Dollar cost averaging cannot begin until after the end of your free look period if your state requires refund of all premiums paid during the free look period. With dollar cost averaging, you designate either a dollar amount, or a percentage of your account value, for automatic transfer from either the division invested in either the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio for automatic transfer. Each period, we automatically transfer the amount you select from your chosen source division to one or more other variable divisions. You may not make transfers to or from the guaranteed interest division or the loan division under dollar cost averaging. The minimum percentage you may transfer to any one division is 1% of the total amount you transfer to all divisions you select. You must transfer at least $100 for each dollar cost averaging transfer. Dollar cost averaging may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly, on the monthly processing date. We do not count dollar cost averaging transfers toward your twelve free transfers per policy year. There is no charge for this feature. You may have both dollar cost averaging and automatic rebalancing at the same time. The dollar cost averaging division from which your transfer will be taken cannot be included in your automatic rebalancing program. CHANGING DOLLAR COST AVERAGING You may change your dollar cost averaging program one time per policy year. If you have telephone privileges, you may make changes to the dollar cost averaging program by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 47. TERMINATING DOLLAR COST AVERAGING You may cancel dollar cost averaging by sending satisfactory notice to our customer service center. We must receive it at least five days before the next dollar cost averaging date. Dollar cost averaging will terminate if: 1. you specify a termination date; or 2. your balance remaining in the division from which your dollar cost averaging transfers are taken reaches a dollar amount you set; or 3. on any dollar cost averaging date, the amount in the division from which you want to make a transfer is equal to or less than the amount to be transferred. We will transfer the remaining amount and dollar cost averaging ends. - -------------------------------------------------------------------------------- Variable Survivorship 38 AUTOMATIC REBALANCING Automatic rebalancing provides you with a method for maintaining a consistent approach to investing account values over time, and simplifying the process of asset allocation by dividing amounts among the investment options you have chosen. Transfers made for automatic rebalancing do not count toward your twelve free transfers per policy year. There is no charge for this feature. If you choose this feature, on each rebalancing date we transfer amounts among the divisions to match your pre-set automatic rebalancing allocation percentages. After the transfers, the ratio of your account value in each division to your total account value for all divisions included in automatic rebalancing matches the automatic rebalancing allocation percentage for that division. This action rebalances the amounts in the investment divisions that do not match your set allocation. This happens if an investment division outperforms other divisions for that time period. You may choose the automatic rebalancing feature on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. If you do not specify, automatic rebalancing will occur quarterly. If you choose automatic rebalancing on your policy application, the first transfer occurs on the date you select (after your free look period if your state requires return of all premiums paid during the free look period). If you elect this feature after your policy date, we process the first transaction on the date you have requested. If you requested no date, processing is on the last valuation date of the calendar quarter we receive your notice at our customer service center. When you choose automatic rebalancing allocations, you may choose up to eighteen total investment divisions. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 22. You may have both automatic rebalancing and dollar cost averaging at the same time. The division from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocating program. You may not include the loan division in your automatic rebalancing allocations. CHANGING AUTOMATIC REBALANCING You may change your allocation percentages for automatic rebalancing at any time. Your allocation change is effective on the valuation date that we receive it at our customer service center. If you reduce the amount allocated to the guaranteed interest division, it is considered a transfer from that division. You must meet the requirements for the maximum transfer amount and time limitations on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 37. If you have automatic rebalancing and the guaranteed minimum death benefit and you ask for an allocation which does not meet the guaranteed minimum death benefit diversification requirements, we will notify you that the allocation needs to be changed and ask you for revised instructions. TERMINATING AUTOMATIC REBALANCING You may terminate automatic rebalancing at any time, as long as we receive your notice of termination at least five days before the next automatic rebalancing date. If you have the guaranteed minimum death benefit and you terminate the automatic rebalancing feature, you still must meet the diversification requirements of your net account value for the guarantee period to continue. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. POLICY LOANS You may borrow against your policy at any time after the first monthly processing date, by using your policy as security for a loan, or as otherwise required by law. The amount you borrow is called a policy loan. Your policy loan is: 1. the total amount you borrow from your policy; plus 2. any policy loan interest that is capitalized when due; minus 3. policy loan repayments you make. Unless state law requires differently, any new policy loan you take must be at least $100. The maximum amount you can borrow on any valuation date, unless required differently by state law, is your net cash surrender value minus the monthly deductions to your next policy anniversary. - -------------------------------------------------------------------------------- Variable Survivorship 39 Your request for a policy loan must be directed to our customer service center. If you have telephone privileges, you may request a policy loan for less than $25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 47. Based on our administrative system, we may have other rules for policy loans. For example, we may require that your loan request be for a dollar amount rather than a percentage to be taken from a specific division. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.75%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan on your policy anniversary. If you request an additional loan, we add the amount you request to your existing outstanding policy loan. This way, there is only one loan outstanding on your policy at any time. You may repay all or part of your policy loan at any time while your policy is in force. We assume that any payments you make, other than your scheduled premiums, are policy loan repayments. You must tell us otherwise if you want us to consider additional payments as premiums. When you request a loan you may specify one investment division from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment division you have. When you take a policy loan, we transfer an amount equal to your policy loan amount from the variable and the guaranteed interest divisions in the same proportion they represent of your total net account value to the loan division. We follow this same process for loan interest in the amount due at your policy anniversary. We credit the loan division with interest at an annual rate of 3%. After your tenth policy year, the loan division is credited with a persistency refund at an annual rate of 0.60%. The loan division is part of our general account, separate from the guaranteed interest division. When we make transfers to the loan division, we redeem sufficient units of the variable divisions to cover the amount of the loan which you take from the variable account. Unless you tell us otherwise, we deduct the amount transferred from each division in the same proportion that your account value in that division has to your net account value immediately before the loan transaction. We determine the amounts in each division as of the valuation date when we receive your loan request. Policy loans may cause your policy to lapse if your net cash surrender value is not enough to pay all deductions each month. SEE LAPSE, PAGE 42. Any policy loans you take may have tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 58, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 59. LOAN REPAYMENT We transfer the amount of interest credited to the loan division for a policy year from the loan division on your policy anniversary. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division up to the amount of your policy loan. Unless you tell us otherwise, we allocate these transfers among the variable divisions and the guaranteed interest division in the same proportion as your current premium allocation. LOANS AND YOUR BENEFITS Taking a loan decreases the amount you have in the variable divisions. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan. Even if you repay your loan, it has a permanent effect on your account value. This means that the benefits under your policy may be affected. The loan is a first lien on your policy. This means we deduct your outstanding policy loan and accrued loan interest from the death benefit payable and the cash surrender value payable on surrender. Failure to repay your loan may affect the guaranteed minimum death benefit feature and the length of time your policy remains in force. The policy lapses (FOR EXCEPTIONS, SEE SPECIAL CONTINUATION PERIOD, PAGE 25 AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30) when the cash surrender value minus policy loans and accrued loan interest is not enough to cover your monthly deductions. If your policy lapses with a loan outstanding, you may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 58, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 59. - -------------------------------------------------------------------------------- Variable Survivorship 40 If you use the continuation of coverage feature and you have a policy loan, loan interest continues to accrue. If you do not make loan payments your policy could lapse. If you do not repay your policy loan, we deduct the outstanding policy loan amount and accrued loan interest from the death benefits payable, or the cash surrender value payable upon surrender. PARTIAL WITHDRAWALS You may request a partial withdrawal on any valuation date after your first policy anniversary by contacting our customer service center. If you request partial withdrawals by telephone, the partial withdrawal must be for an amount less than $25,000 and may not cause a decrease in your death benefit; otherwise, your partial withdrawal request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 47. You may take only one partial withdrawal per policy year. We may set rules on partial withdrawals, based on our administrative system. For example, we may require that you specify a dollar amount rather than a percentage to be taken from a specific division. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net cash surrender value. If you request a withdrawal of more than this maximum, we require you to surrender your policy. When you take a partial withdrawal, we deduct your withdrawal amount plus a service fee from your account value. If applicable, we deduct a surrender charge from your account value if your partial withdrawal causes a reduction in your stated death benefit. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 51. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 58 AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 59. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, and if no more than fifteen years have passed since your policy date and the joint equivalent age of the insured people is not yet age 81, you may make a partial withdrawal of up to the greater of 10% of your account value, or 5% of your stated death benefit without decreasing the stated death benefit. Any additional amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2 If you have selected death benefit option 2, a partial withdrawal does not reduce your stated death benefit or target death benefit. However, we reduce the total death benefit by at least the partial withdrawal amount because your account value is reduced. STATED DEATH BENEFIT AND TARGET DEATH BENEFIT REDUCTIONS Generally, we reduce the stated death benefit by the amount of the partial withdrawal. A partial withdrawal may reduce your target death benefit. Partial withdrawals do not reduce the stated death benefit if your base death benefit has been increased to qualify your policy as life insurance under the federal income tax laws, if you withdraw an amount that is no greater than the amount that reduces your account value to a level which no longer requires your base death benefit to be increased to qualify as life insurance for federal income tax law purposes. SEE TAX STATUS OF THE POLICY, PAGE 57. We require a minimum stated death benefit and a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your stated death benefit or target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 56. PARTIAL WITHDRAWAL MECHANICS Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable divisions in the same proportion that each division has to your net account value immediately before your withdrawal. The amount withdrawn from the guaranteed interest division may not be for more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. We will send a new schedule page for your policy showing the effect of your withdrawal if there is any - -------------------------------------------------------------------------------- Variable Survivorship 41 change to your stated death benefit or your target death benefit. To make this change, we may ask that you return the policy to our customer service center. Your withdrawal and any reductions in the death benefits are effective as of the valuation date on which we receive your request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 58, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 59. LAPSE Your insurance coverage continues as long as your net cash surrender value is enough to pay all deductions each month and your cash surrender value is more than your outstanding policy loan plus accrued loan interest. Lapse does not apply if either the guaranteed minimum death benefit or the special continuation period is in effect and you have met all requirements. SEE SPECIAL CONTINUATION PERIOD, PAGE 25 AND GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. If the continuation of coverage feature is active, the policy could lapse even though there are no further monthly deductions. If there is an outstanding policy loan, your policy will lapse if the loan plus the accrued interest owed is more than the account value. GRACE PERIOD Your policy enters the 61-day lapse grace period if, on a monthly processing date: 1. your net cash surrender value is zero (or less) or your cash surrender value is less than your outstanding policy loan plus accrued loan interest; and 2. the five-year special continuation period has expired, or you have not paid the required special continuation period premium; and 3. you do not have the guaranteed minimum death benefit rider or it has expired or terminated. We notify you that the policy is in a grace period at least 30 days before the grace period ends. We provide this notice to you, or a person to whom you have assigned your policy, at the last address in our records. We notify you of the required premium payment necessary to prevent your policy from lapsing. This amount is generally the amount of past due charges, plus the amount that covers your estimated monthly policy and rider deductions for the next two months. If the second death of the insured people occurs during the grace period, we pay death proceeds to your beneficiary(ies) with reductions for policy loans, accrued loan interest and monthly deductions owed. We will send you a lapse notice if the guaranteed minimum death benefit is going to lapse. If we receive your payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we take the overdue deductions from your account balance. If you do not pay the full amount we request within the 61-day grace period, your policy and all of its riders lapse without value. We then withdraw your remaining account balance from the variable divisions and the guaranteed interest division. We deduct amounts which you owe us, including any surrender charge and inform you that the policy has ended. If the second death of the insured people occurs during the grace period, we pay death proceeds to your beneficiary(ies) with reductions for policy loans, accrued loan interest, and monthly deductions owed. IF YOU HAVE THE GUARANTEED MINIMUM DEATH BENEFIT IN EFFECT After the special continuation period has ended, and if the guaranteed minimum death benefit is in effect, your policy's stated death benefit will not lapse during the guarantee period. This is true even if your net cash surrender value is not enough to cover all of the deductions from your account value on any monthly processing date. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 30. The guaranteed minimum death benefit does not protect benefits you may have under riders attached to your policy. Nor does it protect any amount of the base death benefit which is more than the stated death benefit. These benefits lapse if on any monthly processing date, your policy net cash surrender value is not enough to pay all monthly deductions from your account value (unless your policy is in the five-year special continuation period and your account value is more than the interest due on your loan). - -------------------------------------------------------------------------------- Variable Survivorship 42 While the guaranteed minimum death benefit applies, we reduce your account value by monthly deductions, but not below zero. We permanently waive monthly deductions during the guarantee period which would reduce your account value below zero. The guaranteed minimum death benefit terminates if your policy does not meet the monthly premium or diversification tests. If your guaranteed minimum death benefit terminates, the normal test for lapse then resumes. SEE REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD, PAGE 31. LAPSE SUMMARY
SPECIAL CONTINUATION PERIOD GUARANTEED MINIMUM DEATH BENEFIT ========================================================= =========================================================== IF YOU MEET THE IF YOU DO NOT MEET THE IF YOU MEET THE IF YOU DO NOT MEET THE REQUIREMENTS REQUIREMENTS REQUIREMENTS REQUIREMENTS Your policy does not Your policy enters the Your policy does not Your policy enters the lapse if you do not have grace period if your net lapse if you do not have grace period if your net enough net cash cash surrender value is enough net cash cash surrender value is surrender value to pay the not enough to pay the surrender value to pay the not enough to pay the monthly charges. The monthly charges, or if monthly charges. monthly charges, or if charges are delayed until your loan plus accrued However, if you have any your loan plus accrued loan the earlier of: 1) the date loan interest is more riders, they lapse after the interest is more than your you have enough net account than your cash surrender grace period and only cash surrender value. If surrender value to cover value. If you do not pay your base coverage you do not pay enough the monthly charge, or 2) enough premium to cover remains in force. premium to cover the past until the end of the the past due monthly charges Charges for your base due monthly charges and special continuation and interest due, plus the coverage are then interest due, plus the period. monthly charges and deducted each month to monthly charges and interest due through the the extent that there is interest due through the end of the grace period sufficient net account end of the grace period (at the end of the value to pay these (at the end of the following two months), charges. If there is not following two months), your policy lapses. sufficient net account your policy lapses. value to pay a charge, it is permanently waived.
REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may still reinstate your policy and its riders (other than the guaranteed minimum death benefit) within five years after the grace period ends. Unless state law requires differently, we will reinstate your policy and riders if: 1. you have not surrendered your policy for its net cash surrender value; 2. you provide satisfactory evidence to us that both insured people are alive and that each insured person (and any people insured under your riders) is still insurable according to our normal rules of underwriting for your type of policy; and 3. we receive enough premium from you to keep your policy and its riders in force from the beginning to the end of the grace period and for two months after the reinstatement date. If one insured person has either died or has become uninsurable since your policy date, when your policy lapses, we will not reinstate your policy. If one insured person was uninsurable at the issue of your policy and remains uninsurable, we will review - -------------------------------------------------------------------------------- Variable Survivorship 43 underwriting requirements applicable to each insured person at the time of reinstatement to determine whether your policy may be reinstated. Each surviving insured person may apply for individual insurance coverage at that point with proof of insurability. Reinstatement is effective as of the monthly processing date following our approval of your reinstatement application. When we reinstate your policy, we also reinstate the surrender charges for the amount and time remaining when your policy lapsed. If you had a policy loan when coverage ended, we reinstate it with accrued loan interest to the date of lapse. The cost of insurance charges in effect at the time of reinstatement for the age of each insured person are adjusted to reflect the time since the lapse. We apply the net premiums received after reinstatement according to the premium allocation instructions in effect at the start of the grace period, unless you tell us otherwise. SURRENDER You may surrender your policy for its net cash surrender value any time before the second death of the insured people. You do this by sending a written request and your policy or a lost policy form to our customer service center. Your policy net cash surrender value is your cash surrender value, minus policy loans you have taken including accrued loan interest. We compute your net cash surrender value as of the valuation date we receive your surrender request and policy at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. We do not pro-rate or add back charges and expenses deducted from your account value which we deducted on the monthly anniversary before the date your surrender is processed. If you surrender your policy during the first nine policy years or segment years we deduct a surrender charge from your net account value. If you surrender your policy during the early policy years, you may have little or no net cash surrender value. SEE SURRENDER CHARGE, PAGE 55. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 58, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 59. GENERAL POLICY PROVISIONS FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy. If for any reason you do not want it, you may return your policy to us or your registered representative within the period shown in the policy. If you return your policy to us within your state's specified time limit, we will consider it canceled as of your policy date. If you cancel your policy during this free look period, you will receive a refund as determined under state law. Generally, there are two types of free look refunds. Some states require a return of all premiums paid while others permit payment of the account value plus a refund of all charges deducted. Your policy will specify what free look refund applies in your state. The type of free look refund allowed in your state will affect when your initial net premium and any additional net premiums we receive from you before the end of the free look period are invested into the variable divisions you selected. Your state may require us to return the premiums you have paid if you cancel your policy during the free look period. In this case, that portion of your initial net premium and any net premium we receive from you during the free look period that you have allocated to the variable divisions will then be held in the division investing in the Fidelity Money Market Portfolio for 15 days after we issue your policy (5 days deemed delivery time plus a typical free look period of 10 days), unless state law requires otherwise, if: o you made a premium payment before we issued your policy; and o you have provided all information and documents we have requested. At the end of 15 days, your account value will be allocated among your chosen variable divisions, based on your most recent premium allocation instructions. Your state may require us to return your account value plus a refund of all charges deducted during the - -------------------------------------------------------------------------------- Variable Survivorship 44 free look period. In this case, that portion of your initial net premium that you have allocated to the variable divisions will then be invested according to your most recent premium allocation instructions on the date we issue your policy if: o you made a premium payment before we issued your policy; and o you have provided all information and documents we have requested. Amounts you allocated to the guaranteed interest division will be invested into that division when we issue your policy if you have made a premium payment and have no outstanding information or document requests from us. Once we have applied your net premium to your selected investment divisions, you may transfer funds between investment divisions and activate policy investment features such as automatic rebalancing or dollar cost averaging. YOUR POLICY The entire contract between you and us is the combination of: o your policy; o a copy of your original application and any applications for benefit increases or decreases; o all of your riders; o endorsements; o schedule pages; and o reinstatement applications. If you make a change to your coverage, we give you a copy of your changed application and new schedules. If you send us your policy, we attach these items to your policy and return it to you. Otherwise, you need to attach them to your policy. Unless there is fraud, we consider all statements made in an application to be representations and not guarantees. We use no statement to deny a claim, unless it is in an application. A president or an officer of our company and our secretary or assistant secretary must sign all changes or amendments we make to your policy. No other person may change the terms or conditions of your policy. AGE We issue your policy at the joint equivalent age of the insured people stated in your policy schedule. The joint equivalent age of the insured people is based on the sum of both insured people's ages adjusted for the difference in ages and gender, divided by two and rounded up. The younger insured person's 100th birth date 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 purposes. The insured people must each be less than 90 years of age at policy issue. The maximum joint equivalent age of the insured people must be no more than 85. There is no limit to the difference in the insured people's ages. Age is measured as the age of the insured person on the birth date nearest the policy anniversary. To process joint life insurance, we use the joint equivalent age to calculate rates, charges and values. We determine the joint equivalent age at any given time by adding the number of completed policy years to the age calculated at issue and shown in the schedule. 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 second death of the insured people. This includes the right to change the owner, beneficiaries, or method to pay proceeds. As a matter of law, all rights of ownership are limited by the rights of any person who has been assigned rights under the policy, and any irrevocable beneficiary(ies). You may name a new owner by giving us written notice. The effective date of the change to the new owner is the date the prior owner signs the notice. However, we will not be liable for any action we take before a change is recorded at our customer service center. A change in ownership may cause the prior owner to recognize taxable income on gain under the policy. BENEFICIARY(IES) You, as owner, name the beneficiary(ies) when you apply for your policy. The primary beneficiary(ies) who survives both of the insured people receives the death proceeds. Other surviving beneficiary(ies) receive death proceeds only if there is no surviving primary beneficiary(ies). If more than one - -------------------------------------------------------------------------------- Variable Survivorship 45 beneficiary(ies) survives both insured people, they share the death proceeds equally, unless you have told us otherwise. If none of your policy beneficiaries has survived both insured people, we pay the death proceeds to you or to your estate, as owner. Once you tell us who the beneficiary(ies) is/are, we keep this information on file. You may name a new beneficiary(ies) any time before the second death of the insured people. We pay the death proceeds to the most recent beneficiary(ies) whom you have most recently named and which we have on record. We do not make multiple payments. COLLATERAL ASSIGNMENT You may assign your policy as security by sending written notice to us. After we record the assignment, your rights as owner and the beneficiary's(ies') rights (unless the beneficiary(ies) were made an irrevocable beneficiary(ies) under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After your policy has been in force while both insured people are alive for two years from your policy date, we will not question the validity of the statements in your application. After your policy has been in force while both insured people are alive for two years from the effective date of any new segment or from the effective date of an increase in any other benefit, we will not contest the statements in your application for the new segment or other increase. After this policy has been in force while both insured people are alive for two years from the effective date of any reinstatement, we will not contest the statements in your application for reinstatement. MISSTATEMENTS OF AGE OR GENDER If either insured person's age or gender has been misstated, we adjust the death benefit. We adjust death benefits to the amount which would have been purchased for 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 second death of the insured people, or as otherwise required by state law. SUICIDE If either insured person commits suicide, while that insured person is sane or insane within two years of your policy date, unless otherwise required by state law, we limit death benefits payable in one sum to: 1. the total of all premiums paid to the time of death; minus 2. the amount of outstanding policy loans and accrued loan interest; minus 3. any partial withdrawals you have taken We make a limited payment to the beneficiary(ies) for a new segment or other increase if the second death of the insured people is due to suicide, while that insured person is sane or insane within two years of the effective date of a new segment, or within two years of an increase in any other benefit, unless otherwise required by state law. The limited payment we make is equal to the cost of insurance and monthly expense charges which were deducted for such increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o net cash surrender value upon surrender; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable divisions or to determine the value of an investment division's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. Any SEC rules and regulations that apply determine whether or not these conditions exist. We execute transfers among the variable divisions as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the date of the second death of the insured people. The death - -------------------------------------------------------------------------------- Variable Survivorship 46 proceeds are not affected by changes in the value of the variable divisions after the second death of the insured people. We pay interest at our stated rate (or at a higher rate if required by law) from the date of the second death of the insured people to the date of payment. We may delay payment from our guaranteed interest division for up to six months, unless state law requires otherwise, of: o surrender proceeds; o withdrawal amounts; or o loan amounts. We pay interest at our declared rate (or at a higher rate if required by law) from the date we receive the request if we delay payment more than 30 calendar days. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive in writing any election, designation, change, assignment or request made by the owner. You must use a form acceptable to us. We are not liable for actions taken before we receive and record the written notice. We may require you to return your policy for policy change, or at the time of surrender. If an insured person dies while your policy is in force, please let us or your registered representative know as soon as possible. We will immediately send you instructions on how to make a claim upon the second death of the insured people, or at either insured person's death if you have a single life term rider. As proof of a deceased insured person's death, we may require you to provide proof of the deceased insured person's age, and a certified copy of the deceased insured person's death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information about the deceased insured person. This information may include medical records of doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES Telephone privileges are automatically provided to you and your agent or registered representative, unless you tell us otherwise. If you do not wish to have this feature, decline it on the application or contact our customer service center. Telephone privileges allow you or your agent or registered representative, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o request partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls to us. If we use reasonable procedures to confirm instructions, we are not liable for losses due to unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc. ING America Equities, Inc. is a wholly owned subsidiary of Security Life. It is registered as a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. for acting as the principal underwriter under a distribution agreement. We sell our policies through registered representatives of other broker-dealers including, but not limited to: 1. VESTAX Securities Corporation, a subsidiary of ING America Insurance Holdings, Inc.; 2. Locust Street Securities, Inc., an affiliate of Security Life of Denver Insurance Company; - -------------------------------------------------------------------------------- Variable Survivorship 47 3. Multi-Financial Services, Inc., an affiliate of Security Life of Denver Insurance Company; and 4. IFG Network Securities, Inc., a subsidiary of Investors Financial Group, Inc., which is a subsidiary of ING America Insurance Holdings, Inc. These broker-dealers have entered into selling agreements with us. They are registered with the SEC and the NASD. Under these selling agreements, we pay a distribution allowance to other broker-dealers, who then pay commissions to the registered representative who sells this policy. The distribution allowance may be up to 90% of the first target premium that you pay. For premiums that you pay over your first target premium, the distribution allowance may be up to 5% in policy years one through five, and up to 2% after the fifth policy year. Broker-dealers may receive annual renewal payments of up to 0.2% of the net account value in policy years five through twenty. Compensation arrangements vary among broker-dealers and depend on particular circumstances. In addition to the above-described compensation, we may pay: o override payments; o expense allowances; o bonuses; o special marketing fees; o wholesaler fees and marketing allowances; and o training allowances. Under our sales incentive programs, as permitted by law, registered representatives may receive other compensation such as: o expense-paid trips; o expense-paid educational seminars; and o merchandise. We pay all distribution and other allowances from our own resources which includes sales charges deducted from premiums and surrender charges. ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; o indices or rankings of investment securities; and o comparisons with other investment vehicles, including tax considerations. We may use information regarding the past performance of the variable investment divisions. But past performance is not indicative of future performance of the investment divisions or the policies and is not reflective of the actual investment experience of individual policyowners. We may feature certain investment divisions and their managers, as well as describe asset levels and sales volumes for our products. We may refer to past, current, or prospective economic trends and investment performance or other information we believe may be of interest to our customers. SETTLEMENT PROVISIONS You may elect to have the beneficiary(ies) receive the death proceeds other than in one payment. If you make this election, you must do so before the second death of the insured people. If you have not made this election, the beneficiary(ies) may do so within 60 days after we receive proof of the second death of the insured people. You may take your net cash surrender value in other than one payment. The investment performance of the variable divisions does not affect payments under these settlement options. Instead, interest accrues at a fixed rate based on the option you choose. Payment options are subject to our rules at the time you make your selection. A periodic payment must be at least $20. Currently, these alternate payment options are available if the proceeds are $2,000 or more. Option I: PAYOUTS FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. These payments may last for a period from five to thirty years. The installment dollar amounts are equal except for any excess interest. Settlement Option Table I in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. - -------------------------------------------------------------------------------- Variable Survivorship 48 Option II: LIFE INCOME WITH PAYOUTS GUARANTEED FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis. We make these payments throughout the lifetime of the person receiving the payment, or if longer for guaranteed periods of five, ten, fifteen, or twenty years. You may choose the length of time to receive the guaranteed payments. If you choose a longer guaranteed period, this will decrease the amount of your periodic payments. The installment dollar amounts are equal except for any excess interest. The Settlement Option Table II in your policy shows the amount of the first monthly payout for each $1,000 of account value applied. This option is available only for the ages shown in this table. Option III: HOLD AT INTEREST: Amounts may be left on deposit with us to be paid at the death of the person you choose to receive the payment, or at a chosen earlier date. We will pay interest at our declared rate on any unpaid balance (or at a higher rate if required by law). You may choose interest to be accumulated or be paid on a monthly, quarterly, semi-annual, or annual basis. You may not leave money on deposit for more than 30 years. Option IV: PAYOUTS OF A DESIGNATED AMOUNT: Payouts will be made until proceeds, including interest, are exhausted. Interest is at a rate we declare (or at a higher rate as required by law). Payout payment choices are on a monthly, quarterly, semi-annual, or annual basis. Option V: OTHER: You, as owner, may ask us to apply money under any options we offer at the time we pay the benefit. The beneficiary(ies) or other person (successor to the beneficiary(ies)) who has the right to receive payments may name someone else to receive amounts that we would otherwise pay to the beneficiary's(ies') estate if he/she/they die(s). The person who has the right to receive payment may name another person, at any time. Designating another person to receive payment may have income, gift or estate tax consequences. Consult a professional tax adviser before making this designation. We must approve an arrangement that involves someone who is to receive payment who is not a human being (for example, a corporation). We must approve a situation involving a person who is to receive payment while acting on behalf of another, called a fiduciary. We base the details of all arrangements on our rules at the time the arrangements are effective. This includes rules on the: o minimum amount we pay under an option; o minimum amounts for installment payments; o withdrawal rights; o right to receive payments over time, which we may offer as a lump sum payment; o naming of people who have the right to receive payment and their successors; and o proof of age and survival. ADMINISTRATIVE INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the variable divisions' assets in shares of investment portfolios. We are the legal owner of the shares held in the variable account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your account value. We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. Each investment portfolio's shares have the right to one vote. The votes of all investment portfolios are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. - -------------------------------------------------------------------------------- Variable Survivorship 49 Examples of issues that require a portfolio-by-portfolio vote are: 1. changes in the fundamental investment policy of a particular investment portfolio; or 2. approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies, and any investment portfolio shares for which the owner does not give us instructions, the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations, or their interpretations change to allow this. You may only instruct us on matters relating to the investment portfolios corresponding to divisions in which you have invested assets as of the record date set by the investment portfolio's board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each division that we attribute to your policy by dividing your account value allocated to that division by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, we may ignore voting instructions relating to changes in an investment portfolio's adviser or its investment policies. If we do ignore voting instructions, we give you a summary of our actions in the next semi-annual report to owners. Under the Investment Company Act of 1940, we must get your approval for certain actions involving our separate account. In this case, you have one vote for every $100 of value you have in the variable divisions. We cast votes credited to amounts in the variable divisions, but not credited to policies in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional divisions which will invest in portfolios we find appropriate for policies we issue. 3. Eliminate variable divisions. 4. Combine two or more variable divisions. 5. Substitute a new investment portfolio for a portfolio in which the division currently invests. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. - -------------------------------------------------------------------------------- Variable Survivorship 50 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more divisions to invest in a mutual fund other than, or in addition to, the investment portfolios. 10. Stop selling these policies. 11. End any employer or plan trustee agreement with us under the agreement's terms. 12. Limit or eliminate any voting rights for the separate account. 13. Make any changes required by the 1940 Act, or its rules or regulations. We will not make a change until it is effective with the SEC and approved by the appropriate state insurance departments, if necessary. We will notify you of changes. If you then wish to transfer the amount you have in the affected division to another variable division, or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loans, if any, plus accrued interest; o your net cash surrender value; o information about the variable divisions; and o your account transactions during the previous year showing net premiums, transfers, deductions, loans, or withdrawals. We also send semi-annual reports with financial information on the investment portfolios, including a list of the investment holdings of each portfolio to you. We send confirmation notices to you throughout the year for certain policy transactions. CHARGES, DEDUCTIONS AND REFUNDS The amount of a charge may not exactly correspond to the cost incurred by us to provide the service or benefits associated with the particular policy. Many charges are not at "cost." For example, the sales charges may not cover all of the sales and distribution expenses actually incurred by us. Proceeds from other charges, including the mortality and expense risk charge or cost of insurance charges, may be used in part to cover such expenses. DEDUCTIONS FROM PREMIUMS We consider any payment we receive to be a premium if the policy anniversary nearest the younger insured person's 100th birth date has not occurred and you do not have an outstanding loan. After we deduct certain expenses from your premium payment, we add the remaining net premium to your account value. TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0.5% to 5% with some states not imposing these types of taxes. We currently deduct an amount equal to 2.5% of each premium payment you make to cover these taxes. The 2.5% rate approximates the average tax rate we expect to pay in all states. We also currently deduct an amount equal to 1.5% of each premium payment you make to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by the amount of life insurance premiums we receive. We reserve the right to increase or decrease your premium expense charge for taxes as a result of changes in the tax law, within limits set by state law. We also reserve the right to increase or decrease your premium expense charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. - -------------------------------------------------------------------------------- Variable Survivorship 51 SALES CHARGE We deduct a percentage from each of your premium payments to compensate us for the costs we incur in selling the policies. We base the percentage on the time expired since your policy date or addition of a segment and on your premium up to and above a target premium: Sales Charge Percentage ----------------------- Up to Segment Above Segment Segment Target Target Year Premium Premium ---- ------- ------- 1 - 5 5.5% 2% 6 + 2% 2% We determine the target premium for each policy based on the insured people's ages, genders, ratings and your stated death benefit. Your schedule page shows the target premium for your policy. For example, if this policy is issued to insure a male, age 85 who is uninsurable, and a female, age 85 who is insurable but in a substandard underwriting rating class, the target premium for sales charge purposes is $66 for each $1,000 of stated death benefit. We believe this amount represents the maximum target premium; although most policies we issue will have a much lower target premium. SEE SURRENDER CHARGE, PAGE 55 AND ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 61. The sales charge covers the costs of distribution, preparing our sales literature, promotional expenses, and other direct and indirect expenses. The amount charged is not specifically related to sales expenses in a particular year. We may reduce or waive the sales charge for certain group or sponsored arrangements or for corporate purchasers. To determine your applicable sales charge, premiums you pay after an increase in stated death benefit are allocated to your policy segments in the same proportion as the target premium for each segment bears to the sum of the target premium for all segments. DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each day for the mortality and expense risks we assume. This charge is 0.002055% per day of the amount you have in the variable divisions. This is an annual rate of 0.75%. The mortality risk we assume is that insured people, as a group, may live less time than we estimated. We assume risk that expenses we incur in issuing and administering the policies and in operating the variable divisions are greater than the amount we estimated when we set these charges. The mortality and expense risk charge does not apply to your account value which is invested in the guaranteed interest division or the loan division. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. On or before November 1, 1999, we will make available to you the option to designate a single withdrawal investment division from which we will take your monthly deductions. You may designate a withdrawal investment division at policy application or at a later time. You may choose to have us withdraw the monthly deduction from the guaranteed interest division or the variable divisions in which you have amounts. You may not use the loan division as your designated withdrawal investment division from which to deduct monthly deductions. If you do not choose a withdrawal investment division from which to deduct monthly deductions, or if the amount you have in your designated withdrawal investment division is not enough to cover the monthly deductions, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each division has to your total net account value as of the monthly processing date. If you change your designated withdrawal investment division from which monthly deductions are deducted, we may consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 54. - -------------------------------------------------------------------------------- Variable Survivorship 52 DIVISIONS FROM WHICH WE DEDUCT CHARGES
MONTHLY CHARGES: COST OF INSURANCE LOANS AND CHARGES, RIDER CHARGES, TRANSACTION FEES PARTIAL WITHDRAWALS ADMINISTRATION FEES - --------------- --------------------------------------- ------------------------ -------------------------------- Choice May choose one withdrawal investment Proportionally among May choose one division, including guaranteed interest variable divisions and withdrawal investment division when this option is available guaranteed interest division, or combination of division investment divisions, subject to requirements Default Proportionally among variable divisions Proportionally among Proportionally among and guaranteed interest division variable divisions and variable divisions and guaranteed interest guaranteed interest division division - --------------- --------------------------------------- ------------------------ --------------------------------
