-----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, VE+CAy01eF/VovO8IzNtgNUCQPHP2rhwq9+ciaftjrv3oVucCnkAz0Srm4YKT+je pTd+2jRXB5b2+HPEgZoiSQ== 0000917677-99-000054.txt : 19991206 0000917677-99-000054.hdr.sgml : 19991206 ACCESSION NUMBER: 0000917677-99-000054 CONFORMED SUBMISSION TYPE: S-6/A PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 19991203 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-6/A SEC ACT: SEC FILE NUMBER: 333-90577 FILM NUMBER: 99768881 BUSINESS ADDRESS: STREET 1: 1290 BROADWAY STREET 2: C/O SECURITY LIFE CENTER CITY: DENVER STATE: CO ZIP: 80203 BUSINESS PHONE: 3038601290 MAIL ADDRESS: STREET 1: 1290 BROADWAY CITY: DENVER STATE: CO ZIP: 80203-5699 S-6/A 1 CBVUL PROSPECTUS As filed with the Securities and Exchange Commission on December 3, 1999 Registration No. 333-90577 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Pre-Effective Amendment No. 1 ----------------- SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices) Copy to: GARY W. WAGGONER, ESQ. KIMBERLY J. SMITH, ESQ. Security Life of Denver Insurance Company Sutherland Asbill & Brennan LLP 1290 Broadway 1275 Pennsylvania Avenue, NW Denver, Colorado 80203-5699 Washington, D.C. 20004-2415 (202) 383-0314 (Name and Address of Agent for Service) ---------------------------- Title of securities being registered: Corporate variable life insurance policies. Approximate date of proposed public offering: as soon as practicable after the effective date of this Registration Statement. The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. Form V-112-00 SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 333-90577) Cross-Reference Table Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 1, 2 Cover; Security Life of Denver Insurance Company; Security Life Separate Account L1 3 Inapplicable 4 Security Life of Denver Insurance Company 5, 6 Security Life Separate Account L1 7 Inapplicable 8 Financial Statements 9 Inapplicable 10(a),(b),(c),(d),(e) Policy Summary; Policy Values, Determining the Value in the Variable Division; Charges and Deductions; Surrender; Partial Withdrawals; The Guaranteed Interest Division; Transfers of Account Values; Right to Exchange Policy; Lapse; Reinstatement; Premiums 10(f) Voting Privileges; Right to Change Operations 10(g), (h) Right to Change Operations 10(i) Tax Considerations; Detailed Information about the Corporate Benefits Variable Universal Life Policy; General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges and Deductions; Group or Sponsored Arrangements or Corporate Purchasers ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look; General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values 17 Payment; Surrender; Partial Withdrawals 18 Policy Summary; Tax Considerations; Detailed Information about the Corporate Benefits Variable Universal Life Policy; Security Life Separate Account L1 19 Reports to Owners; Notification and Claims Procedures; Performance Information (Appendix B) 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Corporate Benefits Variable Universal Life Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 37 Inapplicable 38, 39, 40, 41(a) General Policy Provisions; Distribution of the Policies; Security Life of Denver Insurance Company 41(b), 41(c), 42, 43 Inapplicable 44 Determining the Value in the Variable Division; How We Calculate Accumulation Unit Values 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Corporate Benefits Variable Universal Life Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Corporate Benefits Variable Universal Life Policy 52 Determining the Value in the Variable Division; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements iv This information is subject to completion or change. An amended registration statement for these securities has been filed with the Securities and Exchange Commission. These securities may not be sold and offers to buy may not be accepted prior to the amended registration statement becoming effective. This prospectus is not an offer to sell and is not a solicitation of an offer to buy. There will be no sale of these securities in any state in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the laws of the state. Prospectus CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE UNIVERSAL LIFE INSURANCE POLICY issued by SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 Consider carefully the policy charges and deductions beginning on page 42 in this prospectus. You should read this prospectus and keep it for future reference. A prospectus for each underlying fund portfolio must accompany and should be read together with this prospectus. This policy is not available in all jurisdictions. This policy is not offered in any jurisdiction where this type of offering is not legal. Depending on the state where it is issued, policy features may vary. You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information that is different. Replacing your existing life insurance policy(ies) with this policy may not be beneficial to you. Your Policy o is a flexible premium variable universal life insurance policy o is issued by Security Life of Denver Insurance Company o is designed primarily for use on a multi-life basis when the insured people share a common employment or business relationship o is returnable by you during the free look period or right to examine policy period if you are not satisfied. Your Policy Premium Payments o are flexible, so the premium amount and frequency may vary o are allocated to variable investment options and the guaranteed interest division based on your instructions o are invested in shares of the underlying investment portfolios under each variable investment option o can be invested in up to eighteen investment options over the policy's lifetime. Your Account Value o is the sum of your holdings in the variable division, the guaranteed interest division and the loan division o has no guaranteed minimum cash value under the variable division. The value varies with the value of the underlying investment portfolio o has a minimum guaranteed rate of return if you have an amount in the guaranteed interest division and o is subject to various expenses and charges. Death Proceeds o are paid if the policy is in force when the insured person dies o are equal to the death benefit minus outstanding policy loans, accrued loan interest and unpaid charges incurred before the insured person dies o are calculated under your choice of options; * Option 1- a fixed minimum death benefit * Option 2- a stated death benefit plus your account value * Option 3- a stated death benefit plus the sum of the premiums you have paid minus partial withdrawals and o are generally not federally income taxed if your policy continues to meet the federal income tax definition of life insurance. NEITHER THE SEC NOR ANY STATE SECURITIES COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED THAT THIS PROSPECTUS IS ACCURATE OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS LIFE INSURANCE POLICY IS NOT A BANK DEPOSIT OR OBLIGATION, FEDERALLY INSURED, OR BACKED BY ANY BANK OR GOVERNMENTAL AGENCY. Date of Prospectus: December 3, 1999 Form V-112-00 Corporate Benefits Preliminary Prospectus Number:_____ ISSUED BY: Security Life of Denver UNDERWRITTEN BY: ING America Equities, Inc. Insurance Company 1290 Broadway Security Life Center Denver, CO 80203-5699 1290 Broadway (303) 860-2000 Denver, CO 80203-5699 (800) 525-9852
THROUGH ITS: Security Life Separate Account L1 ADMINISTERED BY: Customer Service Center P.O. Box 173888 Denver, CO 80217-3888 (800) 848-6362 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 2 TABLE OF CONTENTS POLICY SUMMARY.................................................................6 Your Policy...............................................................6 Free Look Period or Right to Examine Policy Period................................................................6 Your Policy Premiums......................................................6 Charges and Deductions....................................................7 Fees and Expenses of the Investment Portfolios............................8 Variable Division........................................................10 Policy Values............................................................10 Transfers of Account Value...............................................11 Special Policy Features..................................................11 Policy Modification, Termination and Continuation Features................................................11 Death Benefits...........................................................12 Tax Considerations.......................................................12 INFORMATION ABOUT SECURITY LIFE, THE SEPARATE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION........................................................12 Security Life of Denver