POLICY CHARGE The initial policy charge is $15 per month for the first ten years of your policy. After the first ten years of your policy, the policy charge is $9 per month. This charge compensates us for such costs as: o application processing; o medical examinations; o establishment of policy records; and o insurance underwriting costs. MONTHLY ADMINISTRATIVE CHARGE For this policy, we charge a per month administrative charge of no less than $0.07 and no more than $0.095 per $1,000 for the greater of the stated death benefit, or the target death benefit, for the first ten policy years. We charge $0.023 per $1,000 for each policy year after the tenth for the greater of the stated death benefit or the target death benefit. The exact per $1,000 charge for your policy is based on the insured people's issue ages and policy duration. This charge is designed to compensate us for ongoing costs such as: o premium billing and collections; o claim processing; o policy transactions; o record keeping; o reporting and communications with policy owners; and o other expenses and overhead. COST OF INSURANCE CHARGE The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage under the policy, including the expected cost of paying death proceeds that are more than your account value at the second death of the insured people. We base the cost of insurance charge rates on the insured people's ages, genders, ratings and premium classes on the policy for each segment date, or on the date you add a base coverage segment. The cost of insurance charge is equal to our current monthly cost of insurance rate times the net amount at risk for each portion of your death benefit. We calculate the net amount at risk monthly, at the beginning of each policy month. For the base death benefit, the net amount at risk is calculated using the difference between the current base death benefit and your account value. We determine the amount of your account value after we deduct your policy and rider charges due on that date other than cost of insurance charges for the base death benefit and adjustable term insurance rider. If your base death benefit at the beginning of a month increases (due to requirements of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. This means that the amount of your cost of insurance charge varies from month to month with changes in your net amount at risk, changes in the death benefit and with the increasing age of the insured people. We allocate the net amount at risk to any segments in the same proportion that each segment has to the total stated death benefit for all coverage segments as of the monthly processing date. - -------------------------------------------------------------------------------- Variable Survivorship 53 We base your cost of insurance rates on the insured people's ages, genders, ratings and premium classes on the policy for each segment date, or on the date you add a base coverage segment. Separate cost of insurance rates apply to: o each segment of the base death benefit; o your adjustable term insurance rider; and o single life term riders. These rates are never more than the guaranteed maximum rates shown in your policy; however, they may change from time to time. The guaranteed maximum rates are based on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The maximum rates for the initial and any new segment will be printed in the schedule which we will provide to you. There are no cost of insurance charges after the policy anniversary nearest the younger insured person's 100th birth date. GUARANTEED MINIMUM DEATH BENEFIT CHARGE If you choose the guaranteed minimum death benefit feature, we currently charge $0.005 per $1,000 of stated death benefit each month during the guarantee period. We guarantee it never to exceed $0.005 per $1,000 of death benefit. CHARGES FOR ADDITIONAL BENEFITS On each monthly processing date, we deduct the cost of additional benefits under your riders, including the adjustable term insurance rider and the single life term rider. SEE ADDITIONAL BENEFITS, PAGE 32. CHANGES IN MONTHLY CHARGES Changes we make in the cost of insurance charges or charges for additional benefits are for a class of insured persons. We base the new charge on changes in expectations about: o investment earnings; o mortality; o the time policies remain in effect; o expenses; and o taxes. New monthly charges will never be more than the guaranteed maximum rates shown in your policy. CONTINUATION OF COVERAGE ADMINISTRATIVE FEE At the policy anniversary nearest the younger insured person's 100th birth date, if your policy has not been surrendered, the continuation of coverage period begins. We will charge a one-time administrative fee of $400. This charge compensates us for maintaining and servicing your policy until the second death of the insured people. We then no longer charge you a monthly administrative fee. POLICY TRANSACTION FEES We also charge fees for certain transactions you may make under your policy. We take these fees from the variable and the guaranteed interest divisions in the same proportion that your account value in each division has to your net account value immediately after the transaction. PARTIAL WITHDRAWALS We charge a service fee of $25 against your account value for each partial withdrawal you take to cover our costs. We may also deduct a surrender charge from your account value. SEE PARTIAL WITHDRAWALS, PAGE 41. TRANSFERS There is a $25 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one transfer request, it counts as one transfer. There is no transfer fee if you are transferring your account value into the guaranteed interest division under the right to exchange feature in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 37, AND RIGHT TO EXCHANGE POLICY, PAGE 35. ILLUSTRATIONS The first policy illustration you request in a policy year is free. After that, we may charge a fee of up to $25 for each additional policy illustration you request. PREMIUM ALLOCATION CHANGE You may make five free premium allocation changes per policy year. After the five free premium allocation changes, we charge you $25 for each additional premium allocation change per policy year. - -------------------------------------------------------------------------------- Variable Survivorship 54 PERSISTENCY REFUND Where state law allows us, we pay long-term policy owners a persistency refund. Each month your policy remains in force after your tenth policy anniversary, we credit your account value with a refund. This refund equals 0.6% of your account value on an annual basis. On a monthly basis, this equals 0.05%. We do not guarantee that we will pay a persistency refund on the guaranteed interest division. If applicable, we add the persistency refund to the variable and guaranteed interest divisions, but not the loan division, in the same proportion that your account value in each division has to your net account value as of the monthly processing date. If we pay a persistency refund on the guaranteed interest division, we will pay it to you if your policy is in the continuation of coverage period. Here are two examples of how the persistency refund may affect your account value each month: EXAMPLE 1: YOUR POLICY HAS NO LOAN: o account value = $10,000 (all in the variable divisions) o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable divisions $10,000.00 $10,005.00 EXAMPLE 2: YOUR POLICY DOES HAVE A LOAN: o account value = $10,000 o account value in the variable divisions = $6,000 o account value in the loan division = $4,000 o monthly persistency refund rate = .0005 o persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable divisions $6,000.00 $6,005.00 Loan $4,000.00 $4,000.00 SURRENDER CHARGE We may deduct a surrender charge from your account value during the first nine years of your policy or coverage segment if you: o surrender your policy; o reduce your stated death benefit; o allow your policy to lapse; or o take a partial withdrawal which decreases your stated death benefit. The surrender charge compensates us for issuing and distributing policies. We deduct surrender charges proportionately based on the account value in each investment division in which you have amounts invested immediately following the transaction. For purposes of the surrender charge, we determine the surrender target premium for each policy based on the insured people's issue ages, genders and your stated death benefit. The surrender target premium does not vary based on ratings. Your schedule page shows the surrender charge amounts for your policy. If you change your death benefit option, this may decrease your stated death benefit. Under these circumstances, we do not deduct a surrender charge from your account value, and we do not reduce future surrender charges. If you change your death benefit option, this may increase the stated death benefit. We do not increase your surrender charge in this case. However, all other increases in your stated death benefit create a new segment which will be subject to its own nine year surrender charge period. If your surrender charge changes, we send you a new schedule showing the change. The surrender charge remains level for the first five years of each coverage segment and then decreases through the ninth year. Thereafter, the surrender charge is zero. For purposes of calculating surrender charges, target premium is premium attributable to base death benefit coverage. - -------------------------------------------------------------------------------- Variable Survivorship 55 For example, if this policy is issued to insure a male, age 85, and a female, age 85, the target premium for surrender charge purposes is $61 for each $1,000 of stated death benefit. We believe this amount represents the maximum surrender charge target premium; although most policies we issue will have a much lower surrender charge target premium. SEE SALES CHARGE, PAGE 52 AND ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 61. SURRENDER CHARGES AS A PERCENTAGE OF SURRENDER TARGET PREMIUM
JOINT EQUIVALENT AGE YEARS 1 - 5 YEAR 6 YEAR 7 YEAR 8 YEAR 9 - -------------------- ----------- ------ ------ ------ ------ 15 - 78 100% 80% 60% 40% 20% 79 93% 80% 60% 40% 20% 80 85% 70% 55% 40% 20% 81 78% 65% 50% 35% 20% 82 72% 60% 45% 30% 20% 83 65% 50% 40% 30% 20% 84 60% 45% 35% 25% 15% 85 54% 40% 30% 20% 10%
You should review the surrender charge table in the schedule pages of your policy for your specific surrender charge amount each year. If you increase your stated death benefit (other than by a death benefit option change), we will send a new schedule page to you. You should attach this new page to your policy. In some instances, we may ask you to send your policy to us so that we can make this change for you. GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS Individuals, corporations or other institutions may purchase this policy. For group or sponsored arrangements (including employees of Security Life of Denver, its affiliates and appointed sales agents) corporate purchasers, or special exchange programs which we may offer from time to time, we may reduce or waive the: o surrender charge, including the surrender charge on partial withdrawals; o length of time a surrender charge applies; o administrative charge; o minimum stated death benefit; o minimum target death benefit; o minimum annual premium; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items due to expected economies under a group or sponsored arrangement or with a corporate purchaser. Group arrangements include those in which there is a trustee, an employer or an association. The group either purchases policies covering a group of individuals on a group basis or endorses a policy to a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer policies to its employees or members on an individual basis. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors. We take all these factors into account when we reduce charges. A group or sponsored arrangement must meet certain requirements to qualify for reduced charges. We make reductions to charges based on our rules in effect when we approve a policy application form. We may change these rules from time to time. - -------------------------------------------------------------------------------- Variable Survivorship 56 Sponsored arrangements or corporations 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 charges, fees and privileges. These variations are based on differences in costs or services. OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable division for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable divisions, we may make such a charge in the future. In most states, we must pay state and local taxes. If these taxes increase, we may charge for such taxes. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in the Internal Revenue Code. Specifically, the policy must meet the requirements of the "guideline premium/cash value corridor test," as specified in Code section 7702. The guideline premium/cash value corridor test provides for a maximum premium in relation to the death benefit, and a minimum "corridor" of death benefit in relation to account value. SEE APPENDIX A OR B, PAGE 171 FOR A TABLE OF THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FACTORS. There is very little guidance with respect to policies issued on a last survivor basis, however, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 guideline premium/cash corridor test, Code Section 817(h) requires separate account investments, such as our variable account, to be adequately diversified. The Treasury has issued regulations which set the standards for measuring the adequacy of any diversification. To be adequately diversified, each variable division must meet certain tests. If your variable life policy is not adequately diversified under these regulations, it is not treated as life insurance under Code Section 7702. You would then be subject to federal income tax on your policy income as you earn it. Our variable divisions' investment portfolios have promised they will meet the diversification standards that apply to your policy. In certain circumstances, you, as owner of a variable life insurance contract, may be considered the owner for federal income tax purposes of the separate account assets used to support your contract. Any income and gains from the separate account assets are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets. - -------------------------------------------------------------------------------- Variable Survivorship 57 Your ownership rights under your policy are similar to, but different in some ways from those described by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have flexibility in allocating your premium payments and in your policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the variable account assets. We do not know what standards will be set forth in the future, if any, in Treasury regulations or rulings. We reserve the right to modify your policy, as necessary, to try to prevent you from being considered the owner of a pro rata share of the variable account assets, or to otherwise qualify your policy for favorable tax treatment. The following discussion assumes that the policy will qualify as a life insurance contract for federal income tax purposes. TAX TREATMENT OF POLICY DEATH BENEFITS We believe that the death benefit under a policy is generally excludable from the gross income of the beneficiary(ies) under section 101(a)(1) of the Code. However, there are exceptions to this general rule. Additionally, federal and local transfer, estate inheritance, and other tax consequences of ownership or receipt of policy proceeds depend on the circumstances of each policy owner or beneficiary(ies). A tax adviser should be consulted about these consequences. Generally, the policy owner will not be taxed on any of the policy cash value until there is a distribution. When distributions from a policy occur, or when loans are taken from or secured by a policy, the tax consequences depend on whether or not the policy is a "modified endowment contract." Special rules also apply if you are subject to the alternative minimum tax. You should consult a tax adviser if you are subject to the alternative minimum tax. MODIFIED ENDOWMENT CONTRACTS Under the Internal Revenue Code, certain life insurance contracts are classified as "modified endowment contracts," and are given less favorable tax treatment than other life insurance contracts. Due to the flexibility of the policies as to premiums and benefits, the individual circumstances of each policy will determine whether or not it is classified as a modified endowment contract. The rules are too complex to be summarized here, but generally depend on the amount of premiums paid during the first seven policy years. Certain changes in a policy after it is issued could also cause it to be classified as a modified endowment contract. A current or prospective policy owner should consult with a competent adviser to determine whether or not a policy transaction will cause the policy to be classified as a modified endowment contract. MULTIPLE POLICIES All modified endowment contracts that are issued by us (or our affiliates) to the same policy owner during any calendar year are treated as one modified endowment contract for purposes of determining the amount includable in the policy owner's income when a taxable distribution occurs. DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS Once a policy is classified as a modified endowment contract, the following tax rules apply both prospectively and to any distributions made in the prior two years: 1. All distributions other than death benefits, including distributions upon surrender and withdrawals, from a modified endowment contact will be treated first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 2. Loans taken from or secured by a policy classified as a modified endowment contract are treated as distributions and taxed first as distributions of gain taxable as ordinary income and as tax-free recovery of the policy owner's investment in the policy only after all gain has been distributed. 3. A 10% additional income tax penalty may be imposed on the distribution amount subject to income tax. Consult a tax adviser to determine whether or not you may be subject to this penalty tax. - -------------------------------------------------------------------------------- Variable Survivorship 58 DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS Distributions other than death benefits from a policy that is not classified as a modified endowment contract are generally treated first as a recovery of the policy owner's investment in the policy. Only after the recovery of all investment in the policy, is there taxable income. However, certain distributions which must be made in order to enable the policy to continue to qualify as a life insurance contract for federal income tax purposes, if policy benefits are reduced during the first fifteen policy years, may be treated in whole or in part as ordinary income subject to tax. Loans from or secured by a policy that is not a modified endowment contract are generally not treated as distributions. Finally, neither distributions from, nor loans from or secured by, a policy that is not a modified endowment contract are subject to the 10% additional income tax. INVESTMENT IN THE POLICY Your investment in the policy is generally the total of your aggregate premiums. When a distribution is taken from the policy other than a policy loan, your investment in the policy is reduced by the amount of the distribution that is tax free. POLICY LOANS In general, interest on a policy loan will not be deductible. Before taking out a policy loan, you should consult a tax adviser as to the tax consequences. SECTION 1035 EXCHANGES Code Section 1035 generally provides that no gain or loss shall be recognized on the exchange of one life insurance policy for another life insurance policy, or for an endowment or annuity contract. We accept 1035 exchanges with outstanding loans. Special rules and procedures apply to Section 1035 exchanges. If you wish to take advantage of Section 1035, you should consult your tax adviser. TAX-EXEMPT POLICY OWNERS Special rules may apply to a policy that is owned by a tax-exempt entity. Tax-exempt entities should consult their tax adviser regarding the consequences of purchasing and owning a policy. These consequences could include an effect on the tax-exempt status of the entity and the possibility of the unrelated business income tax. POSSIBLE TAX LAW CHANGES Although the likelihood of legislative action is uncertain, there is always the possibility that the tax treatment of the policy could be changed by legislation or otherwise. You should consult a tax adviser with respect to legislative developments and their effect on the policy. CHANGES TO COMPLY WITH THE LAW So that your policy continues to qualify as life insurance under the Code, we reserve the right to refuse to accept all or part of your premium payments, or to change your death benefit. We may refuse to allow you to make partial withdrawals that would cause your policy to fail to qualify as life insurance. We also may: o make changes to your policy or its riders; or o take distributions from your policy to the degree that we deem necessary to qualify your policy as life insurance for tax purposes. If we make any change of this type, it applies the same way to all affected policies. We will give you advance notice of this change. The tax law limits the amount we can charge for mortality costs and other expenses used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges and other charges reasonably expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. - -------------------------------------------------------------------------------- Variable Survivorship 59 Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. OTHER Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you may have to pay income taxes and possibly penalties later. The transfer of the policy or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. For example, the transfer of the policy to, or the designation as a beneficiary of, or the payment of proceeds to, a person who is assigned to a generation which is two or more generations below the generation assignment of the policy owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each policy owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL, AND OTHER TAX CONSIDERATIONS. - -------------------------------------------------------------------------------- Variable Survivorship 60 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables are intended to show how the policy works. This includes how benefits and values can vary over a long period of time. Each table also compares these values with total premiums paid with interest. The policy illustrated includes:
Definition Death of Life Stated Target Smoker User Benefit Insurance Death Death Gender Age Status Option Test Benefit Premium Benefit ------ --- ------ ------ ---- ------- ------- ------- Male 50 Non-smoker 1 GP 1,000,000 $13,000 1,000,000 Preferred Female 50 Non-smoker Preferred
For sales charge purposes, the target premium for the illustrated policy is $7,995.92 (approximately $8 per $1,000 of stated death benefit). For surrender charge purposes, the target premium for the illustrated policy is $8,885.29 (approximately $9 per $1,000 of stated death benefit). The tables show how death benefits, account values, and cash surrender values of a hypothetical policy could vary over an extended period of time, assuming the variable divisions had constant hypothetical gross annual investment returns of 0%, 12%, or 6% over the periods indicated in each table. Values would differ from those shown in the tables if the annual investment returns were not constant. The amounts shown would differ if we had used two females or two males. These illustrations assume there is no policy loan. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. The difference between the account value and the cash surrender value in the first nine years of the policy show the effect of the surrender charge. The net investment return on your policy is lower than the gross investment return on the variable divisions. This is due to the mortality and expense risk charge, and the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the amounts for death benefits, account values and cash surrender values. The tables reflect annual investment management fees of 0.6643% of the portfolios' aggregate average daily net assets. This hypothetical rate is a simple average of the investment advisory fees applying to the investment portfolios for the year ending December 31, 1998. We assume other portfolio expenses at the rate of 0.2531% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1998 after any absorption by investment portfolio managers has been made. The average of all portfolios' total expenses is 0.9174%. - -------------------------------------------------------------------------------- Variable Survivorship 61 Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after absorption of fees and expenses by the portfolio's investment manager. Absent such absorption, the total average investment management fees, average other portfolio expenses and the average of all portfolios' total expenses used in the illustrations would have been higher (0.7126%, 0.9213% and 1.6339%, respectively). The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue through 1999. The effect of these portfolio charges and expenses, and mortality and expense risk charges results in a net rate of return of: o (1.66)% on a 0% gross rate of return; o 10.25% on a 12% gross rate of return; and o 4.30% on a 6% gross rate of return. The tables assume that charges have been deducted including deductions for premiums, cost of insurance rider charges, monthly deductions and administrative and sales charges. The tables show charges at our current rates which includes a persistency refund. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 52. The tables reflect that we do not currently charge against the variable account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and cash surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o the insured people's ages and genders; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with your policy form; and o special features elected on your policy. At issue, we deliver an individualized illustration showing the scheduled premium you chose and the insured people's actual risk classes. After we issue the policy, if you ask us to, we will give you an illustration of future policy benefits. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Variable Survivorship 62 PROSPECT: INSURED PERSON NO. 1'S NAME MALE 50 NON-SMOKER PREFERRED PRESENTED BY: INSURED PERSON NO. 2'S NAME FEMALE 50 NON-SMOKER PREFERRED SECURITY LIFE VARIABLE SURVIVORSHIP UNIVERSAL LIFE STATED DEATH BENEFIT: $1,000,000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $13,000.00 GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%----------- ------------12.00%---------- ------------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 13000 13650 10651 1766 1000000 12003 3118 1000000 11327 2442 1000000 2 13000 27983 21053 12167 1000000 25159 16274 1000000 23065 14180 1000000 3 13000 43032 31193 22307 1000000 39571 30686 1000000 35216 26331 1000000 4 13000 58833 41057 32172 1000000 55348 46463 1000000 47780 38895 1000000 5 13000 75425 50630 41744 1000000 72611 63726 1000000 60753 51868 1000000 6 13000 92846 60166 53058 1000000 91799 84691 1000000 74423 67314 1000000 7 13000 111138 69368 64037 1000000 112781 107449 1000000 88502 83171 1000000 8 13000 130345 78215 74660 1000000 135722 132168 1000000 102988 99434 1000000 9 13000 150513 86687 84910 1000000 160807 159030 1000000 117875 116098 1000000 10 13000 171688 94758 94758 1000000 188239 188239 1000000 133153 133153 1000000 15 13000 294547 134217 134217 1000000 384197 384197 1000000 224292 224292 1000000 20 13000 451350 153589 153589 1000000 704980 704980 1000000 323952 323952 1000000 25 13000 651475 133167 133167 1000000 1251143 1251143 1338723 422763 422763 1000000 30 13000 906890 15157 15157 1000000 2162731 2162731 2270867 495073 495073 1000000 AGE 65 13000 322925 140097 140097 1000000 436085 436085 1000000 243737 243737 1000000
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and should not be deemed as a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including the investment allocations made to the divisions of the variable account and the guaranteed interest division and the investment experience of the divisions. No representation can be made that these hypothetical gross investment returns can be achieved for any one year or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Variable Survivorship 63 PROSPECT: INSURED PERSON NO. 1'S NAME: MALE 50 NON-SMOKER PREFERRED PRESENTED BY: INSURED PERSON NO. 2'S NAME FEMALE 50 NON-SMOKER PREFERRED SECURITY LIFE VARIABLE SURVIVORSHIP UNIVERSAL LIFE STATED DEATH BENEFIT: $1,000,000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $13,000.00 GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%----------- ------------12.00%---------- ------------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 13000 13650 10651 1766 1000000 12003 3118 1000000 11327 2442 1000000 2 13000 27983 21053 12167 1000000 25159 16274 1000000 23065 14180 1000000 3 13000 43032 31193 22307 1000000 39571 30686 1000000 35216 26331 1000000 4 13000 58833 41138 32253 1000000 55433 46548 1000000 47864 38978 1000000 5 13000 75425 50916 42030 1000000 72920 64035 1000000 61051 52166 1000000 6 13000 92846 60800 53692 1000000 92505 85397 1000000 75093 67984 1000000 7 13000 111138 70512 65181 1000000 114091 108760 1000000 89729 84398 1000000 8 13000 130345 80049 76495 1000000 137880 134326 1000000 104983 101429 1000000 9 13000 150513 89408 87631 1000000 164094 162317 1000000 120874 119097 1000000 10 13000 171688 98586 98586 1000000 192977 192977 1000000 137425 137425 1000000 15 13000 294547 148683 148683 1000000 403485 403485 1000000 241139 241139 1000000 20 13000 451350 193392 193392 1000000 755907 755907 1000000 370654 370654 1000000 25 13000 651475 227919 227919 1000000 1348180 1348180 1442552 529977 529977 1000000 30 13000 906890 242278 242278 1000000 2340256 2340256 2457269 725721 725721 1000000 AGE 65 13000 322925 158180 158180 1000000 460228 460228 1000000 264872 264872 1000000
The current cost of insurance rates are subject to change. Account values will vary from those illustrated if actual rates differ from those assumed. Current mortality charge rates are based on current mortality experience and are not dependent upon future improvements in underlying mortality. The hypothetical gross rates of return shown are illustrative only and should not be deemed as a representation of past or future investment results. Actual investment results and policy charges may be more or less than those shown and will depend on a number of factors, including the investment allocations made to the divisions of the variable account and the guaranteed interest division and the investment experience of the divisions. No representation can be made that these hypothetical gross investments returns can be achieved for any one year or sustained over any period of time. The death benefit, account value and cash surrender value for a policy would be different from those shown if the actual gross annual rates of return averaged 0.00%, 12.00% and 6.00% over a period of years but varied above or below that average during the period. They would also be different if premiums were paid in a different frequency than shown. - -------------------------------------------------------------------------------- Variable Survivorship 64 ADDITIONAL INFORMATION DIRECTORS AND OFFICERS Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person denoted with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273.
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Stephen M. Christopher Chairman, President and Chief Executive Officer Thomas F. Conroy Director, President, Security Life Reinsurance Michael W. Cunningham* Director, Executive Vice President Linda B. Emory* Director James L. Livingston, Jr. Executive Vice President and Chief Operating Officer Jeffrey R. Messner Executive Vice President and Chief Marketing Officer Jess A. Skriletz President, ING Institutional Markets John R. Barmeyer* Senior Vice President, Chief Legal Officer Wayne D. Bidelman Senior Vice President, CCRC Eugene L. Copeland Senior Vice President and General Counsel, Security Life Reinsurance and ING Institutional Markets Arnold A. Dicke Senior Vice President, Chief Actuary, ING Reinsurance Carol D. Hard Senior Vice President, Variable Products Philip R. Kruse Senior Vice President Charles LeDoyen** Senior Vice President, Structured Settlements Timothy P. McCarthy Senior Vice President, Marketing Services
- -------------------------------------------------------------------------------- Variable Survivorship 65
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Gregory G. McGreevey Senior Vice President, New Products and Market Development, ING Institutional Markets Jeffery W. Seel* Senior Vice President, Chief Investment Officer Lawrence D. Taylor Senior Vice President, Chief Actuary Louis N. Trapolino Senior Vice President, Distribution William D. Tyler* Senior Vice President, Chief Information Officer Katherine Anderson Vice President, Chief Product Actuary Evelyn A. Bentz Vice President, M Financial Sales Thomas Kirby Brown, Jr. Vice President, Operations, ING Institutional Markets Douglas W. Campbell Vice President, Agency Sales Daniel S. Clements Vice President and Chief Underwriter Stanley F. Eckert Vice President, National Marketing Shari A. Enger Vice President -- Controller Larry D. Erb Vice President, Information Technology Martha K. Evans Vice President, Variable Operations Fitz Fisher Vice President, Information Technology Craig Fowler Vice President, Risk Management and Chief Actuary, ING Institutional Markets Deborah B. Holden* Vice President, Corporate Benefits Brian Holland Vice President, Domestic and International Risk Management Kenneth R. Kiefer** Vice President, Operations, Structured Settlements Richard D. King Vice President, Medical Director Stephen F. Kraysler Vice President, Structured Reinsurance
- -------------------------------------------------------------------------------- Variable Survivorship 66
Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- C. Lynn McPherson* Vice President Sue A. Miskie Vice President, Corporate Services David S. Pendergrass* Vice President and Treasury Officer Stephen R. Pryde Vice President, Business Operations Christiaan M. Rutten Vice President, International Reinsurance Casey J. Scott Vice President, National Marketing Alan C. Singer Vice President, Customer Relations and Regulatory Compliance Mark A. Smith Vice President, Insurance Services Jerome M. Strop Vice President, Strategic Marketing Gary W. Waggoner Vice President, General Counsel and Corporate Secretary Amy L. Winsor Vice President and Treasurer William Wojciechowski* Vice President, CCRC Eric G. Banta Assistant Secretary Roger O. Beebe Actuarial Officer Marsha K. Crest Agency Administration Officer Kim M. Curley Appointed Actuary John B. Dickinson Actuarial Officer Relda A. Fleshman Deputy General Counsel Shirley A. Knarr Actuarial Officer Glen E. Stark Actuarial Officer William J. Wagner Actuarial Officer
- -------------------------------------------------------------------------------- Variable Survivorship 67 REGULATION We are regulated and supervised by the Division of Insurance of the Department of Regulatory Agencies of the State of Colorado which periodically examines our financial condition and operations. In addition, we are subject to the insurance laws and regulations in every jurisdiction in which we do business. As a result, the provisions of this policy may vary somewhat from jurisdiction to jurisdiction. We are required to submit annual statements, including financial statements, of our operations and finances to the insurance departments of the various jurisdictions in which we do business to determine solvency and compliance with state insurance laws and regulations. We are also subject to various federal securities laws and regulations. LEGAL MATTERS The legal matters in connection with the policy described in this prospectus have been passed on by the General Counsel of Security Life. Sutherland Asbill & Brennan LLP has provided advice on certain matters relating to the federal securities laws. LEGAL PROCEEDINGS Security Life, as an insurance company, is ordinarily involved in litigation. We do not believe that any current litigation is material to Security Life's ability to meet its obligations under the policy or to the variable account, and we do not expect to incur significant losses from such actions. ING America Equities, Inc., the principal underwriter and distributor of the policy, is not engaged in any litigation of any material nature. EXPERTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, and the financial statements of the Security Life Separate Account L1 at December 31, 1998, and for each of the three years in the period ended December 31, 1998, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given on the authority of such firm as experts in accounting and auditing. Actuarial matters in this prospectus have been examined by William J. Wagner, F.S.A., M.A.A.A., who is an Actuarial Officer of Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. REGISTRATION STATEMENT We have filed a Registration Statement relating to the Variable Account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. There is a charge for this material. - -------------------------------------------------------------------------------- Variable Survivorship 68 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1998 and 1997, and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and start on page 70. The financial statements included for the Security Life Separate Account L1 at December 31, 1998 and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statements included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Variable Survivorship 69 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Variable Survivorship 70 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ...............................................72 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................73 Consolidated Statements of Income ............................................75 Consolidated Statements of Comprehensive Income...............................76 Consolidated Statements of Stockholder's Equity ..............................77 Consolidated Statements of Cash Flows ........................................78 Notes to Consolidated Financial Statements ...................................80 - -------------------------------------------------------------------------------- Variable Survivorship 71 [Logo of Ernst & Young LLP appears here] Report of Independent Auditors Board of Directors and Stockholder Security Life of Denver Insurance Company We have audited the accompanying consolidated balance sheets of Security Life of Denver Insurance Company (a wholly-owned subsidiary of ING America Insurance Holdings, Inc.) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Variable Survivorship 72 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1998 1997 -------------------------------- Assets Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost: 1998--$3,383,582; 1997--$3,007,012) $ 3,503,530 $3,152,355 Equity securities, at fair value (cost: 1998--$6,761; 1997--$6,754) 8,400 8,019 Mortgage loans on real estate 784,108 576,620 Investment real estate, at cost, less accumulated depreciation (1998--$706; 1997--$667) 1,740 1,767 Policy loans 925,623 875,405 Other long-term investments 17,671 14,307 Short-term investments 747 55,466 -------------------------------- Total investments 5,241,819 4,683,939 Cash 31,644 22,299 Accrued investment income 52,440 49,726 Reinsurance recoverable: Paid benefits 11,364 11,170 Unpaid benefits 24,312 14,988 Prepaid reinsurance premiums (Note 8) 3,329,901 2,744,863 Deferred policy acquisition costs (DPAC) 778,126 682,905 Property and equipment, at cost, less accumulated depreciation (1998--$25,981; 1997--$22,925) 36,141 37,943 Federal income tax recoverable (Note 9) -- 5,722 Indebtedness from related parties 4,339 2,443 Other assets 113,019 87,298 Separate account assets (Note 6) 423,474 263,035 -------------------------------- Total assets $10,046,579 $8,606,331 ================================
- -------------------------------------------------------------------------------- Variable Survivorship 73
DECEMBER 31 1998 1997 ----------------------------------------- Liabilities and stockholder's equity Liabilities: Future policy benefits: Life and annuity reserves $ 4,857,141 $4,328,577 Guaranteed investment contracts 3,210,012 2,634,654 Policyholders' funds 81,064 82,291 Advance premiums 272 365 Accrued dividends and dividends on deposit 21,268 21,129 Policy and contract claims 130,100 103,525 ----------- ---------- Total future policy benefits 8,299,857 7,170,541 Accounts payable and accrued expenses 108,165 99,335 Indebtedness to related parties 13,755 7,704 Long-term debt to related parties (Note 10) 100,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 5,387 5,128 Other liabilities 109,593 61,424 Federal income taxes payable (Note 9) 106 -- Deferred federal income taxes (Note 9) 60,062 53,829 Separate account liabilities (Note 6) 423,474 263,035 ----------- ---------- Total liabilities 9,120,399 7,735,996 Commitments and contingencies (Notes 8 and 13) Stockholder's equity (Note 11): Common stock, $20,000 par value: Authorized - 149 shares Issued and outstanding - 144 shares 2,880 2,880 Additional paid-in capital 315,722 315,722 Retained earnings 563,553 500,795 Accumulated other comprehensive income 44,025 50,938 ----------- ---------- Total stockholder's equity 926,180 870,335 ----------- ---------- Total liabilities and stockholder's equity $10,046,579 $8,606,331 =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 74 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Revenues: Traditional life insurance premiums $ 120,675 $ 122,429 $ 118,200 Universal life and investment product charges 229,226 217,108 202,081 Reinsurance premiums assumed 431,267 446,434 339,335 ----------- ----------- --------- 781,168 785,971 659,616 Reinsurance premiums ceded (143,211) (124,815) (117,880) ----------- ----------- --------- 637,957 661,156 541,736 Net investment income 361,996 340,898 312,121 Net realized gains on investments 10,818 28,645 4,770 Other revenues 11,771 6,743 526 ----------- ----------- --------- 1,022,542 1,037,442 859,153 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 239,921 299,305 235,828 Other benefits 77,209 79,849 71,939 Universal life and investment contracts: Interest credited to account balances 236,136 217,614 186,908 Death benefits incurred in excess of account balances 63,103 73,260 54,004 Increase in future policy benefits 102,875 72,685 121,946 Reinsurance recoveries (84,506) (98,376) (80,276) Product conversions 10,578 7,014 16,379 ----------- ----------- --------- 645,316 651,351 606,728 Expenses: Commissions 49,569 46,516 25,846 Insurance operating expenses 125,194 89,075 69,580 Amortization of deferred policy acquisition costs 105,639 116,495 94,685 ----------- ----------- --------- 925,718 903,437 796,839 ----------- ----------- --------- Income before federal income taxes 96,824 134,005 62,314 Federal income taxes (Note 9) 34,066 47,019 21,876 ----------- ----------- --------- Net income $ 62,758 $ 86,986 $ 40,438 =========== =========== =========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 75 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------------- Net income $ 62,758 $ 86,986 $ 40,438 -------- -------- -------- Other comprehensive income: Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (11,251) 28,367 (25,294) Reclassification adjustment for realized gains included in net income, net of tax (5,010) (4,601) (2,422) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 7,236 (37,522) 13,461 Reclassification effect on DPAC of realized gains and losses included in net income, net of tax 3,075 5,976 -- Net change in pension liability, net of tax (963) -- -- -------- -------- -------- Total other comprehensive income (6,913) (7,780) (14,255) -------- -------- -------- Comprehensive income $ 55,845 $ 79,206 $ 26,183 ======== ======== ========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 76 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ----------------------------------------- Common stock: Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880 ========= ========= ========= Additional paid-in capital: Balance at beginning of year $ 315,722 $ 302,722 $ 297,422 Capital contributions -- 13,000 5,300 --------- --------- --------- Balance at end of year $ 315,722 $ 315,722 $ 302,722 ========= ========= ========= Accumulated other comprehensive income: Net unrealized gains on investments: Balance at beginning of year $ 50,938 $ 58,718 $ 72,973 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (16,261) 23,766 (27,716) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 10,311 (31,546) 13,461 --------- --------- --------- Balance at end of year 44,988 50,938 58,718 Accumulated net pension liability: Balance at beginning of year -- -- -- Net change in pension liability, net of tax (963) -- -- --------- --------- --------- Balance at end of year (963) -- -- --------- --------- --------- Total accumulated other comprehensive income $ 44,025 $ 50,938 $ 58,718 ========= ========= ========= Retained earnings: Balance at beginning of year $ 500,795 $ 413,809 $ 373,371 Net income 62,758 86,986 40,438 --------- --------- --------- Balance at end of year $ 563,553 $ 500,795 $ 413,809 ========= ========= ========= Total stockholder's equity $ 926,180 $ 870,335 $ 778,129 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 77 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 -------------------------------------------------- Operating activities Net income $ 62,758 $ 86,986 $ 40,438 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 874,765 995,632 585,581 Net decrease (increase) in federal income taxes 12,061 (12,317) 78,668 Increase (decrease) in accounts payable and accrued expenses 55,361 21,033 (1,361) Increase in accrued interest on long-term debt 259 1,428 3,676 Increase in accrued investment income (2,714) (4,300) (7,294) (Increase) decrease in reinsurance recoverable (9,518) 3,733 (5,214) Increase in prepaid reinsurance premiums (585,038) (793,851) (336,053) Net realized investment gains (10,818) (28,645) (4,770) Depreciation and amortization expense 3,174 3,630 3,857 Policy acquisition costs deferred (184,993) (174,374) (152,299) Amortization of deferred policy acquisition costs 105,639 116,495 94,685 Increase in accrual for postretirement benefits 675 557 484 Other, net (7,053) 43,538 (15,539) --------- --------- --------- Net cash provided by operating activities 314,558 259,545 284,859 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 5,015,989 2,279,598 334,482 Equity securities 2,251 648 4,198 Maturities--fixed maturities 274,463 410,632 727,937 Purchases: Fixed maturities (5,670,994) (2,919,145) (1,522,369) Equity securities (2,089) (2,561) (428) Sale, maturity or repayment of investments: Mortgage loans on real estate 51,235 38,756 18,102 Investment real estate -- -- 1,354 Other long-term investments 10,678 2,002 --
- -------------------------------------------------------------------------------- Variable Survivorship 78 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1998 1997 1996 ---------------------------------------------- Investing activities (continued) Purchase or issuance of investments: Mortgage loans on real estate $(259,945) $(163,528) $(186,228) Investment real estate (13) (35) -- Policy loans, net (50,218) (80,094) (41,071) Other long-term investments (14,042) (5,248) 809 Short-term investments, net 55,115 (48,447) 3,942 Additions to property and equipment (1,418) (2,687) (4,482) Disposals of property and equipment 68 145 2,389 --------- --------- --------- Net cash used by investing activities (588,920) (489,964) (661,365) FINANCING ACTIVITIES Increase in indebtedness to related parties 29,156 5,217 42,206 Cash contributions from parent -- 13,000 5,300 Receipts from interest sensitive products credited to policyholder account balances 505,728 555,223 434,726 Return of policyholder account balances on interest sensitive policies (251,177) (334,543) (123,949) --------- --------- --------- Net cash provided by financing activities 283,707 238,897 358,283 --------- --------- --------- Net increase (decrease) in cash 9,345 8,478 (18,223) Cash at beginning of year 22,299 13,821 32,044 --------- --------- --------- Cash at end of year $ 31,644 $ 22,299 $ 13,821 ========= ========= =========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 79 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1998 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on two markets, the advanced market and reinsurance to other insurers. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest sensitive life, universal life and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - -------------------------------------------------------------------------------- Variable Survivorship 80 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the valuation for long-lived assets that are identified for disposal. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. This Statement is effective for years beginning after December 15, 1997, with the restatement of disclosures for prior periods provided for comparative purposes, unless prior period information is not readily available. During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive Income, which requires an entity to divide comprehensive income into net income and other comprehensive income in the period recognized. This Statement is effective for fiscal years beginning after December 15, 1997, with the restatement of prior period disclosures for comparative purposes. As a result of implementing this Statement, the Company has classified items of other comprehensive income by their nature in the statements of comprehensive income and the accumulated balance of other comprehensive income in the equity section of the balance sheet. This Statement affects the presentation of the financial statements, with no effect on the valuation of total stockholder's equity. - -------------------------------------------------------------------------------- Variable Survivorship 81 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PENDING ACCOUNTING STANDARDS During 1998, the FASB issued Statement No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, which establishes a new model for accounting and reporting for derivatives and hedging activities. Statement 133 requires all derivatives to be recognized on the balance sheet and measured at fair value. Based on the type of hedging relationship (fair value, cash flow, or foreign currency), Statement 133 requires the recognition of offsetting changes in value or cash flows of both the derivative and the hedged item in earnings in the same period. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in Statement 133 are included in earnings in the period of change. The implementation of this Statement is required for years beginning after June 15, 1999, and upon the initial application of the Statement all derivatives are required to be recognized in the balance sheet as either assets or liabilities and measured at fair value. The Company plans to adopt this Statement during 2000, and the effect of implementation on the Company's financial statements has not yet been determined. INVESTMENTS Investments are presented on the following bases: The carrying value of fixed maturities depends on the classification of the security: securities held-to-maturity, securities available-for-sale, and trading securities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, and deferred policy acquisition cost adjustments, reported net of tax as a component of other comprehensive income in stockholder's equity. - -------------------------------------------------------------------------------- Variable Survivorship 82 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance, including reinsurance assumed, universal life insurance (including interest sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business, have been deferred. Traditional life insurance acquisition costs are being amortized using assumptions consistent with those used in computing policy benefit reserves. The period of amortization is normally over the premium-paying period. In the case of policies with no first year premium, the period of amortization includes the first year, in addition to the premium-paying period. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting - -------------------------------------------------------------------------------- Variable Survivorship 83 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) rate) of expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to accumulated other comprehensive income in stockholder's equity. FUTURE POLICY BENEFITS Benefit reserves for traditional life insurance products (other than reinsurance assumed) are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on Company and industry experience. These assumptions include provisions for adverse deviation and are modified as necessary to reflect anticipated trends. Reserve interest assumptions are those deemed appropriate at the time of policy issue, and range from 3% to 7.5%. Policy benefit claims are charged to expense in the year that the claims are incurred. Benefit reserves for reinsurance assumed are computed using pricing assumptions with provisions for adverse deviation. Benefits for level-term reinsurance assumed are computed to recognize profits in proportion with revenue. Benefit reserves for all other reinsurance assumed are computed to recognize profits in proportion to the coverage provided. Benefit reserves for universal life-type policies (including fixed premium interest sensitive products) and investment products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred during the year in excess of related policy account balances. Interest crediting rates for universal life and investment products range from 3.80% to 7.81% during 1998, 4.60% to 7.81% during 1997, and 4.60% to 7.45% during 1996. Included in life and annuity reserves is an unearned revenue reserve that reflects the unamortized balance of excess heaped expense loads over ultimate renewal expense loads on universal life and investment products. These excess fees have been deferred and are being recognized in income over the periods benefitted, using the same assumptions and factors used to amortize deferred policy acquisition costs. - -------------------------------------------------------------------------------- Variable Survivorship 84 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POLICY AND CONTRACT CLAIMS The liabilities for unpaid claims include estimates of amounts due on reported claims and claims that have been incurred but were not reported as of December 31. Such estimates are based on actuarial projections applied to historical claim payment data and are considered reasonable and adequate to discharge the Company's obligations for claims incurred but unpaid as of December 31. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment are present and the estimated undiscounted cash flows are less than the assets' carrying value. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $5,816,000 and $6,074,000 at December 31, 1998 and 1997, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,233,000; $3,377,000; and $3,307,000 were incurred in 1998, 1997, and 1996, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - -------------------------------------------------------------------------------- Variable Survivorship 85 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH FLOW INFORMATION Cash includes cash on hand and demand deposits. Included as a component of operating activities is interest paid of $10,121,000; $10,110,000; and $1,016,000 for 1998, 1997, and 1996, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. - -------------------------------------------------------------------------------- Variable Survivorship 86 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1998 and 1997:
December 31, 1998 --------------------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 166,611 $ 3,829 $ 589 $ 169,851 States, municipalities and political subdivisions 23,368 959 1,803 22,524 Public utilities securities 172,968 4,885 904 176,949 Debt securities issued by foreign governments 952 -- -- 952 Corporate securities 1,251,462 46,292 23,512 1,274,242 Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295 Other asset-backed securities 635,539 19,968 3,578 651,929 Redeemable preferred stocks 312 42 -- 354 Derivatives hedging fixed maturities (Note 3) 312 6,434 312 6,434 ---------- -------- ------- ---------- Total fixed maturities 3,383,582 157,568 37,620 3,503,530 Preferred stocks (nonredeemable) 4,251 6 52 4,205 Common stocks 2,510 1,780 95 4,195 ---------- -------- ------- ---------- Total equity securities 6,761 1,786 147 8,400 ---------- -------- ------- ---------- Total $3,390,343 $159,354 $37,767 $3,511,930 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Variable Survivorship 87 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
December 31, 1997 ------------------------------------------------------ Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 -- -- 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Redeemable preferred stocks -- -- -- -- Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ---------- -------- ------- ---------- Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ---------- -------- ------- ---------- Total equity securities 6,754 1,513 248 8,019 ---------- -------- ------- ---------- Total $3,013,766 $163,138 $16,530 $3,160,374 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Variable Survivorship 88 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1998, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value ------------------------------ Available for sale: Due in one year or less $ 18,024 $ 18,156 Due after one year through five years 187,198 183,735 Due after five years through ten years 695,842 702,563 Due after ten years 714,609 740,418 ---------- ---------- 1,615,673 1,644,872 Mortgage-backed securities 1,132,058 1,200,295 Other asset-backed securities 635,539 651,929 Derivatives 312 6,434 ---------- ---------- Total available-for-sale $3,383,582 $3,503,530 ========== ========== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands): December 31, 1998 -------------------------------------------- Fixed Equity Total -------------------------------------------- Gross unrealized gains $ 157,568 $ 1,786 $ 159,354 Gross unrealized (losses) (37,620) (147) (37,767) --------- ------- --------- Net unrealized gains 119,948 1,639 121,587 Deferred income tax (41,982) (574) (42,556) --------- ------- --------- Net unrealized gains after taxes 77,966 1,065 79,031 Less: Balance at beginning of year 94,470 822 95,292 --------- ------- --------- Change in net unrealized gains (losses) $ (16,504) $ 243 $ (16,261) ========= ======= ========= - -------------------------------------------------------------------------------- Variable Survivorship 89 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) December 31, 1997 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 161,625 $ 1,513 $ 163,138 Gross unrealized (losses) (16,282) (248) (16,530) --------- ------- --------- Net unrealized gains 145,343 1,265 146,608 Deferred income tax (50,873) (443) (51,316) --------- ------- --------- Net unrealized gains after taxes 94,470 822 95,292 Less: Balance at beginning of year 71,237 289 71,526 --------- ------- --------- Change in net unrealized gains (losses) $ 23,233 $ 533 $ 23,766 ========= ======= ========= December 31, 1996 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 140,089 $ 822 $ 140,911 Gross unrealized (losses) (30,493) (376) (30,869) --------- ------- --------- Net unrealized gains 109,596 446 110,042 Deferred income tax (38,359) (157) (38,516) --------- ------- --------- Net unrealized gains after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 --------- ------- --------- Change in net unrealized gains (losses) $ (28,152) $ 436 $ (27,716) ========= ======= ========= As part of its overall investment management strategy, the Company has entered into agreements to purchase $79,175,000 in mortgage loans as of December 31, 1998. These agreements were settled during 1999. The Company had no agreements to sell securities at December 31, 1998. - -------------------------------------------------------------------------------- Variable Survivorship 90 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 --------------------------------------------- Fixed maturities $ 278,227 $ 259,936 $ 240,931 Mortgage loans on real estate 47,567 40,908 29,143 Policy loans 58,016 56,087 52,205 Other investments 2,911 3,159 2,197 --------- --------- --------- 386,721 360,090 324,476 Investment expenses (24,725) (19,192) (12,355) --------- --------- --------- Net investment income $ 361,996 $ 340,898 $ 312,121 ========= ========= ========= Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 ---------------------------------------------- Fixed maturities $ 9,691 $ 27,717 $4,540 Equity securities 168 (57) 79 Real estate and other 959 985 151 ------- -------- ------ Net realized gains on investments $10,818 $ 28,645 $4,770 ======= ======== ====== During 1998, 1997 and 1996, fixed maturities and marketable equity securities available-for-sale were sold with fair values at the date of sale of $5,018,240,000; $2,281,886,000 and $334,482,000, respectively. Gross gains of $44,314,000; $41,017,000 and $7,248,000 and gross losses of $34,455,000; $13,357,000 and $2,629,000 were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, bonds with an amortized cost of $29,081,000 and $28,434,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Variable Survivorship 91 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Variable Survivorship 92 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) The table below summarizes the Company's interest rate contracts at December 31, 1998 and 1997 (in thousands): December 31, 1998 ------------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ------------------------------------------------- Interest rate contracts: Swaps $ 767,873 $ (155) $(2,952) $(2,952) Swaps-affiliates 734,176 155 5,440 5,440 ---------- ------- ------- ------- Total swaps 1,502,049 -- 2,488 2,488 Caps owned 560,000 312 11 11 ---------- ------- ------- ------- Total caps owned 560,000 312 11 11 Floors owned 422,485 (72) 3,768 3,768 Floors owned-affiliates 8,485 72 167 167 ---------- ------- ------- ------- Total floors owned 430,970 -- 3,935 3,935 Options owned 418,300 5,268 2,664 2,664 Options owned-affiliates 418,300 (5,268) (2,664) (2,664) ---------- ------- ------- ------- Total options owned 836,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ========== ======= ======= ======= - -------------------------------------------------------------------------------- Variable Survivorship 93 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) December 31, 1997 ----------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ---------------------------------------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 ---------- ------- ------- ------- Total swaps 1,793,375 -- 804 804 Caps owned 760,000 986 766 766 ---------- ------- ------- ------- Total caps owned 760,000 986 766 766 Floors owned 354,000 311 1,730 1,730 Floors owned-affiliates -- -- -- -- ---------- ------- ------- ------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 Options owned-affiliates 384,300 (6,192) (4,312) (4,312) ---------- ------- ------- ------- Total options owned 768,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300 ========== ======= ======= ======= 4. CONCENTRATIONS OF CREDIT RISK At December 31, 1998, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $277,793,000. These holdings amounted to 7.9% of the Company's investments in fixed maturity securities and 2.8% of total assets. The holdings of less-than-investment-grade bonds are widely diversified and of satisfactory quality based on the Company's investment policies and credit standards. At December 31, 1998, the Company's mortgages involved a concentration of properties located in Florida (15.5%), Texas (9.7%), and Georgia (7.5%). The remaining mortgages relate to properties located in 35 other states. The portfolio is well diversified, covering many different types of income-producing properties on which the Company has first mortgage liens. The maximum mortgage outstanding on any individual property is $16,068,000. - -------------------------------------------------------------------------------- Variable Survivorship 94 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS PENSION PLANS AND POSTRETIREMENT BENEFITS The Company has a qualified noncontributory defined benefit retirement plan covering substantially all employees. In addition, the Company maintains a non-qualified unfunded Supplemental Employees' Retirement Plan (SERP). In addition to providing pension plans, the Company provides certain health care and life insurance benefits for retired employees. The funded status and the amounts recognized in the balance sheets for the defined benefit plans and other postretirement benefit plans are as follows (in thousands):
December 31 1998 1997 --------------------------------------- ---------------------------------- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement --------------------------------------- ---------------------------------- Projected benefit obligation $ (38,685) $ (8,320) $ (8,949) $(37,801) $(9,154) $ (7,590) Less plan assets at fair value 47,230 -- -- 40,150 -- -- ---------- ----------- --------- -------- ------- -------- Plan assets in excess (deficient) of projected benefit obligation $ 8,545 $ (8,320) $ (8,949) $ 2,349 $(9,154) $ (7,590) ========== =========== ========= ======== ======= ======== Net asset (liability) $ 1,240 $ (4,918) $ (12,044) $ 1,322 $(4,135) $(11,369) ========== =========== ========= ======== ======= ========
As of December 31, 1998 and 1997, the Company recognized an additional minimum net liability on the SERP of $1,482,000 and $3,848,000, respectively, as this plan is unfunded and the actuarial present value of accumulated benefit obligation exceeds the net pension liability. Prior to 1998, the change in the additional minimum net liability was reported in net income. Beginning in 1998, the change in the additional minimum net liability is recorded net of tax as a component of other comprehensive income directly in stockholder's equity, net of tax. - -------------------------------------------------------------------------------- Variable Survivorship 95 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The net periodic pension cost, employer contributions, plan participant contributions, and benefits paid for the defined benefit plans are as follows (in thousands):
1998 1997 1996 -------------------------------- --------------------------------- ---------------------------------- Qualified Post- Qualified Post- Qualified Post- Plan SERP Retirement Plan SERP Retirement Plan SERP Retirement -------------------------------- --------------------------------- ---------------------------------- Net periodic pension expense $ 82 $1,109 $893 $607 $1,502 $755 $ 390 $1,109 $669 Employer contributions -- 325 218 -- 317 198 -- 320 Not available Plan participants' contributions -- -- 77 -- -- 71 -- -- Not available Benefits paid 890 325 296 811 317 268 1,466 320 187
The information for employer and plan participant contributions to the postretirement plan for 1996 is not readily available. Assumptions used in accounting for the defined benefit plans as of December 31, 1998, 1997, and 1996 were as follows: 1998 1997 1996 ------------------------- Weighted-average discount rate 6.75% 7.25% 7.50% Rate of increase in compensation level 4.00% 4.25% 4.50% Expected long-term rate of return on assets 9.50% 9.50% 9.50% Plan assets of the defined benefit plans at December 31, 1998 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plan is 9.75% graded to 5.25% over 9 years. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1998 by $1,015,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $136,000. Decreasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1998 by $(862,000) and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $(113,000). - -------------------------------------------------------------------------------- Variable Survivorship 96 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% at December 31, 1998 and 7.50% at December 31, 1997 and December 31, 1996. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution plan which is available to substantially all home office employees. Participants may make contributions to the plan through salary reductions up to a maximum of $10,000 for 1998, and $9,500 for both 1997 and 1996. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participants' contributions, plus 50% of contributions which exceed 3% of participants' compensation, subject to a maximum matching percentage of 4 1/2% of the individual's salary. Company matching contributions were $1,343,000 for 1998, $1,211,000 for 1997, and $1,143,000 for 1996. Plan assets of the Savings Plan at December 31, 1998 are invested in a group deposit administration contract (the Contract) with the Company, various stock funds maintained by the Principal Financial Group, and loans to participants. The Contract is a policyholder liability of the Company and had a balance of $27.8 million and $26.6 million at December 31, 1998 and 1997, respectively. 6. SEPARATE ACCOUNTS Separate account assets and liabilities represent funds segregated by the Company for the benefit of certain policy and contract holders who bear the investment risk. Revenues and expenses on the separate account assets and related liabilities equal the benefits paid to the separate account policy and contract holders, and are excluded from the amounts reported in the consolidated statements of income except for fees charged for administration services and mortality risk. - -------------------------------------------------------------------------------- Variable Survivorship 97 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. LEASES In 1997, the Company terminated a significant operating lease agreement relating to electronic data processing equipment due to outsourcing of computer operations. The Company incurred $4,819,000 in lease expense in 1997 related to that agreement prior to termination. The Company does not have any other significant lease obligations. Total rental expense for all equipment leases was approximately $0, $4,993,000 and $6,151,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1998, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion retroceded. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from retrocessionaire insolvencies, the Company evaluates the financial condition of the retrocessionaire and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The use of reinsurance pools with retrocessionaires also minimizes the Company's exposure to significant losses from retrocessionaire insolvencies. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. As of December 31, 1998, $2.7 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Variable Survivorship 98 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE (CONTINUED) These GIC transactions are summarized as follows (in thousands):
1998 1997 ------------------------------------------------------------ Policy Policy Deposits Liabilities Deposits Liabilities ------------------------------------------------------------ Direct (nonaffiliated) $ 2,773,952 $ 3,112,460 $ 1,673,471 $2,527,957 Assumed from Life Insurance Company of Georgia -- 97,552 35,000 106,698 ----------- ----------- ----------- --------- 2,773,952 3,210,012 1,708,471 2,634,655 Ceded to Columbine Life Insurance Company (2,547,743) (2,696,409) (1,479,371) (2,231,118) Ceded to Life Insurance Company of Georgia (225,083) (512,477) (116,100) (403,537) Ceded to First Columbine Life Insurance Company (1,126) (1,126) -- -- ----------- ----------- ----------- --------- Net $ -- $ -- $ 113,000 $ -- =========== =========== =========== ==========