Insurance Company................................12 Year 2000 Preparedness...................................................13 Security Life Separate Account L1........................................13 Objectives of the Investment Portfolios..................................14 The Guaranteed Interest Division.........................................18 Maximum Number of Investment Options.....................................19 DETAILED INFORMATION ABOUT THE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE POLICY....................................................19 Applying for a Policy....................................................19 Temporary Insurance......................................................20 Premiums.................................................................20 Premium Payments Affect Your Coverage....................................21 Death Benefits...........................................................22 Adjustable Term Insurance Rider..........................................26 Special Features.........................................................27 Policy Values............................................................28 Transfers of Account Value...............................................30 Dollar Cost Averaging....................................................30 Automatic Rebalancing....................................................31 Policy Loans.............................................................32 Partial Withdrawals......................................................33 Lapse....................................................................34 Reinstatement............................................................35 Surrender................................................................35 General Policy Provisions................................................35 Free Look Period or Right to Examine Policy Period...................35 Your Policy..........................................................36 Age ................................................................36 Ownership............................................................36 Beneficiary(ies).....................................................36 Collateral Assignment................................................37 Incontestability.....................................................37 Misstatements of Age or Gender.......................................37 Suicide..............................................................37 Transaction Processing...............................................37 Notification and Claims Procedures...................................38 Telephone Privileges.................................................38 Non-participation....................................................38 Distribution of the Policies.........................................38 Advertising Practices and Sales Literature...........................39 Settlement Provisions................................................39 Administrative Information About the Policy..............................40 CHARGES AND DEDUCTIONS........................................................42 Deductions from Premiums.................................................42 Deferred Sales Charge....................................................43 Monthly Deductions from Your Account Value ....................................................................44 Policy Transaction Fees..................................................45 Group or Sponsored Arrangements or Corporate Purchasers..................46 Other Charges............................................................46 TAX CONSIDERATIONS............................................................46 Tax Status of the Policy.................................................47 Diversification Requirements.............................................47 Tax Treatment of Policy Death Benefits...................................48 Modified Endowment Contracts.............................................48 Multiple Policies........................................................48 Distributions Other than Death Benefits from Modified Endowment Contracts.........................................48 Distributions Other than Death Benefits from Policies That Are Not Modified Endowment Contracts. .................48 Investment in the Policy.................................................49 Policy Loans.............................................................49 Section 1035 Exchanges...................................................49 Tax-exempt Policy Owners.................................................49 Possible Tax Law Changes.................................................49 Changes to Comply with the Law...........................................49 Other....................................................................50 ILLUSTRATIONS.................................................................51 ADDITIONAL INFORMATION........................................................65 Directors and Officers...................................................65 Regulation...............................................................68 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 3 Legal Matters............................................................68 Legal Proceedings........................................................68 Experts..................................................................68 Registration Statement...................................................68 FINANCIAL STATEMENTS..........................................................69 APPENDIX A...................................................................244 APPENDIX B...................................................................245 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 4 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.................................................................10 Accumulation unit.............................................................29 Accumulation unit value.......................................................29 Adjustable term insurance rider...............................................22 Age.......................................................................19, 36 Base death benefit............................................................24 Beneficiary(ies)..............................................................12 Customer service center........................................................2 Death proceeds................................................................24 Free look period..............................................................35 General account...............................................................13 Guaranteed interest division..................................................18 Initial premium...............................................................19 Insured.......................................................................19 Investment date...............................................................19 Investment options............................................................19 Loan division.................................................................10 Monthly processing date.......................................................25 Net account value.............................................................10 Net amount at risk............................................................10 Net premium...................................................................21 Owner.........................................................................36 Partial withdrawal............................................................33 Policy.....................................................................6, 13 Policy date...................................................................20 Policy loan...................................................................32 Portfolios....................................................................14 Rider.........................................................................26 Scheduled premium.............................................................20 Segment.......................................................................26 Separate account..............................................................13 Stated death benefit..........................................................19 Target death benefit..........................................................26 Target premium................................................................21 Total death benefit...........................................................26 Transaction date..............................................................29 Valuation date................................................................10 Valuation period..........................................................10, 