Ceded GIC policy liabilities totaling $3,210 and $2,635 million as of December 31, 1998 and 1997, respectively, are classified as part of prepaid reinsurance premiums. During 1998 and 1997, the Company had ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "financial reinsurance," represent financial arrangements and, in accordance with generally accepted accounting principles, are not reflected in the accompanying financial statements except for the risk fees paid to or received from reinsurers. Financial reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1998, the Company entered into a new financial reinsurance contract with an affiliated company. 9. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Variable Survivorship 99 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31 1998 1997 ------------------------ Deferred tax liabilities: Deferred policy acquisition costs $(272,970) $(239,678) Unrealized gains/losses (42,556) (51,312) --------- --------- Total deferred tax liabilities (315,526) (290,990) Deferred tax assets: Benefit reserves and surplus relief 102,177 111,610 Tax-basis deferred policy acquisition costs 83,836 71,241 Investment income 13,712 13,459 Unearned investment income -- 9,208 Nonqualified deferred compensation 14,667 14,129 Postretirement employee benefits 2,501 3,979 Separate accounts 18,775 8,571 Other, net 19,796 4,964 --------- --------- Total deferred tax assets 255,464 237,161 --------- --------- Net deferred tax liabilities $ (60,062) $ (53,829) ========= ========= The components of federal income tax expense consist of the following (in thousands): December 31 1998 1997 1996 --------------------------------- Current $24,111 $37,542 $10,340 Deferred 9,955 9,477 11,536 ------- ------- ------- Federal income tax expense $34,066 $47,019 $21,876 ======= ======= ======= The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Variable Survivorship 100 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) The Company had net income tax payments (receipts) of $18,283,000 during 1998, $55,468,000 during 1997, and $(61,467,000) during 1996 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the stockholder exceed amounts in the Stockholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 10. LONG-TERM DEBT Long-term indebtedness to related parties for $100,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1998. This subordinated note bears interest at a variable rate equal to the prevailing rate for 10-year U.S. Treasury Bonds plus 1/4% adjusted annually. The repayment of this note requires approval of the Commissioner of Insurance of the State of Colorado and is payable only out of surplus funds of the Company and only at such time as the surplus of the Company, after payment is made, does not fall below the prescribed level. The principal and interest is scheduled to be repaid in five annual installments beginning April 15, 2000 and continuing through April 15, 2004, with the option of prepaying any outstanding principal and accrued interest. As of December 31, 1998, the Company accrued interest of $5,387,000. Upon receiving approval from the Commissioner of Insurance of the State of Colorado, the Company made a $5,128,000 payment for accrued interest during 1998. The Company recognized interest expense of $5,387,000; $5,096,000; and $3,644,000 for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- Variable Survivorship 101 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. LONG-TERM DEBT (CONTINUED) Future minimum payments, assuming a current effective interest rate of 5.41%, are as follows (in thousands): Total YEAR Payments - --------------------------------------------------------- 2000 $ 25,946 2001 25,946 2002 25,946 2003 25,946 2004 25,946 -------- Total 129,730 Less imputed interest (29,730) -------- Present value of payments $100,000 ============= 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES Security Life and its insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by their state of domicile. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within the state, and may change in the future. During 1998, the NAIC completed the process of codifying statutory accounting practices ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that Security Life uses to prepare its statutory-basis financial statements. Codification will require adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domiciled within those states. Accordingly, before Codification becomes effective for Security Life, the State of Colorado must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Department. At this time it is unknown whether the State of Colorado will adopt Codification. - -------------------------------------------------------------------------------- Variable Survivorship 102 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1998, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $386,607,000 and $403,239,000 at December 31, 1998 and 1997, respectively. Combined net income, determined in accordance with SAP, was $11,712,000; $22,261,000; and $9,141,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1998. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Variable Survivorship 103 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Variable Survivorship 104 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are summarized below (in thousands):
December 31, 1998 December 31, 1997 ----------------------------- ------------------------------ Carrying Carrying Amount Fair Value Amount Fair Value ----------------------------- ------------------------------ Assets Fixed maturities (Note 2) $3,503,530 $3,503,530 $3,152,355 $3,152,355 Equity securities (Note 2) 8,400 8,400 8,019 8,019 Mortgage loans 784,108 832,629 576,620 630,019 Policy loans 925,623 925,623 875,405 875,405 Short-term investments 747 747 55,466 55,466 Cash 31,644 31,644 22,299 22,299 Indebtedness from related parties 4,339 4,339 2,443 2,443 Separate account assets 423,474 423,474 263,035 263,035 LIABILITIES Supplemental contracts without life contingencies 3,966 3,966 4,240 4,240 Other policyholder funds left on deposit 98,638 98,638 99,545 99,545 Individual and group annuities, net of reinsurance 87,096 86,007 43,313 43,077 Indebtedness to related parties 13,755 13,755 7,704 7,704 Long-term debt to related parties 100,000 100,000 75,000 75,000 Accrued interest on long-term debt to related parties 5,387 5,387 5,128 5,128 Separate account liabilities 423,474 423,474 263,035 263,035
- -------------------------------------------------------------------------------- Variable Survivorship 105 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair values. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 4.5% - 14.0% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Variable Survivorship 106 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's deferred annuity contracts are estimated based on the cash surrender value. The carrying values of other liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies and premium deposits, approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS: The Company accepted additional deposits on existing synthetic guaranteed investment contracts in the amounts of $66,480,000 and $1,000,000 in 1998 and 1997, respectively, from trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such assets had a value of $433,689,000 and $493,757,000 at December 31, 1998 and 1997, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT The Company is the beneficiary of letters of credit totaling $197,254,000 which have a market value to the Company of $0 and two lines of credit totaling $284,471,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Variable Survivorship 107 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) In 1998, the Company established an accrued liability of $40,000,000 related to certain potential litigation similar to that faced by other major life insurers. This litigation relates to sales practices of interest sensitive policies. The Company is vigorously defending its position in these cases. No such litigation reserve was established in 1997. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. 14. OTHER FINANCING ARRANGEMENTS The Company has a $144,471,000 line of credit issued by the Company's parent to provide short-term liquidity. The Company has an additional non-affiliated line of credit of $140,000,000, also to provide short-term liquidity, which expires July 31, 1999. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1998 or 1997. The weighted-average balance outstanding of short-term debt was $37.5 million during 1998. The weighted-average interest rate paid on this debt during 1998 was 5.63% (see Note 12). The Company is the beneficiary of letters of credit totaling $197,254,000 that were established in accordance with the terms of reinsurance agreements. Such letters of credit are unconditional, irrevocable, and provide for automatic renewal for the following year at December 31. The letters were unused during both 1998 and 1997. 15. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare its computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed modification and preliminary testing of portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $6.4 million. To date the Company has incurred approximately $2.6 million for the above activities. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. - -------------------------------------------------------------------------------- Variable Survivorship 108 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. YEAR 2000 (UNAUDITED) (CONTINUED) The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Variable Survivorship 109 Financial Statements Security Life Separate Account L1 of Security Life of Denver Insurance Company Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Variable Survivorship 110 Security Life Separate Account L1 Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................112 Audited Financial Statements Statement of Net Assets .....................................................113 Statements of Operations ....................................................120 Statements of Changes in Net Assets .........................................139 Notes to Financial Statements ...............................................158 - -------------------------------------------------------------------------------- Variable Survivorship 111 [Logo of Ernst & Young LLP appears here] Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Divisions) ("NB"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged AllCap Divisions) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Divisions) ("Fidelity"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Industrial Income, High Yield, Utilities and Small Company Growth Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide Balanced, Worldwide Hard Assets, Worldwide Bond, Worldwide Emerging Markets and Worldwide Real Estate Divisions) ("Van Eck") and AIM Advisors, Inc. (comprising the Capital Appreciation and Government Securities Divisions) ("AIM")) as of December 31, 1998, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Life Separate Account L1 at December 31, 1998, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Variable Survivorship 112 Security Life Separate Account L1 Statement of Net Assets December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ----------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 113 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
NB ------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- ----------------- --------------- --------------- ------------- Assets Investments in mutual funds at market value (Note C) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- Net assets $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== Number of division units outstanding (Note G) 1,245,559.121 447,486.376 -- 986,298.018 ============== ============ =========== =========== Value per divisional unit $ 12.51 $ 20.17 $ -- $ 22.78 ============== ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 114 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------- ------------ Assets Investments in mutual funds at market value (Note C) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- Net assets $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- TOTAL POLICYHOLDER RESERVES $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== Number of division units outstanding (Note G) 838,692.418 402,532.472 923,696.066 221,642.446 =========== ========== =========== ========== Value per divisional unit $ 18.49 $ 22.91 $ 24.80 $ 30.69 =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 115 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Fidelity ---------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 600,255.213 1,293,480.338 1,429,659.907 1,526,404.399 3,215,990.519 =========== =========== =========== =========== =========== Value per divisional unit $ 17.05 $ 25.44 $ 14.40 $ 12.06 $ 26.79 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 116 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
INVESCO ---------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ---------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 450,557.216 473,616.752 486,858.648 110,379.616 67,506.441 =========== =========== =========== =========== =========== Value per divisional unit $ 17.99 $ 22.92 $ 16.19 $ 18.49 $ 11.09 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 117 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 0.000 132,513.824 18,656.317 67,354.295 8,765.232 =========== =========== =========== =========== =========== Value per divisional unit $ 0.00 $ 8.10 $ 11.03 $ 6.85 $ 8.70 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 118 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Assets Investments in mutual funds at market value (Note C) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- Net assets $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== Number of division units outstanding (Note G) 105,457.867 246,150.062 ========== ========== Value per divisional unit $ 11.42 $ 10.55 ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 119 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $17,747,833 $ 4,273,690 $ 4,617,072 $ 6,943,854 $1,625,860 $ 189,620 $ 97,737 Less valuation period deductions (Note B) 1,740,661 291,487 290,412 971,160 162,321 11,393 13,888 ----------- ----------- ----------- ----------- ---------- --------- -------- Net investment income (loss) 16,007,172 3,982,203 4,326,660 5,972,694 1,463,539 178,227 83,849 ----------- ----------- ----------- ----------- ---------- --------- -------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ----------- ----------- ----------- ----------- ---------- --------- -------- Net realized and unrealized gains (losses) on investments 27,303,251 (1,975,813) 7,511,094 21,633,430 604,461 (628,607) 158,686 ----------- ----------- ----------- ----------- ---------- --------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $43,310,423 $ 2,006,390 $11,837,754 $27,606,124 $2,068,000 $(450,380) $242,535 =========== =========== =========== =========== ========== ========= ========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 120 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
NB ------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,273,690 $ 409,268 $1,579,109 $ 136,565 $2,148,748 Less valuation period deductions (Note B) 291,487 87,183 52,660 3,213 148,431 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 3,982,203 322,085 1,526,449 133,352 2,000,317 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments (1,975,813) 69,372 (345,724) (114,848) (1,584,613) ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,006,390 $ 391,457 $1,180,725 $ 18,504 $ 415,704 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 121 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Alger ------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,617,072 $ 1,681,373 $ 593,045 $ 2,196,712 $ 145,942 Less valuation period deductions (Note B) 290,412 95,588 53,316 113,376 28,132 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 4,326,660 1,585,785 539,729 2,083,336 117,810 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 7,511,094 353,953 1,339,272 4,015,300 1,802,569 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $11,837,754 $ 1,939,738 $1,879,001 $ 6,098,636 $1,920,379 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 122 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Fidelity --------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 6,943,854 $ 808,986 $ 2,663,618 $ 1,015,626 $ 830,137 $ 1,625,487 Less valuation period deductions (Note B) 971,160 63,669 183,002 129,504 116,932 478,053 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 5,972,694 745,317 2,480,616 886,122 713,205 1,147,434 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 -- 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 -- 9,762,177 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 21,633,430 335,949 5,978,805 1,005,777 -- 14,312,899 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 27,606,124 $ 1,081,266 $ 8,459,421 $ 1,891,899 $ 713,205 $15,460,333 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 123 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 1,625,860 $ 312,534 $ 514,174 $ 769,805 $ 29,058 $ 289 Less valuation period deductions (Note B) 162,321 40,898 60,678 49,140 10,730 875 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 1,463,539 271,636 453,496 720,665 18,328 (586) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 604,461 210,162 701,861 (692,507) 317,745 67,200 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,068,000 $ 481,798 $ 1,155,357 $ 28,158 $ 336,073 $ 66,614 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 124 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 189,620 $ 45,674 $ 143,946 $ -- $ -- $ -- Less valuation period deductions (Note B) 11,393 1,050 8,170 212 1,736 225 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 178,227 44,624 135,776 (212) (1,736) (225) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments (628,607) (18,721) (557,808) 4,083 (54,296) (1,865) ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (450,380) $ 25,903 $ (422,032) $ 3,871 $ (56,032) $ (2,090) ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 125 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Investment income Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628 Less valuation period deductions (Note B) 13,888 3,056 10,832 ---------- ---------- ---------- Net investment income (loss) 83,849 24,053 59,796 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 158,686 115,910 42,776 ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 242,535 $ 139,963 $ 102,572 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 126 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck --------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,158,702 $ 678,740 $ 323,895 $ 2,094,346 $ 1,039,818 $ 21,903 Less valuation period deductions (Note B) 813,630 135,310 141,930 461,022 67,625 7,743 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 3,345,072 543,430 181,965 1,633,324 972,193 14,160 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 13,842,525 2,679,881 2,542,807 7,796,838 822,618 381 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 17,187,597 $ 3,223,311 $ 2,724,772 $ 9,430,162 $ 1,794,811 $ 14,541 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 127 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 678,740 $ 156,667 $ 183,497 $ 72,086 $ 266,490 Less valuation period deductions (Note B) 135,310 33,725 24,959 10,366 66,260 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 543,430 122,942 158,538 61,720 200,230 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 2,679,881 139,095 548,903 52,644 1,939,239 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,223,311 $ 262,037 $ 707,441 $ 114,364 $2,139,469 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 128 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------ Investment income Dividends from mutual funds $ 323,895 $ 218,789 $ 55,945 $ 49,161 $ -- Less valuation period deductions (Note B) 141,930 51,004 28,138 48,785 14,003 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 181,965 167,785 27,807 376 (14,003) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 2,542,807 598,169 474,852 1,207,783 262,003 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,724,772 $ 765,954 $ 502,659 $ 1,208,159 $ 248,000 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 129 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Fidelity ---------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 2,094,346 $ 204,696 $ 274,868 $ 451,874 $ 764,538 $ 398,370 Less valuation period deductions (Note B) 461,022 27,097 91,298 60,714 107,253 174,660 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 1,633,324 177,599 183,570 391,160 657,285 223,710 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 -- 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) -- 5,083,667 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 7,796,838 383,408 2,010,229 27,088 -- 5,376,113 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 9,430,162 $ 561,007 $ 2,193,799 $ 418,248 $ 657,285 $ 5,599,823 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 130 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO --------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 1,039,818 $ 76,461 $ 417,376 $ 519,369 $ 26,612 Less valuation period deductions (Note B) 67,625 12,921 27,525 23,478 3,701 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 972,193 63,540 389,851 495,891 22,911 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 822,618 249,670 441,718 16,568 114,662 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,794,811 $ 313,210 $ 831,569 $ 512,459 $ 137,573 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 131 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997 Van Eck ------------------------------------------ Total Worldwide Worldwide Van Eck Balanced Hard Assets ------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897 Less valuation period deductions (Note B) 7,743 3,329 4,414 ---------- ---------- ---------- Net investment income (loss) 14,160 5,677 8,483 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,541 $ 47,584 $ (33,043) ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 132 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck -------------------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 1,183,779 $ 292,143 $ 56,842 $ 593,973 $ 238,653 $ 2,168 Less valuation period deductions (Note B) 241,127 50,116 44,898 128,637 14,752 2,724 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,019,811 $ 885,779 $ 470,917 $ 2,299,336 $ 324,175 $ 39,604 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 133 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 292,143 $ 127,305 $ 76,287 $ 35,420 $ 53,131 Less valuation period deductions (Note B) 50,116 13,218 9,400 8,882 18,616 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 885,779 $ 68,196 $ 109,347 $ 30,848 $ 677,388 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 134 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less valuation period deductions (Note B) 44,898 18,457 7,398 16,087 2,956 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 470,917 $ 55,738 $ 102,371 $ 271,036 $ 41,772 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 135 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Fidelity ------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------- ------------- -------------- ------------- -------------- ------------- Investment income Dividends from mutual funds $ 593,973 $ 9,800 $ 109,786 $ 27,966 $ 246,349 $ 200,072 Less valuation period deductions (Note B) 128,637 3,818 25,455 16,972 35,006 47,386 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 -- 1,207,167 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,299,336 $ 76,955 $ 367,427 $ 283,758 $ 211,343 $ 1,359,853 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 136 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO ----------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ----------------------------------------------------------------------- Investment income Dividends from mutual funds $ 238,653 $ 25,285 $ 93,816 $ 114,676 $ 4,876 Less valuation period deductions (Note B) 14,752 3,402 4,272 6,357 721 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 223,901 21,883 89,544 108,319 4,155 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 324,175 $ 61,103 $ 113,391 $ 137,747 $ 11,934 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 137 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996 Van Eck ---------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ---------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less valuation period deductions (Note B) 2,724 1,304 1,420 ---------- ---------- ---------- Net investment income (loss) (556) (1,135) 579 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 39,604 $ 21,192 $ 18,412 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 138 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849 Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Increase (decrease) in net assets from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535 ------------ ----------- ----------- ------------ ----------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458 Cost of insurance and administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728) Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) -- -- Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295 Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 -- ------------ ----------- ----------- ------------ ----------- ---------- ---------- Increase (decrease) from principal transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Total increase (decrease) in net assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153 Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 -- ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 139 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- --------------- ------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $ 133,352 $2,000,317 Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 2,006,390 391,457 1,180,725 18,504 415,704 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335 Cost of insurance and administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287) Benefit payments (11,220) -- -- -- (11,220) Surrenders (725,767) (15,922) (419,497) (3,243) (287,105) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068 Other (87,331) (31,757) 3,226 (31,566) (27,234) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261 Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ -- $22,463,242 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 140 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Alger ---------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810 Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003 Cost of insurance and administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211) Benefit payments (26,492) (14,248) (12,244) -- -- Surrenders (859,454) (196,345) (376,263) (216,867) (69,979) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791 Other (18,626) (504) (14,286) 1,597 (5,433) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550 Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 141 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Fidelity ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 5,972,694 $ 745,317 $ $ 886,122 $ 713,205 $ 1,147,434 2,480,616 Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 -- 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 -- 9,762,177 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447 Cost of insurance and administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967) Benefit payments (259,989) -- (8,890) (8,379) (240,733) (1,987) Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066 Other 54,208 7,219 (14,128) (29,375) 39,827 50,665 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233 Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 142 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,463,539 $ 271,636 $ 453,496 $ 720,665 $ 18,328 $ (586) Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 2,068,000 481,798 1,155,357 28,158 336,073 66,614 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 8,092,294 2,104,849 3,170,236 2,297,048 435,105 85,056 Cost of insurance and administrative charges (1,481,570) (425,176) (567,563) (389,895) (87,692) (11,244) Benefit payments (9,161) -- (9,161) -- -- -- Surrenders (586,533) (56,509) (192,220) (329,292) (8,210) (302) Net transfers among divisions (including the loan division and Guaranteed interest division in the general account) 6,011,967 2,955,200 1,315,595 931,519 201,017 608,636 Other 9,107 556 22,617 (18,840) 4,856 (82) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 12,036,104 4,578,920 3,739,504 2,490,540 545,076 682,064 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 14,104,104 5,060,718 4,894,861 2,518,698 881,149 748,678 Net assets at beginning of year 15,526,649 3,044,610 5,958,144 5,364,084 1,159,811 -- ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 143 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Van Eck ------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bonds Markets Estate ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 178,227 $ 44,624 $ 135,776 $ (212) $ (1,736) $ (225) Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations (450,380) 25,903 (422,032) 3,871 (56,032) (2,090) ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 875,501 (1,347) 571,430 129,336 137,102 38,980 Cost of insurance and administrative charges (108,634) (9,423) (86,867) (1,544) (7,777) (3,023) Benefit payments -- -- -- -- -- -- Surrenders (15,198) (3,105) (11,871) -- -- (222) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 216,552 (399,466) 111,286 74,151 387,960 42,621 Other 1,060 90 1,059 (7) (97) 15 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 969,281 (413,251) 585,037 201,936 517,188 78,371 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 518,901 (387,348) 163,005 205,807 461,156 76,281 Net assets at beginning of year 1,298,098 387,348 910,750 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 144 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Increase (decrease) in net assets from operations 242,535 139,963 102,572 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments -- -- -- Surrenders (1,407) (1,407) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other -- -- -- ---------- ---------- ---------- Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ---------- ---------- ---------- Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year -- -- -- ---------- ---------- ---------- Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 145 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160 Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716 Cost of insurance and administrative charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222) Benefit payments (406,386) (20,591) (63,369) (322,263) (163) -- Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748 Other 5,891 9,817 11,046 (21,999) 11,180 (4,153) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067 Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $ 1,298,098 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 146 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ------------------------------------------------------------------------ Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230 Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 3,223,311 262,037 707,441 114,364 2,139,469 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680 Cost of insurance and administrative charges (957,887) (163,472) (219,117) (62,075) (513,223) Benefit payments (20,591) -- -- -- (20,591) Surrenders (146,698) (3,761) (71,838) (792) (70,307) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988 Other 9,817 (2,202) 11,700 (6,404) 6,723 ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739 Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $26,924,496 $ 6,675,166 $5,563,672 $ 893,677 $13,791,981 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 147 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003) Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 2,724,772 765,954 502,659 1,208,159 248,000 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316 Cost of insurance and administrative charges (1,466,664) (526,742) (299,891) (479,902) (160,129) Benefit payments (63,369) -- (62,593) (776) -- Surrenders (412,252) (255,386) (74,317) (58,850) (23,699) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582 Other 11,046 (6,069) 19,072 2,082 (4,039) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031 Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $ 9,616,179 $2,909,779 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 148 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710 Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 -- 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) -- 5,083,667 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968 Cost of insurance and administrative charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331) Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142) Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828 Other (21,999) 7,567 3,217 10,563 (35,219) (8,127) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072 Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 90,636,169 $ 6,137,073 $18,074,922 $12,225,779 $15,013,259 $39,185,136 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 149 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO ------------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------- --------------- --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 972,193 $ 63,540 $ 389,851 $ 495,891 $ 22,911 Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 1,794,811 313,210 831,569 512,459 137,573 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,683,620 517,831 1,250,551 835,890 79,348 Cost of insurance and administrative charges (614,145) (133,107) (266,208) (177,612) (37,218) Benefit payments (163) -- -- (163) -- Surrenders (112,699) (28,672) (37,810) (9,783) (36,434) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 7,796,299 1,498,300 2,804,344 2,695,587 798,068 Other 11,180 2,581 6,081 2,305 213 ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 9,764,092 1,856,933 3,756,958 3,346,224 803,977 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 11,558,903 2,170,143 4,588,527 3,858,683 941,550 Net assets at beginning of year 3,967,746 874,467 1,369,617 1,505,401 218,261 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $15,526,649 $ 3,044,610 $5,958,144 $ 5,364,084 $1,159,811 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 150 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 Van Eck -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments -- -- -- Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ---------- ---------- ---------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ---------- ---------- ---------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ---------- ---------- ---------- Net assets at end of year $1,298,098 $ 387,348 $ 910,750 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 151 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 4,019,811 885,779 470,917 2,299,336 324,175 39,604 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative charges (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) -- (9,457) (184) -- -- Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 57,856,827 $10,539,346 $11,356,089 $31,399,615 $ 3,967,746 $ 594,031 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 152 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
NB --------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative charges (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments -- -- -- -- -- Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $10,539,346 $ 2,492,076 $1,835,714 $ 1,548,314 $4,663,242 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 153 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------- Increase (decrease) in net assets OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative charges (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) -- -- (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $11,356,089 $ 4,332,108 $2,335,055 $ 3,814,178 $ 874,748 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 154 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative charges (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) -- -- -- -- (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $10,234,064 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 155 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ---------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ---------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 324,175 61,103 113,391 137,747 11,934 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative charges (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments -- -- -- -- -- Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $ 3,967,746 $ 874,467 $1,369,617 $ 1,505,401 $ 218,261 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 156 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996 Van Eck ----------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ----------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Increase in net assets from operations 39,604 21,192 18,412 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative charges (41,236) (29,480) (11,756) Benefit payments -- -- -- Surrenders (1,584) (1,584) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ---------- ---------- ---------- Increase from principal transactions 459,361 229,801 229,560 ---------- ---------- ---------- Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ---------- ---------- ---------- Net assets at end of year $ 594,031 $ 327,805 $ 266,226 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Variable Survivorship 157 Security Life Separate Account L1 Notes to Financial Statements December 31, 1998 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of December 31, 1998, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Variable Survivorship 158 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio INVESCO VIF Small Company Growth Portfolio Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold and Natural Resources Portfolio") Van Eck Worldwide Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio Effective May 1, 1997, the Divisions of the Separate Account investing in the Neuberger Berman Government Income Portfolio and the Van Eck Worldwide Balanced Portfolio stopped accepting new investments. These divisions were discontinued during 1998. Effective February 19, 1998, six new divisions became available to the policyholders for investment in the following funds: Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Small Company Growth Portfolio - -------------------------------------------------------------------------------- Variable Survivorship 159 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) The FirstLine and FirstLine policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Variable Survivorship 160 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A daily deduction, at an annual rate of .75% of the daily asset value of the Separate Account divisions, is charged to the Separate Account for mortality and expense risks assumed by the Company. Total mortality and expense charges for the years ended December 31, 1998, 1997 and 1996 were $1,740,661; $813,630 and $241,127, respectively. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Variable Survivorship 161 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS Fund shares are purchased at net asset value with net premiums (premium payments, less sales and tax loads charged by the Company) and divisional transfers from other divisions. Fund shares are redeemed for the payment of benefits, for surrenders, for transfers to other divisions, and for charges by the Company for certain cost of insurance and administrative charges. The cost of insurance and administrative charges for the years ended December 31, 1998, 1997 and 1996 were $14,458,798; $8,284,944 and $2,843,666, respectively. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of December 31, 1998:
Number Net Value of Asset of Shares Cost of FUND Shares Value at Market Shares - ---------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 1,127,232.206 $13.82 $ 15,578,349 $ 15,334,595 Growth 343,330.535 $26.29 9,026,160 8,510,696 Government Income -- $11.14 -- -- Partners 1,186,647.771 $18.93 22,463,242 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 352,589.754 $43.97 15,503,371 14,851,950 American MidCap Growth 319,369.785 $28.87 9,220,207 7,858,579 American Growth 430,357.281 $53.22 22,903,614 18,608,688 American Leveraged AllCap 194,880.482 $34.90 6,801,329 5,293,171 Fidelity Management & Research Co.: Asset Manager 563,726.801 $18.16 10,237,279 9,501,494 Growth 733,232.497 $44.87 32,900,142 26,845,882 Overseas 1,026,528.069 $20.05 20,581,887 19,913,166 Money Market 18,412,252.400 $1.00 18,412,252 18,412,252 Index 500 609,942.422 $141.25 86,154,369 70,067,500 INVESCO Funds Group, Inc.: Total Return 488,861.727 $16.58 8,105,328 7,814,990 Industrial Income 583,181.351 $18.61 10,853,005 10,163,306 High Yield 696,358.875 $11.32 7,882,782 8,752,765 Utilities 114,789.679 $17.78 2,040,960 1,727,429 Small Company Growth 64,989.440 $11.52 748,678 674,581 Van Eck Associates Corporation: Worldwide Balanced -- $12.03 -- -- Worldwide Hard Assets 116,712.440 $9.20 1,073,755 1,517,809 Worldwide Bond 16,759.491 $12.28 205,807 201,853 Worldwide Emerging Markets 64,769.133 $7.12 461,156 414,017 Worldwide Real Estate 7,995.940 $9.54 76,281 76,310 AIM Advisors, Inc.: Capital Appreciation 47,795.065 $25.20 1,204,436 1,085,211 Government Securities 232,175.030 $11.18 2,595,717 2,560,855 ----------------- ----------------- Total $305,030,106 $272,757,896 ================= =================
- -------------------------------------------------------------------------------- Variable Survivorship 162 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the year ended December 31, 1998, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