29 Variable division.............................................................14 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 5 POLICY SUMMARY THIS SUMMARY HIGHLIGHTS SOME OF THE IMPORTANT POINTS ABOUT YOUR POLICY. THE POLICY IS MORE FULLY DESCRIBED IN THE ATTACHED, COMPLETE PROSPECTUS. PLEASE READ THE PROSPECTUS CAREFULLY. "WE," "US," "OUR," AND THE "COMPANY" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. "YOU" AND "YOUR" REFER TO THE POLICY OWNER. THE OWNER IS THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO MAY EXERCISE ALL RIGHTS OVER THE POLICY AND RECEIVE THE POLICY BENEFITS DURING THE INSURED PERSON'S LIFETIME. STATE VARIATIONS ARE COVERED IN A SPECIAL POLICY FORM FOR USE IN THAT STATE. THIS PROSPECTUS PROVIDES A GENERAL DESCRIPTION OF THE POLICY. YOUR ACTUAL POLICY AND RIDERS ARE THE CONTROLLING DOCUMENTS. IF YOU WOULD LIKE TO REVIEW A COPY OF THE POLICY AND RIDERS, CONTACT OUR CUSTOMER SERVICE CENTER. YOUR POLICY This policy is available only to groups of ten or more insured people. Generally, we require a minimum total group first year premium of at least $250,000. However, depending on underwriting circumstances, we may reduce the minimum total group first year premium in some cases. We generally require a minimum target death benefit of $50,000 per policy. We may reduce the minimum target death benefit if the average target death benefit at policy issuance for the group is at least $50,000. Your policy provides life insurance protection on the insured person. The policy includes the basic policy, applications, and riders or endorsements. As long as the policy remains in force, we pay a death benefit at the death of the insured person. While your policy is in force, you may access your policy value by taking loans or partial withdrawals. You may also surrender your policy for its surrender value. When the insured person reaches age 100, the policy can be surrendered or continued under the continuation of coverage option. SEE CONTINUATION OF COVERAGE, PAGE 28. We designed this policy primarily for use on a multi-life basis where the insured people share common employment or a business relationship. The policy may be owned individually or by a corporation, trust, association or similar entity. Life insurance is not a short-term investment. You should evaluate your need for life insurance coverage and this policy's long-term investment potential and risks before purchasing a policy. FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD Within limits as specified by state law, you have the right to examine your policy and return it for a refund of premiums paid or the account value if you are not satisfied for any reason. The policy is then void. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 35. YOUR POLICY PREMIUMS The policy is a flexible premium policy because the amount and frequency of the premium payments you make may vary within limits. You must make premium payments: o for us to issue your policy; and o sufficient to keep your policy in force. On your application, you choose how much and how often you want to pay premiums. Depending on your choices, it may not be enough to keep your policy or riders in force. The amount of premium you pay affects the length of time your policy stays in force. SEE PREMIUMS, PAGE 20. ALLOCATION OF NET PREMIUMS This policy has premium-based charges which are subtracted from your payments. We add the balance, or the net premium, to your policy based on your investment instructions. You may allocate the net premiums among one or more variable investment options and the guaranteed interest division. We apply the net premium payments to your policy after we: o receive your initial premium; o have the information we require; o approve your policy application; and o issue your policy. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 6 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 21. CHARGES AND DEDUCTIONS DEDUCTIONS FROM PREMIUMS We make the following deductions from each premium payment you make: 1. Tax charges-- In the first policy or segment year, we deduct a charge of 2.5% of premiums for state and local taxes up to target premium. Thereafter, we deduct 2.5% of premiums you make. Generally, in the first policy or segment year, we deduct the charge of 1.5% up to target premium. Thereafter, we deduct 1.5% of premiums you make to cover our estimated cost of the federal income tax treatment of deferred acquisition costs. SEE TAX CHARGES, PAGE 42. 2. Sales charge-- We deduct a percentage of each premium to cover a portion of our expenses in selling your policy. This charge is 2% of premiums you pay in the first policy or segment year up to target premium. Thereafter, this charge is 0.5% of the premiums you make. SEE DEDUCTIONS FROM PREMIUMS, PAGE 42. DEFERRED SALES CHARGE The deferred sales charge is based on a percentage of premium and is deducted from the account value at the beginning of each policy year for seven years after each year in which the premium payments are made. It applies to the first ten years of premium payments made. The deduction applies to each segment separately. SEE DEFERRED SALES CHARGE, PAGE 43, AND CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct the following charges from your account value at the beginning of each policy month: 1. Monthly administrative charge -- $12 per month for the first policy year, then $6 per month for each policy year beyond that. 2. Cost of insurance charge -- Based on the net amount at risk on the life of the insured person. The amount of this charge differs for: o the segments of the base death benefit; and o the adjustable term insurance rider. 3. Mortality and Expense Risk Charge -- we assess a mortality and expense risk charge of 0.20% per year or 0.01667% per month against the variable division. This charge compensates us for mortality and expense risks under the policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 44. 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 45. 1. Partial withdrawal fee -- $25. 2. Transfer fee -- We allow twelve free transfers among investment options per policy year. For each transfer beyond that, a $10 fee may apply. 3. Illustrations -- You may request one free illustration per policy year. For each illustration beyond that, a $25 fee 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 may apply. 5. Continuation of Coverage -- We will charge a one-time $200 administrative fee when the insured person turns age 100 to activate continued coverage. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 7 FEES AND EXPENSES OF THE INVESTMENT PORTFOLIOS The separate account purchases shares of the investment portfolios, or series, at net asset value. This price reflects investment management fees and other direct expenses that are deducted from the portfolio assets. The following table describes these investment management fees and other direct expenses of the investment portfolios. The fees and expenses are shown in both gross amounts and net amounts shown after any expenses or fees have been voluntarily absorbed by the investment portfolio advisers. INVESTMENT PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS) /1/
Fees and Investment Total Expenses Total Net Management Other Portfolio Waived or Portfolio Portfolio Fees Expenses Expenses Reimbursed Expenses --------- ---- -------- -------- ---------- -------- AIM VARIABLE INSURANCE FUNDS, INC. AIM V.I. Capital Appreciation Fund 0.62% 0.05% 0.67% NA 0.67% AIM V.I. Government Securities Fund 0.50% 0.26% 0.76% NA 0.76% THE ALGER AMERICAN FUND Alger American Growth Portfolio 0.75% 0.04% 0.79% NA 0.79% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% NA 0.84% Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% NA 0.89% FIDELITY VARIABLE INSURANCE PRODUCTS FUND VIP Growth Portfolio 0.59% 0.09% 0.68% NA 0.68%/2/ VIP Overseas Portfolio 0.74% 0.17% 0.91% NA 0.91%/2/ FIDELITY VARIABLE INSURANCE PRODUCTS FUND II VIP II Index 500 Portfolio 0.24% 0.11% 0.35% 0.07% 0.28%/3/ GCG TRUST /4/ Equity Income Portfolio 0.98% 0.00% 0.98% NA 0.98% Growth Portfolio 1.08% 0.01% 1.09% NA 1.09% Hard Assets Portfolio 0.98% 0.02% 1.00% NA 1.00% Limited Maturity Bond Portfolio 0.60% 0.00% 0.60% NA 0.60% Liquid Asset Money Market Portfolio 0.59% 0.00% 0.59% NA 0.59% Mid-Cap Growth Portfolio 0.94% 0.01% 0.95% NA 0.95% Research Portfolio 0.94% 0.00% 0.94% NA 0.94% Total Return Portfolio 0.94% 0.04% 0.98% 0.01%/5/ 0.97% INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund 0.75% 0.42% 1.17%/6/ 0.24%/7/ 0.93% INVESCO VIF-High Yield Fund 0.60% 0.47% 1.07% NA 1.07% INVESCO VIF-Small Company Growth Fund 0.75% 11.92% 12.67%/6/ 10.80%/8/ 1.87% NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST /9/ Partners Portfolio 0.78% 0.06% 0.84% NA 0.84% VAN ECK WORLDWIDE INSURANCE TRUST Worldwide Bond Fund 1.00% 0.15% 1.15% NA 1.15% Worldwide Emerging Markets Fund 1.00% 0.61% 1.61%/6/ 0.31%/10/ 1.30% Worldwide Real Estate Fund 1.00% 4.32% 5.32%/6/ 4.43%/11/ 0.89%
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 8 /1/ The portfolio expense information was provided to us by the portfolios, and we have not independently verified such information. These portfolio expenses are not direct charges against variable investment options assets or reduction from contract values; rather these portfolio expenses are taken into consideration in computing each underlying portfolio's net asset value, which is the share price used to calculate the unit values of the variable investment options. For a more complete description of the portfolios' costs and expenses, see the prospectuses for the portfolios. /2/ A Portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total portfolio expenses presented in the table would have been 0.66% for Growth Portfolio and 0.89% for Overseas portfolio. /3/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' total portfolio expenses would have been 0.35%. /4/ Directed Services, Inc. ("DSI") serves as the overall manager of the GCG Trust. The fee shown is a management fee. Fees decline as the total assets of certain combined portfolios increase. DSI provides or procures at its own expense, the services necessary for the operation of the portfolios. DSI does not bear the expense of brokerage fees and other transactional expenses for securities, taxes (if any) paid by a portfolio, interest on borrowing, fees and expenses of the independent trustees, and extraordinary expenses, such as litigation or indemnification expenses. The GCG Trust pays DSI for its services a monthly fee based on the annual rates of the average daily net assets of the investment portfolios. DSI (and not the GCG Trust) in turn pays each portfolio manager a monthly fee for managing the assets of the portfolios. More detailed information about each portfolio's management fees and expenses can be found in the prospectus of the GCG Trust. You should read this prospectus before investing. /5/ DSI is currently reimbursing expenses to maintain total expenses at 0.97% for the Total Return Portfolio. Without this reimbursement, and based on actual reimbursements for the fiscal year ended December 31, 1998, total expenses for this portfolio would have been 0.98%. This agreement to reimburse may end at any time. /6/ Certain expenses of the Fund are being voluntarily absorbed by the Funds. /7/ Certain expenses of the VIF-Equity Income Fund (formerly VIF-Industrial Income Fund) are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Equity Income Fund's "Other Expenses" and "Total Portfolio Expenses" were 0.18% and 0.93% respectively. This commitment can be changed at any time following consultation with the board of directors. /8/ Certain expenses of the VIF-Small Company Growth Fund are being absorbed voluntarily by INVESCO Funds Group, Inc. pursuant to a commitment to the Fund. After absorption, the VIF-Small Company Growth Fund's "Other Expenses" and "Total Portfolio Expenses" were 1.12% and 1.87% respectively. This commitment can be changed at any time following consultation with the board of directors. /9/ Neuberger Berman Advisers Management Trust (the "Trust") is divided into portfolios ("Portfolios"), each of which invests all of its net investable assets in a corresponding series ("Series") of Advisers Managers Trust. The figures reported under "Investment Management and Administration Fees" include the aggregate of the administration fees paid by the Portfolio and the management fees paid by its corresponding Series. Similarly, the "Other Expenses" includes all other expenses of the Portfolio and its corresponding Series. See "Expenses" in the Trust's Prospectus. Expenses may reflect expense reimbursement. NBMI has undertaken to reimburse certain operating expenses, including compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed, in the aggregate, 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. /10/ Van Eck Associates Corporation (the "Advisor") absorbed expenses exceeding 1.50% of the Fund's average daily net assets. Due to this arrangement, the actual expenses incurred were "Total Portfolio Expenses" of 1.50%. The Adviser has voluntarily agreed to limit the Worldwide Emerging Markets Fund's total annual operating expenses to 1.30% of the Fund's average daily net assets. /11/ Van Eck Associates Corporation (the "Advisor") waived its management fees and assumed certain expenses for the period January 1, 1998 to February 28, 1998. The Advisor also assumed expenses exceeding 1.00% of the Fund's average daily net assets for the period March 1,1998 to December 31, 1998. The Fund's expenses were also reduced by a fee arrangement based on cash balances left on deposit with the custodian and a directed brokerage arrangement where the fund directs certain portfolio trades to a broker that, in turn, pays a portion of the Fund's expenses. Due to this arrangement the actual expenses incurred were "Investment Management Fees" of 0.00%, "Other Expenses" of 0.89% and "Total Portfolio Expenses" of 0.89%. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 9 VARIABLE DIVISION If you invest in any of the following variable investment options, depending on market conditions, you may make or lose money. These variable investment options are described in the prospectuses for the underlying investment portfolios. SEE OBJECTIVES OF THE INVESTMENT PORTFOLIOS, PAGE 14. 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 MidCap Growth Portfolio Alger American Small Capitalization Portfolio FIDELITY VARIABLE INSURANCE PRODUCTS FUND & VARIABLE INSURANCE PRODUCTS FUND II VIP Growth Portfolio VIP Overseas Portfolio VIP II Index 500 Portfolio GCG TRUST Equity Income Portfolio Growth Portfolio Hard Assets Portfolio Limited Maturity Bond Portfolio Liquid Asset Portfolio Mid-Cap Growth Portfolio Research Portfolio Total Return Portfolio INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO VIF-Equity Income Fund INVESCO VIF-High Yield Fund INVESCO VIF-Small Company Growth Fund NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST Neuberger Berman AMT Partners Portfolio VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Bond Fund Van Eck Worldwide Emerging Markets Fund Van Eck Worldwide Real Estate Fund POLICY VALUES Your account value is the amount you have in the guaranteed interest division, plus the amount you have in each variable investment option. If you have an outstanding policy loan, your account value includes the amount in the loan division. 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 investment options; o interest earned on the amount you have in the guaranteed interest division; o interest earned on the amount you have in the loan division; and o partial withdrawals. We subtract charges and partial withdrawals you take from your account value. You make a partial withdrawal when you withdraw part of your net account value. Partial withdrawals may reduce the amount of base death benefit. Your net account value is equal to the account value minus the amount of your outstanding policy loans and accrued loan interest, if any. Your surrender value is the same as your net account value. YOUR ACCOUNT VALUE IN THE VARIABLE DIVISION Accumulation units are the way we measure value in the variable division. Accumulation unit value is the value of a unit of a variable investment option on the valuation date. Each variable investment option has a different accumulation unit value. SEE DETERMINING THE VALUE IN THE VARIABLE DIVISION, PAGE 28. On each valuation date, we determine the accumulation unit values. The accumulation unit value for each variable investment option reflects the investment performance of the underlying investment portfolio during the valuation period. 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 29. The valuation date is each date for which the net asset value of the investment portfolio shares and - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 10 unit values of the variable investment options are determined. Valuation dates are each day the New York Stock Exchange and the company's customer service center are open for business and a corresponding investment portfolio values its shares, or as required by law. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable investment options or to the guaranteed interest division per policy year. We may charge $10 for each transfer over twelve you make in a policy year. This charge does not apply to automatic rebalancing or dollar cost averaging transfers. There are restrictions on transfers from the guaranteed interest division. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 30. SPECIAL POLICY FEATURES DOLLAR COST AVERAGING Dollar cost averaging is a systematic plan of transferring account values to selected variable investment options. It is intended to protect your policy's value from short-term price fluctuations. However, dollar cost averaging does not assure a profit, nor does it protect against a loss in a declining market. Dollar cost averaging is free. SEE DOLLAR COST AVERAGING, PAGE 30. AUTOMATIC REBALANCING Automatic rebalancing periodically reallocates your net account value among the investment options to maintain your specified distribution of account value among those investment options. Automatic rebalancing is free. See Automatic Rebalancing, page 31. LOANS You may take loans against your policy's net account value. We charge an annual loan interest rate of 3.25%. We credit an annual interest rate of 3% on amounts held in the loan division as collateral for your loan. SEE POLICY LOANS, PAGE 32. Partial Withdrawals You may withdraw part of your net account value any time after your first policy year. You may make only one partial withdrawal per policy year. Partial withdrawals may reduce the death benefit and will reduce your account value. SEE PARTIAL WITHDRAWALS, PAGE 33. 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 27. SURRENDER You may surrender your policy at any time while the insured person is living. We calculate your surrender value on the valuation date we receive your request and policy at our customer service center. All insurance coverage ends on the date we receive your request. You must return your policy or a lost policy form to us. SEE SURRENDER, PAGE 35. LAPSE In general, insurance coverage continues as long as your policy's net account value is enough to pay the monthly deductions. SEE LAPSE, PAGE 34. REINSTATEMENT You may reinstate your policy and its riders within five years of its lapse if you still own the policy and the insured person is still living. You will need to give proof that the insured person continues to be insurable. You will also need to pay required reinstatement premiums. We will reinstate any policy loans existing when coverage ended, with accrued loan interest to the date of the lapse. SEE REINSTATEMENT, PAGE 35. POLICY MATURITY If the insured person is still living on the maturity date or the policy anniversary nearest the date when the insured person reaches age 100 and you do not - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 11 choose continuation of coverage, you must surrender your policy and we will pay the net account value. Your policy then ends. SEE POLICY MATURITY, PAGE 28. CONTINUATION OF COVERAGE If the insured person is still living at age 100, you may either surrender your policy or choose the continuation of coverage feature. If the continuation of coverage feature becomes effective, we will deduct a one-time administrative fee of $200 and keep your policy in force. SEE CONTINUATION OF COVERAGE, PAGE 28. DEATH BENEFITS At the insured person's death, we pay death proceeds to the beneficiary(ies) if your policy is still in force. The beneficiary(ies) is(are) the person or people you name to receive the death proceeds. The death proceeds equal the base death benefit plus amounts payable by rider, minus the amount of any outstanding policy loan on your policy and accrued loan interest. Based on the death benefit option you have chosen, the base death benefit varies. The base death benefit does not include any adjustable term insurance rider you may have on your policy. The target death benefit includes any adjustable term insurance rider you may have on your policy plus your base death benefit. The total death benefit is at least equal to or greater than your target death benefit. The death benefit at issue may vary from the stated death benefit plus adjustable term insurance coverage for some 1035 exchanges. There is no minimum stated death benefit to issue a policy. Generally, there is a minimum target death benefit of $50,000 per policy. SEE DEATH BENEFITS, PAGE 22. You may change your stated death benefit amount while your policy is in force, subject to certain restrictions. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25. TAX CONSIDERATIONS Under current federal income tax law, death benefits of life insurance policies generally are not subject to income tax. In order for this treatment to apply, the policy must qualify as a life insurance contract. We believe it is reasonable to conclude that the policy will qualify as a life insurance contract. See Tax Status of the Policy, page 47. Assuming the policy qualifies as a life insurance contract, under current federal income tax law, your account value earnings are generally not subject to income tax as long as they remain within your policy. However depending on circumstances, the following events may cause taxable consequences for you: o partial withdrawals; o surrender; or o lapse. In addition 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 48. You should consult a qualified legal or tax adviser before you purchase your policy. INFORMATION ABOUT SECURITY LIFE, THE SEPARATE 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 12 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 is committed to ensuring that information processing and delivery systems will be Year 2000 compliant before December 31, 1999. Our project team implemented the Year 2000 project plan which included the analysis, remediation and testing of our in-house source code. We followed our normal project management methodology, including communication with senior management on a monthly and as-needed basis and we allocated sufficient funds to ensure Year 2000 processing capabilities. On June 28, 1999, the analysis, remediation and system testing phases of the plan were completed. We will continue to do precautionary testing throughout 1999. Security Life has developed a contingency plan with established manual procedures that we believe will allow us to continue to do business in the event our systems do not perform as expected. However, there is no assurance Security Life's efforts will be successful, or that interaction with other service providers will not impact our services. SECURITY LIFE SEPARATE ACCOUNT L1 SEPARATE ACCOUNT STRUCTURE We established Security Life Separate Account L1 (the "separate account") on November 3, 1993, under Colorado's insurance law. It is a unit investment trust, registered with the SEC under the Investment Company Act of 1940. The SEC does not supervise our management of the separate account or Security Life. The variable account is a separate investment account. We keep the separate account assets separate from our general account and other separate accounts. It is used to support our variable life insurance policies and for other purposes allowed by law and regulation. We may offer other variable life insurance contracts with different benefits and charges that invest in the 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 separate account or other separate accounts. The company owns all the assets in the separate account. We credit gains to or charge losses against the separate account without regard to performance of other investment accounts. ORDER OF SEPARATE ACCOUNT LIABILITIES State law provides that we may not charge general account liabilities against separate account assets equal to its reserves and other liabilities. This means that in the event we were ever to become insolvent, the separate account assets will be used first to pay separate account policy claims. Only if assets remain in the separate account after these claims have been satisfied can these assets be used to pay other policy owners and our creditors. The separate account may have liabilities from assets credited to other variable life policies offered by the separate account. If the assets of the separate account are greater than required reserves and policy liabilities, we may transfer the excess to our general account. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 13 VARIABLE INVESTMENT OPTIONS The separate account has several divisions. Each variable investment option invests in shares of a matching investment portfolio. Each investment portfolio has its own investment objective. This means that the investment performance of a policy depends on the performance of the investment portfolios you choose. These investment portfolios are not available directly to individual investors. They are available only as the underlying investments for variable annuity and variable life insurance contracts and certain pension accounts. INVESTMENT PORTFOLIOS Each of the investment portfolios is a separate series of an open-end management investment company. The investment company receives investment advice from a registered investment adviser who, other than the GCG Trust, is not associated with us. Currently, some variable investment options invest in a portfolio of the GCG Trust. Directed Services, Inc. ("DSI") serves as the manager to each portfolio of the GCG Trust. The GCG Trust and DSI have retained several portfolio managers to manage the assets of each portfolio of the GCG Trust. The investment portfolios sell shares to separate accounts of insurance companies. These insurance companies may or may not be affiliated with us. This is known as "shared funding." Investment portfolios may sell shares as the underlying investment for both variable annuity and variable life insurance contracts. This process is known as "mixed funding." The investment portfolios may sell shares to certain qualified pension and retirement plans that qualify under Section 401 of the Internal Revenue Code ("IRC"). As a result, a material conflict of interest may arise between insurance companies, owners of different types of contracts and retirement plans, or their participants. If there is a material conflict, we will consider what should be done, including removing the investment portfolio from the separate account. There are certain risks with mixed and shared funding, and with selling shares to qualified pension and retirement plans. See the investment portfolios' prospectuses. 