Beginning End FUND of Year Purchases Sales of Year - ------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $6,490,167 $11,289,258 ($2,444,830) $15,334,595 Growth 4,895,677 7,029,074 (3,414,055) 8,510,696 Government Income 833,365 137,502 (970,867) -- Partners 11,515,832 13,300,529 (2,245,564) 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 10,791,047 8,512,969 (4,452,066) 14,851,950 American MidCap Growth 4,680,691 5,007,799 (1,829,911) 7,858,579 American Growth 8,426,205 12,330,367 (2,147,884) 18,608,688 American Leveraged AllCap 2,939,669 4,357,148 (2,003,646) 5,293,171 Fidelity Management & Research Co.: Asset Manager 5,638,123 5,278,809 (1,415,438) 9,501,494 Growth 16,477,099 23,941,147 (13,572,364) 26,845,882 Overseas 12,237,937 23,905,882 (16,230,653) 19,913,166 Money Market 14,300,455 74,696,311 (70,584,514) 18,412,252 Index 500 32,789,297 45,050,855 (7,772,652) 70,067,500 INVESCO Funds Group, Inc.: Total Return 2,812,500 5,585,718 (583,228) 7,814,990 Industrial Income 5,602,678 5,964,437 (1,403,809) 10,163,306 High Yield 4,793,052 10,924,985 (6,965,272) 8,752,765 Utilities 1,129,569 919,214 (321,354) 1,727,429 Small Company Growth -- 775,726 (101,145) 674,581 Van Eck Associates Corporation: Worldwide Balanced 364,193 72,504 (436,697) -- Worldwide Hard Assets 959,451 1,175,104 (616,746) 1,517,809 Worldwide Bond -- 222,604 (20,751) 201,853 Worldwide Emerging Markets -- 771,909 (357,892) 414,017 Worldwide Real Estate -- 95,356 (19,046) 76,310 AIM Advisors, Inc. Capital Appreciation -- 1,174,137 (88,926) 1,085,211 Government Securities -- 2,744,143 (183,288) 2,560,855 --------------- ------------ -------------- ------------ Total $147,677,007 $265,263,487 ($140,182,598) $272,757,896 =============== ============ ============== ============
Aggregate proceeds from sales of investments for the year ended December 31, 1998 were $148,718,872. - -------------------------------------------------------------------------------- Variable Survivorship 163 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and Strategic Advantage products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and Strategic Advantage policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Variable Survivorship 164 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the year ended December 31, 1998:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - ----------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 552,985.394 801,233.327 (108,659.600) 1,245,559.121 Growth 316,146.084 250,854.619 (119,514.327) 447,486.376 Government Income 75,811.559 58.537 (75,870.096) -- Partners 626,285.721 455,096.290 (95,083.993) 986,298.018 Fred Alger Management, Inc.: American Small Capitalization 648,733.740 333,770.247 (143,811.569) 838,692.418 American MidCap Growth 288,809.482 167,037.228 (53,314.238) 402,532.472 American Growth 569,990.309 442,313.190 (88,607.433) 923,696.066 American Leveraged AllCap 148,542.639 102,168.282 (29,068.475) 221,642.446 Fidelity Management & Research Co.: Asset Manager 410,906.106 270,972.780 (81,623.673) 600,255.213 Growth 983,842.388 614,542.294 (304,904.344) 1,293,480.338 Overseas 950,328.899 861,220.218 (381,889.210) 1,429,659.907 Money Market 1,303,059.881 5,059,561.984 (4,836,217.466) 1,526,404.399 Index 500 1,863,056.104 1,617,935.444 (265,001.029) 3,215,990.519 INVESCO Funds Group, Inc.: Total Return 184,042.238 307,178.543 (40,663.565) 450,557.216 Industrial Income 297,553.033 216,644.366 (40,580.647) 473,616.752 High Yield 333,501.857 283,205.205 (129,848.414) 486,858.648 Utilities 78,118.685 41,701.114 (9,440.183) 110,379.616 Small Company Growth -- 71,535.065 (4,028.624) 67,506.441 Van Eck Associates Corporation: Worldwide Balanced 32,139.282 190.627 (32,329.909) -- Worldwide Hard Assets 77,046.773 68,491.375 (13,024.324) 132,513.824 Worldwide Bond -- 18,882.425 (226.108) 18,656.317 Worldwide Emerging Markets -- 105,064.405 (37,710.110) 67,354.295 Worldwide Real Estate -- 9,848.072 (1,082.840) 8,765.232 AIM Advisors, Inc.: Capital Appreciation -- 108,895.839 (3,437.972) 105,457.867 Government Securities -- 261,432.015 (15,281.953) 246,150.062
- -------------------------------------------------------------------------------- Variable Survivorship 165 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1997:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 218,725.891 334,572.082 (312.579) 552,985.394 Growth 133,567.983 187,433.957 (4,855.856) 316,146.084 Government Income 142,773.403 30,012.660 (96,974.504) 75,811.559 Partners 275,892.457 354,159.052 (3,765.788) 626,285.721 Fred Alger Management, Inc.: American Small Capitalization 297,073.322 368,659.345 (16,998.927) 648,733.740 American MidCap Growth 150,480.473 143,410.236 (5,081.227) 288,809.482 American Growth 282,175.287 292,019.948 (4,204.926) 569,990.309 American Leveraged AllCap 53,044.470 96,743.489 (1,245.320) 148,542.639 Fidelity Management & Research Co.: Asset Manager 123,908.168 294,115.342 (7,117.404) 410,906.106 Growth 470,285.667 522,440.765 (8,884.044) 983,842.388 Overseas 367,948.109 589,863.772 (7,482.982) 950,328.899 Money Market 753,707.969 6,017,484.702 (5,468,132.790) 1,303,059.881 Index 500 640,890.650 1,227,420.261 (5,254.807) 1,863,056.104 INVESCO Funds Group, Inc.: Total Return 64,490.483 121,436.060 (1,884.305) 184,042.238 Industrial Income 87,035.356 212,619.908 (2,102.231) 297,553.033 High Yield 108,999.107 225,144.290 (641.540) 333,501.857 Utilities 18,008.490 63,007.328 (2,897.133) 78,118.685 Van Eck Associates Corporation: Worldwide Balanced 29,808.787 5,838.562 (3,508.067) 32,139.282 Worldwide Hard Assets 21,966.093 55,323.208 (242.528) 77,046.773
- -------------------------------------------------------------------------------- Variable Survivorship 166 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1996:
(Decrease) for Outstanding Increase Withdrawals Outstanding at Beginning or Payments and Other at End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 162,009.578 57,300.933 (584.620) 218,725.891 Growth 60,162.107 74,132.806 (726.930) 133,567.983 Government Income 77,187.706 65,930.987 (345.290) 142,773.403 Partners 73,535.288 203,456.199 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 218,770.486 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 131,814.883 (1,027.270) 150,480.473 American Growth 69,805.233 214,057.614 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 51,210.999 (661.260) 53,044.470 Fidelity Management & Research Co.: Asset Manager 11,627.088 112,576.840 (295.760) 123,908.168 Growth 102,248.988 369,855.299 (1,818.620) 470,285.667 Overseas 93,906.733 275,584.696 (1,543.320) 367,948.109 Money Market 178,653.159 3,174,656.740 (2,599,601.930) 753,707.969 Index 500 91,903.027 551,031.963 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.664 52,659.359 (771.540) 64,490.483 Industrial Income 20,026.102 67,339.104 (329.850) 87,035.356 High Yield 45,708.358 63,646.889 (356.140) 108,999.107 Utilities 1,879.859 16,197.511 (68.880) 18,008.490 Van Eck Associates Corporation: Worldwide Balanced 7,739.274 22,412.363 (342.850) 29,808.787 Worldwide Hard Assets 1,765.913 20,257.020 (56.840) 21,966.093
- -------------------------------------------------------------------------------- Variable Survivorship 167 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1998 consisted of the following:
Accumulated Net Accumulated Net Realized Unrealized Investment Gains Gains Principal Income (Losses) On (Losses) On Division Transactions (Loss) Investments Investments Net Assets - ------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $ 14,798,256 $ 554,555 $ (18,215) $ 243,753 $ 15,578,349 Growth 7,028,181 1,750,191 (267,675) 515,463 9,026,160 Government Income (197,709) 219,245 (21,536) - - Partners 19,164,868 2,232,497 1,173,430 (107,553) 22,463,242 Fred Alger Management, Inc.: American Small Capitalization 12,782,408 1,740,285 329,258 651,420 15,503,371 American MidCap Growth 6,729,922 570,025 558,634 1,361,626 9,220,207 American Growth 15,328,177 2,102,491 1,178,019 4,294,927 22,903,614 American Leveraged AllCap 4,597,430 102,339 593,403 1,508,157 6,801,329 Fidelity Management & Research Co.: Asset Manager 8,511,070 928,642 61,784 735,783 10,237,279 Growth 21,880,758 2,745,144 2,220,029 6,054,211 32,900,142 Overseas 17,959,130 1,286,196 667,842 668,719 20,581,887 Money Market 16,762,206 1,650,046 - - 18,412,252 Index 500 63,645,284 1,521,424 4,900,792 16,086,869 86,154,369 INVESCO Funds Group, Inc.: Total Return 7,241,724 359,909 213,358 290,337 8,105,328 Industrial Income 8,730,383 941,544 491,379 689,699 10,853,005 High Yield 7,183,287 1,366,993 202,483 (869,981) 7,882,782 Utilities 1,554,382 45,485 127,560 313,533 2,040,960 Small Company Growth 682,064 (586) (6,898) 74,098 748,678 Van Eck Associates Corporation: Worldwide Balanced (94,857) 49,411 45,446 - - Worldwide Hard Assets 1,509,491 144,822 (136,502) (444,056) 1,073,755 Worldwide Bond 201,935 (212) 130 3,954 205,807 Worldwide Emerging Markets 517,189 (1,736) (101,436) 47,139 461,156 Worldwide Real Estate 78,370 (225) (1,836) (28) 76,281 AIM Advisors, Inc.: Capital Appreciation 1,064,475 24,052 (3,314) 119,223 1,204,436 Government Securities 2,493,145 59,796 7,914 34,862 2,595,717 ------------ ----------- ----------- ----------- ------------ Total $240,151,569 $20,392,333 $12,214,049 $32,272,155 $305,030,106 ============ =========== =========== =========== ============
- -------------------------------------------------------------------------------- Variable Survivorship 168 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer software systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Variable Survivorship 169 APPENDIX A FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained Age of Younger Factor Age of Younger Age of Younger Age of Younger Insured Insured Factor Insured Factor Insured Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Variable Survivorship 170 APPENDIX B ENHANCED DEATH BENEFIT CORRIDOR FACTORS FOR THE GUIDELINE PREMIUM/CASH VALUE CORRIDOR TEST FOR A LIFE INSURANCE POLICY
Attained Attained Attained Attained Age of Younger Factor Age of Younger Age of Younger Age of Younger Insured Insured Factor Insured Factor Insured Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.09 5 2.50 30 2.50 55 1.50 80 1.14 6 2.50 31 2.50 56 1.46 81 1.18 7 2.50 32 2.50 57 1.42 82 1.22 8 2.50 33 2.50 58 1.38 83 1.26 9 2.50 34 2.50 59 1.34 84 1.31 10 2.50 35 2.50 60 1.30 85 1.35 11 2.50 36 2.50 61 1.28 86 1.33 12 2.50 37 2.50 62 1.26 87 1.31 13 2.50 38 2.50 63 1.24 88 1.29 14 2.50 39 2.50 64 1.22 89 1.27 15 2.50 40 2.50 65 1.20 90 1.26 16 2.50 41 2.43 66 1.19 91 1.24 17 2.50 42 2.36 67 1.18 92 1.22 18 2.50 43 2.29 68 1.17 93 1.19 19 2.50 44 2.22 69 1.16 94 1.16 20 2.50 45 2.15 70 1.15 95 1.12 21 2.50 46 2.09 71 1.13 96 1.11 22 2.50 47 2.03 72 1.11 97 1.09 23 2.50 48 1.97 73 1.09 98 1.06 24 2.50 49 1.91 74 1.07 99 1.03 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Variable Survivorship 171 APPENDIX C PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each division of the variable account affects the cash surrender value, account value and death benefit of a policy. These hypothetical illustrations are based on the actual historical return of each portfolio as if a policy had been issued on the date indicated. Each portfolio's annual total return is based on the total return calculated for each fiscal year. These annual total return figures reflect the net portfolio's management fees after any voluntary waiver and other operating expenses but do not reflect the policy level or variable account asset-based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $13,000 annual premium, paid at the beginning of each year, for a hypothetical policy with a $1,000,000 face amount, the guideline premium test, death benefit option 1, issued to a preferred, non-smoker male, age 50 and a preferred, non-smoker female, age 50. It is assumed that all premiums are allocated to the division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the variable account for mortality and expense risks, and each portfolio's charges and expenses. SEE CHARGES, DEDUCTIONS AND REFUNDS, PAGE 51. This prospectus also contains illustrations based on assumed rates of return. SEE ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES AND ACCUMULATED PREMIUMS, PAGE 61. - -------------------------------------------------------------------------------- Variable Survivorship 172 HYPOTHETICAL ILLUSTRATIONS Non-smoker Male Age 50 Preferred Risk Class Non-smoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- AIM V.I. CAPITAL APPRECIATION FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 2,151 11,036 1,000,000 12/31/95 35.69% 20,673 29,559 1,000,000 12/31/96 17.58% 38,171 47,056 1,000,000 12/31/97 13.51% 56,208 65,093 1,000,000 12/31/98 19.30% 80,917 89,802 1,000,000 AIM V.I. GOVERNMENT SECURITIES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (3.73)% 1,450 10,335 1,000,000 12/31/95 15.56% 15,397 24,282 1,000,000 12/31/96 2.29% 26,616 35,501 1,000,000 12/31/97 8.16% 40,703 49,589 1,000,000 12/31/98 7.66% 55,522 64,407 1,000,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 2,336 11,221 1,000,000 12/31/91 40.39% 21,976 30,861 1,000,000 12/31/92 12.38% 37,516 46,401 1,000,000 12/31/93 22.47% 60,600 69,485 1,000,000 12/31/94 1.45% 71,811 80,696 1,000,000 12/31/95 36.37% 117,130 124,238 1,000,000 12/31/96 13.35% 146,812 152,143 1,000,000 12/31/97 25.75% 200,125 203,679 1,000,000 12/31/98 48.07% 313,916 315,693 1,000,000 ALGER AMERICAN LEVERAGED ALLCAP PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 3,226 12,111 1,000,000 12/31/97 19.68% 18,394 27,279 1,000,000 12/31/98 57.83% 50,930 59,815 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 173 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 50 Preferred Risk Class Non-smoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 1,696 10,581 1,000,000 12/31/95 44.45% 21,969 30,854 1,000,000 12/31/96 11.90% 37,307 46,192 1,000,000 12/31/97 15.01% 56,090 64,976 1,000,000 12/31/98 30.30% 89,105 97,990 1,000,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 9,158 18,043 1,000,000 12/31/90 8.71% 22,242 31,127 1,000,000 12/31/91 57.54% 56,838 65,723 1,000,000 12/31/92 3.55% 69,632 78,518 1,000,000 12/31/93 13.28% 91,451 100,336 1,000,000 12/31/94 (4.38)% 98,461 105,569 1,000,000 12/31/95 44.31% 161,802 167,133 1,000,000 12/31/96 4.18% 180,581 184,135 1,000,000 12/31/97 11.39% 213,927 215,704 1,000,000 12/31/98 15.53% 259,929 259,929 1,000,000 FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 31.51% 5,425 14,310 1,000,000 12/31/90 (11.73)% 13,018 21,903 1,000,000 12/31/91 45.51% 38,443 47,328 1,000,000 12/31/92 9.32% 54,078 62,963 1,000,000 12/31/93 19.37% 78,445 87,331 1,000,000 12/31/94 (0.02)% 90,393 97,501 1,000,000 12/31/95 35.36% 140,552 145,883 1,000,000 12/31/96 14.71% 175,056 178,611 1,000,000 12/31/97 23.48% 230,639 232,416 1,000,000 12/31/98 39.49% 337,128 337,128 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 174 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 50 Preferred Risk Class Non-smoker 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 Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/89 9.12% 2,897 11,782 1,000,000 12/31/90 8.04% 15,332 24,218 1,000,000 12/31/91 6.09% 27,888 36,774 1,000,000 12/31/92 3.90% 40,039 48,924 1,000,000 12/31/93 3.23% 52,166 61,051 1,000,000 12/31/94 4.25% 67,385 74,493 1,000,000 12/31/95 5.87% 84,445 89,776 1,000,000 12/31/96 5.41% 101,807 105,361 1,000,000 12/31/97 5.51% 119,987 121,764 1,000,000 12/31/98 5.46% 138,853 138,853 1,000,000 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 26.28% 4,834 13,719 1,000,000 12/31/90 (1.67)% 14,997 23,883 1,000,000 12/31/91 8.00% 28,202 37,087 1,000,000 12/31/92 (10.72)% 33,350 42,235 1,000,000 12/31/93 37.35% 63,435 72,320 1,000,000 12/31/94 1.72% 76,942 84,050 1,000,000 12/31/95 9.74% 98,161 103,493 1,000,000 12/31/96 13.15% 124,999 128,553 1,000,000 12/31/97 11.56% 152,694 154,471 1,000,000 12/31/98 12.75% 185,110 185,110 1,000,000 FIDELITY VIP II ASSET MANAGER PORTFOLIO Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/90 6.72% 2,626 11,512 1,000,000 12/31/91 22.56% 18,334 27,219 1,000,000 12/31/92 11.71% 33,197 42,082 1,000,000 12/31/93 21.23% 54,692 63,577 1,000,000 12/31/94 (6.09)% 60,262 69,147 1,000,000 12/31/95 16.96% 85,943 93,051 1,000,000 12/31/96 14.60% 113,014 118,345 1,000,000 12/31/97 20.65% 151,354 154,908 1,000,000 12/31/98 15.05% 187,651 189,428 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 175 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 50 Preferred Risk Class Non-smoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/93 9.74% 2,967 11,852 1,000,000 12/31/94 1.04% 13,798 22,683 1,000,000 12/31/95 37.19% 36,761 45,646 1,000,000 12/31/96 22.82% 59,880 68,765 1,000,000 12/31/97 32.82% 96,010 104,895 1,000,000 12/31/98 28.31% 140,573 147,682 1,000,000 INVESCO VIF-EQUITY INCOME FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 5,169 14,054 1,000,000 12/31/96 22.28% 21,357 30,243 1,000,000 12/31/97 28.17% 43,336 52,221 1,000,000 12/31/98 15.30% 63,157 72,042 1,000,000 INVESCO VIF-HIGH YIELD FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 4,097 12,982 1,000,000 12/31/96 16.59% 18,683 27,568 1,000,000 12/31/97 17.33% 35,751 44,636 1,000,000 12/31/98 1.42% 46,773 55,659 1,000,000 INVESCO VIF-SMALL COMPANY GROWTH FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 16.38% 3,716 12,601 1,000,000 INVESCO VIF-TOTAL RETURN FUND Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/95 22.79% 4,439 13,325 1,000,000 12/31/96 12.18% 17,999 26,885 1,000,000 12/31/97 22.91% 37,070 45,955 1,000,000 12/31/98 9.56% 52,724 61,609 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 176 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 50 Preferred Risk Class Non-smoker 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 Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 2,892 11,778 1,000,000 12/31/96 12.76% 16,410 25,295 1,000,000 12/31/97 23.41% 35,312 44,197 1,000,000 12/31/98 25.48% 59,578 68,463 1,000,000 NEUBERGER BERMAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 29.47% 5,194 14,079 1,000,000 12/31/90 (8.19)% 13,707 22,592 1,000,000 12/31/91 29.73% 34,127 43,012 1,000,000 12/31/92 9.54% 49,512 58,397 1,000,000 12/31/93 6.79% 64,336 73,221 1,000,000 12/31/94 (4.99)% 72,208 79,316 1,000,000 12/31/95 31.73% 112,839 118,170 1,000,000 12/31/96 9.14% 136,324 139,878 1,000,000 12/31/97 29.01% 191,467 193,244 1,000,000 12/31/98 15.53% 234,166 234,166 1,000,000 NEUBERGER BERMAN LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 10.77% 3,083 11,968 1,000,000 12/31/90 8.32% 15,597 24,482 1,000,000 12/31/91 11.34% 30,030 38,915 1,000,000 12/31/92 5.18% 42,885 51,771 1,000,000 12/31/93 6.63% 57,210 66,095 1,000,000 12/31/94 (0.15)% 69,215 76,323 1,000,000 12/31/95 10.94% 90,790 96,121 1,000,000 12/31/96 4.31% 107,272 110,826 1,000,000 12/31/97 6.74% 127,206 128,983 1,000,000 12/31/98 4.39% 144,919 144,919 1,000,000 NEUBERGER BERMAN PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 5,985 14,871 1,000,000 12/31/96 29.57% 24,245 33,130 1,000,000 12/31/97 31.25% 48,369 57,254 1,000,000 12/31/98 4.21% 61,375 70,260 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. * These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 177 HYPOTHETICAL ILLUSTRATION (Continued) Non-smoker Male Age 50 Preferred Risk Class Non-smoker Female Age 50 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $1,000,000 Annual Premium $13,000 - -------------------------------------------------------------------------------- VAN ECK WORLDWIDE BOND FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 3,137 12,022 1,000,000 12/31/91 18.39% 17,989 26,874 1,000,000 12/31/92 (5.25)% 26,394 35,279 1,000,000 12/31/93 7.79% 40,294 49,180 1,000,000 12/31/94 (1.32)% 49,699 58,584 1,000,000 12/31/95 17.30% 73,915 81,023 1,000,000 12/31/96 2.53% 88,240 93,571 1,000,000 12/31/97 2.38% 102,617 106,172 1,000,000 12/31/98 12.75% 129,295 131,072 1,000,000 VAN ECK WORLDWIDE EMERGING MARKETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 4,895 13,780 1,000,000 12/31/97 (11.61)% 12,583 21,469 1,000,000 12/31/98 (34.15)% 11,937 20,822 1,000,000 VAN ECK WORLDWIDE HARD ASSETS FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 1,540 10,425 1,000,000 12/31/92 (4.09)% 11,260 20,146 1,000,000 12/31/93 64.83% 41,942 50,827 1,000,000 12/31/94 (4.78)% 49,187 58,072 1,000,000 12/31/95 10.99% 66,881 75,766 1,000,000 12/31/96 18.04% 94,565 101,674 1,000,000 12/31/97 (1.67)% 104,541 109,872 1,000,000 12/31/98 (30.93)% 79,064 82,618 1,000,000 VAN ECK WORLDWIDE REAL ESTATE FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/98 (11.35)% 593 9,478 1,000,000 The assumptions underlying these values are described in Performance Information, page 172. *These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset-based charges and deductions which, if reflected, would result in lower total return figures than those shown. - -------------------------------------------------------------------------------- Variable Survivorship 178 -----END PRIVACY-ENHANCED MESSAGE-----