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 AIM Advisors, Inc.; Fidelity Management & Research Company; Fred Alger Management, Inc.; Directed Services, Inc.; INVESCO Funds Group, Inc.; and Van Eck Associates Corporation. The amount of compensation is usually based on the aggregate assets of the investment portfolio from contracts that we issue or administer. Some advisers 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 14 AIM V.I. Government Securities Fund -- seeks to achieve high current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed or otherwise backed by the United States Government. THE ALGER AMERICAN FUND The Alger American Fund is a registered investment company organized on April 6, 1988. It is a multi-series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has provided investment advisory services since 1964. Alger American Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on growing companies that generally have broad product lines, markets, financial resources and depth of management. Under normal circumstances, the portfolio invests primarily in equity securities of large companies. The portfolio considers a large company to have a market capitalization of $1 billion or greater. Alger American MidCap Growth Portfolio -- seeks long-term capital appreciation. The portfolio focuses on midsize companies with promising growth potential. Under normal circumstances, the portfolio invests primarily in equity securities of companies having a market capitalization within the range of companies in the S&P(R) MidCap 400 Index. Alger American Small Capitalization Portfolio -- seeks long-term capital appreciation. The portfolio focuses on small, fast-growing companies that offer innovative products, services or technologies to a rapidly expanding marketplace. Under normal circumstances, the portfolio invests primarily in equity securities of small capitalization companies. A small capitalization company is one that has a market capitalization within the range of the Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund ("VIP" established November 13, 1981) and Variable Insurance Products Fund II ("VIP II" established March 21, 1988) are open-end, diversified, management investment companies. These funds are organized as Massachusetts business trusts. Fidelity Management & Research Company ("FMR") manages and provides investment and other services to the funds named here. However, Bankers Trust Company also provides sub-advisory services for VIP II Index 500 Portfolio. FMR is the management arm of Fidelity Investments(R), which was established in 1946, and is one of America's largest mutual fund managers. VIP Growth Portfolio -- seeks capital appreciation. FMR's principal investment strategies include: o Investing primarily in common stocks. o Investing in companies that it believes have above-average growth potential (stocks of these companies are often called "growth" stocks). o Investing in domestic and foreign issuers. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP Overseas Portfolio -- seeks long-term growth of capital. FMR's principal investment strategies include: o Investing at least 65% of total assets in foreign securities. o Investing primarily in common stocks. o Allocating investments across countries and regions considering the size of the market in each country and region relative to the size of the international market as a whole. o Using fundamental analysis of each issuer's financial condition and industry position and market and economic conditions to select investments. VIP II Index 500 Portfolio -- seeks investment results that correspond to the total return of common stocks publicly traded in the United States as represented by the S&P(R) 500. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 15 Bankers Trust Company (BT)'s principal investment strategies include: o Investing at least 80% of assets in common stocks included in the S&P(R) 500. o Lending securities to earn income for the fund. GCG TRUST The GCG Trust is an open-end management investment company whose shares are available to separate accounts funding variable insurance contracts offered by the company's affiliates, Golden American Life Insurance Company, First Golden Life Insurance Company of New York and Equitable Life Insurance Company of Iowa. The GCG Trust also sells its shares to separate accounts of other insurance companies not affiliated with Security Life. Pending Securities and Exchange Commission approval, shares of the GCG Trust may also be sold to certain qualified pension and retirement plans. Currently, some variable investment options invest in a portfolio of the GCG Trust. Directed Services, Inc. ("DSI"), an affiliate, serves as the manager to each portfolio of the GCG Trust. The GCG Trust and DSI have retained several portfolio managers to manage the assets of each portfolio of the GCG Trust. DSI also serves as the distributor to the GCG Trust. The following variable investment options invest in designated portfolios of the GCG Trust: Equity Income Portfolio -- seeks substantial dividend income as well as long-term growth of capital. Invests primarily in common stocks of well-established companies paying above-average dividends. Sub-advised by T. Rowe Price Associates, Inc. Growth Portfolio -- seeks capital appreciation. Invests primarily in common stocks of growth companies that have favorable relationships between price/earnings ratios and growth rates in sectors offering the potential for above-average returns. Sub-advised by Janus Capital Corporation. Hard Assets Portfolio -- seeks long-term capital appreciation. Invests primarily in hard asset securities. Hard asset companies produce a commodity which the portfolio manager is able to price on a daily or weekly basis. Sub-advised by Baring International Investment Limited (an affiliate). Limited Maturity Bond Portfolio -- seeks highest current income consistent with low risk to principal and liquidity. Also seeks to enhance its total return through capital appreciation when market factors, such as falling interest rates and rising bond prices, indicate that capital appreciation may be available without significant risk to principal. Invests primarily in diversified limited maturity debt securities with average maturity dates of five years or shorter and in no cases more than seven years. Sub-advised by ING Investment Management, LLC (an affiliate). Liquid Asset Portfolio -- seeks high level of current income consistent with the preservation of capital and liquidity. Invests primarily in obligations of the U.S. Government and its agencies and instrumentalities, bank obligations, commercial paper and short-term corporate debt securities. All securities will mature in less than one year. Sub-advised by ING Investment Management, LLC (an affiliate). Mid-Cap Growth Portfolio -- seeks long-term growth of capital. Invests primarily in equity securities of companies with medium market capitalization which the portfolio manager believes have above-average growth potential. Sub-advised by Massachusetts Financial Services Company. Research Portfolio -- seeks long-term growth of capital and future income. Invests primarily in common stocks or securities convertible into common stocks of companies believed to have better than average prospects for long-term growth. Sub-advised by Massachusetts Financial Services Company. Total Return Portfolio -- seeks above-average income (compared to a portfolio entirely invested in equity securities) consistent with the prudent employment of capital. Invests primarily in a combination of equity and fixed income securities. Sub-advised by Massachusetts Financial Services Company. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 16 INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company. It was organized as a Maryland corporation on August 19, 1993. It is currently made up of ten diversified investment portfolios. Five of these investment portfolios are described here. INVESCO Funds Group, Inc. is the Funds' investment adviser. As the adviser, it is mostly responsible for providing the portfolios with investment management, various administrative services, and supervising the Fund's daily business affairs. INVESCO Capital Management, Inc. sub-advises the Total Return Fund. "VIF" refers to INVESCO Variable Investment Fund. INVESCO Distributors, Inc. ("IDI"), provides distribution services for the INVESCO Variable Investment Funds, Inc. INVESCO VIF-Equity Income Fund (Formerly, INVESCO VIF-Industrial Income Portfolio) -- seeks high current income, with growth of capital as a secondary objective. The fund normally invests at least 65% of its assets in dividend-paying common and preferred stocks, although in recent years that percentage has been somewhat higher. Stocks held by the fund generally are expected to produce a relatively high level of income and a consistent, stable return. Although it focuses on the stocks of larger companies with a strong record of paying dividends, the fund also may invest in companies that have not paid regular dividends. The fund's equity investments are limited to stocks that can be traded easily in the United States; it may, however, invest in foreign securities in the form of American Depository Receipts (ADRs). The rest of the fund's assets are invested in debt securities, generally corporate bonds that are rated investment grade or better. The fund also may invest up to 15% of its assets in lower-grade debt securities commonly known as "junk bonds", which generally offer higher interest rates, but are riskier investments than investment grade securities. INVESCO VIF-High Yield Fund -- seeks to provide a high level of current income. It invests substantially all of its assets in lower-rated debt securities, commonly called "junk bonds," and preferred stock, including securities issued by foreign companies. Although these securities carry with them higher risks, they generally provide higher yields-- and therefore higher income--than higher-rated debt securities. INVESCO VIF-Small Company Growth Fund --seeks investment growth over the long term. The fund normally invests at least 80% of its assets in equity securities of companies with market capitalizations of $1 billion or less. INVESCO uses a bottom-up investment approach to the fund's investment portfolio, focusing on companies that are in the developing stages of their life cycles. Using this approach, INVESCO tries to identify companies that it believes are undervalued in the marketplace, have earnings which may be expected to grow faster than the U.S. economy in general, and/or offer the potential for accelerated earnings growth due to rapid growth of sales, new products, management changes, or structural changes in the economy. The prices of securities issued by these small companies tend to rise and fall more rapidly than those of more established companies. The remainder of the fund's assets can be invested in a wide range of securities that may or may not be issued by small companies. In addition to equity securities, the fund can invest in foreign securities and debt securities, including so-called "junk bonds." 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 17 This master feeder structure is different from that of many other investment companies which directly purchase and manage their own securities portfolios. Neuberger Berman Management Incorporated acts as investment manager to Managers Trust. Neuberger Berman, LLC is the sub-adviser. The investments for the Portfolio are managed by the same portfolio manager(s) who manage one or more other mutual funds that have similar names, investment objectives and investment styles as the Portfolio. You should be aware that the Portfolio is likely to differ from the other mutual funds in size, cash flow pattern and tax matters. Accordingly, the holdings and performance of the Portfolio can be expected to vary from those of the other mutual funds. Shares of the separate Portfolios of Neuberger Berman Advisers Management Trust are sold only through the currently effective prospectus and are not available to the general public. Shares of the AMT Portfolios may be purchased only by life insurance companies to be used with their separate accounts which fund variable annuity and variable life insurance policies. Neuberger Berman Partners Portfolio -- seeks growth of capital. The Portfolio invests mainly in common stocks of mid-to large-capitalization companies. Its investment program seeks securities believed to be undervalued based on strong fundamentals, including low price to earnings ratio, consistent cash flow, and the company's track record through all points of the market cycle. VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is an open-end management investment company organized as a business trust under the laws of the Commonwealth of Massachusetts on January 7, 1987. On April 12, 1995, Van Eck Investment Trust changed its name to Van Eck Worldwide Insurance Trust. Van Eck Associates Corporation serves as investment adviser and manager to the funds. Van Eck Worldwide Bond Fund -- seeks high total return--income plus capital appreciation--by investing globally, primarily in a variety of debt securities. Van Eck Worldwide Emerging Markets Fund --seeks long term capital appreciation by investing in equity securities in emerging markets around the world. Van Eck Worldwide Real Estate Fund -- seeks high total return by investing in equity securities of companies that own significant real estate or principally do business in real estate. THE GUARANTEED INTEREST DIVISION You may allocate all or a part of the net 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 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 18 interest rates are never less than the minimum guaranteed interest rate of 3% and will be in effect for periods of at least twelve months. Interest compounds daily at an effective annual rate that equals the declared rate. We credit interest to the guaranteed interest division on a daily basis. We pay interest regardless of the actual investment performance of our account. We bear all of the investment risk for the guaranteed interest division. MAXIMUM NUMBER OF INVESTMENT OPTIONS You may invest in a total of eighteen investment options over the lifetime of your policy. Investment options include the variable and the guaranteed interest divisions, but not the loan division. As an example, if you have had funds in seventeen variable investment options and the guaranteed interest division (or eighteen variable investment options), these are the only investment options to which you may later add or transfer funds. You may want to use fewer investment options in the early years of your policy, so that you can invest in other investment options in the future. If you invest in eighteen variable investment options, you will not be able to invest in the guaranteed interest division. DETAILED INFORMATION ABOUT THE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard Corporate Benefits variable universal life insurance policy. There may be differences in the policy because of state requirements where we issue your policy. We will describe any such differences in your policy. The illustrations beginning on page 53, 55, 57, 59, 61, 63 are to show how the policies work. APPLYING FOR A POLICY You purchase this variable universal life policy by submitting an application to us. On the policy date, the insured person must be no less than 15 years of age and no older than age 85. The insured person is the person on whose life we issue a policy and upon whose death we pay death proceeds. Age is the insured person's age on the birthday nearest the policy date plus the number of completed policy years since the policy date. We may back-date the policy up to six months to allow the insured person to give proof of a younger age for the purposes of your policy. This Corporate Benefits variable universal life policy is available to owners of certain other variable universal life policies issued by the company within a certain time frame. Policyowners may exchange into this Corporate Benefits variable universal life policy with a waiver or reduction of certain fees on both the exchanged policy and this policy. See your agent or registered representative for more information or assistance. POLICY ISSUANCE Before we issue a policy or apply your net premium to your policy, we require satisfactory evidence of insurability of the insured person and payment of your initial premium. This evidence may include completion of all underwriting and issue requirements. The investment date is the first date we apply your net premium payments 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 equal to at least the sum of the scheduled premiums which are due from your policy date through your investment date. This policy is available only to groups of ten or more insured people. Generally, we require a minimum total group first year premium of at least $250,000. However depending on underwriting circumstances, we may reduce the minimum total group first year premium in some cases. We generally require a minimum target death benefit of $50,000 per policy. We may reduce the minimum target death benefit if the average target death benefit at policy issuance for the group or sponsored arrangement is at least $50,000. Our underwriting and reinsurance procedures in effect at the time you apply limit the maximum stated and target death benefit. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 19 The policy date as shown on your policy schedule determines: o monthly processing dates; o policy months; o policy years; and o policy anniversaries. It is not affected by the date you receive the policy. The policy date may be different from the date we receive your first premium payment. If the policy date is earlier, we charge monthly deductions from the policy date. The policy date is: o the date you designate on your application, subject to our approval; or o the back-date of the policy to save age, if we permit this for your policy. If there is no designated date or back-date, the policy date is the date all underwriting and administrative requirements have been met if we have received your initial premium before we issue your policy. DEFINITION OF LIFE INSURANCE The federal income tax definition of life insurance is the cash value accumulation test. SEE TAX STATUS OF THE POLICY, PAGE 47. 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. 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 (planned) premium (within our limits) when you apply for your policy. The scheduled premium, shown in your policy and schedule, is the amount you choose to pay over a stated time period. THIS AMOUNT MAY OR MAY NOT BE ENOUGH TO KEEP YOUR POLICY IN FORCE. You may receive premium reminder notices for the scheduled premium on a monthly, quarterly, semiannual, or annual basis. You are not required to pay the scheduled premium. 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 20 UNSCHEDULED PREMIUM PAYMENTS Generally speaking, you may make unscheduled premium payments at any time, however: 1. We may limit the amount of your unscheduled premium payments that would result in an increase in the base death benefit amount required by the federal income tax law definition of life insurance. We may require satisfactory evidence that the insured person is insurable at the time that you make the unscheduled premium payment if the death benefit is increased due to your unscheduled premium payments. 2. We may require proof that the insured person is insurable if your unscheduled premium payment will cause the net amount at risk to increase; and 3. We will return premium payments which are greater than the "seven-pay" limit for your policy if your payment would cause your policy to become a modified endowment contract, unless you send us notice acknowledging the new modified endowment contract status for your policy. SEE MODIFIED ENDOWMENT CONTRACTS, PAGE 48 AND CHANGES TO COMPLY WITH THE LAW, PAGE 49. If you have an outstanding policy loan and you make an unscheduled payment, we will consider this payment a loan repayment, unless you tell us otherwise. If your payment is a loan repayment, we do not take out tax or sales charges. TARGET PREMIUM Target premiums are not based on the scheduled premium. Target premiums are actuarially determined based on the age, sex and premium class of the insured person. The target premium for your policy and any segments added since the policy date are listed in the schedule we will provide to you. SEE PREMIUMS, PAGE 20. ALLOCATION OF NET PREMIUMS The net premium is the balance remaining after we take tax and sales charges (excluding the deferred sales charge) from your premium payment. We add the net premium to your account value according to your instructions. We apply the initial net premium to your policy after: a) we receive the amount of premium required for your insurance coverage to begin; b) all issue requirements have been met and received by our customer service center; c) we approve your policy application; and d) 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 investment option into the Liquid Asset Money Market Portfolio 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 we invest amounts you designated for the variable investment options directly into your selected variable investment options. SEE FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD, PAGE 35. 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 investment options over the lifetime of your policy. SEE MAXIMUM NUMBER OF INVESTMENT DIVISIONS, PAGE 19. You may make five free premium allocation changes per year. After the five free premium allocation changes, we may 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 Your coverage lasts only as long as your net account value is enough to pay the monthly and annual charges and your account value is more than your - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 21 outstanding policy loan plus accrued loan interest. If these conditions are no longer met, your policy will enter the 61-day grace period and you must make a premium payment to avoid lapse. SEE LAPSE, PAGE 34, AND GRACE PERIOD, PAGE 34. 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 48. If we find that your scheduled premium causes your policy to be a modified endowment contract on your policy date, we will require you to acknowledge that you know the policy is a modified endowment contract. We will issue your policy based on the scheduled premium you selected. If you do not want your policy to be issued as a modified endowment contract, you may reduce your scheduled premium to a level which does not cause your policy to be a modified endowment contract. We will then issue your policy based on the revised scheduled premium. DEATH BENEFITS You can decide the amount of insurance you need, now and in the future. You can combine the long-term advantages of permanent life insurance base coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available under your one policy. When we issue your policy, we base the initial insurance coverage on the instructions in your application. The initial death benefit is the stated death benefit amount. You can add an adjustable term insurance rider for additional insurance coverage. Death benefits are valued as of the date of death of the insured person. The stated death benefit is the permanent element of your policy. The adjustable term insurance rider is the term insurance element of your policy. The adjustable term insurance rider acts as a bridge. It provides term insurance coverage which automatically adjusts to fill the gap between your total death benefit and your base death benefit depending on which death benefit option you choose. Generally, your target death benefit may be no less than $50,000 to issue your policy. It may be to your economic advantage to include part of your insurance coverage under the adjustable term insurance rider. Both the cost of insurance under the adjustable term insurance rider and the cost of insurance for the base death benefit are deducted monthly from your account value and generally increase with the age of the insured person. Use of the adjustable term insurance rider may reduce sales compensation. SEE ADJUSTABLE TERM INSURANCE RIDER, PAGE 26. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 22 DEATH BENEFIT SUMMARY THIS CHART ASSUMES NO DEATH BENEFIT OPTION CHANGES, INCREASES OR DECREASES IN STATED OR TARGET DEATH BENEFIT AND THAT PARTIAL WITHDRAWALS ARE LESS THAN THE PREMIUM PAID.
OPTION 1 OPTION 2 OPTION 3 ============== ==================================== ==================================== ==================================== STATED The amount of policy death The amount of policy death The amount of policy death DEATH benefit at issue, not including benefit at issue, not including benefit at issue, not including BENEFIT rider coverage. This amount rider coverage. This amount rider coverage. This amount stays level throughout the life of stays level throughout the life of stays level throughout the life of the contract. the contract. the contract. BASE DEATH The greater of the stated death The greater of the stated death The greater of the stated death BENEFIT benefit or the account value benefit plus the account value, benefit plus the sum of all multiplied by the death benefit or the account value multiplied premiums you have paid minus corridor factor. by the death benefit corridor partial withdrawals you have factor. taken, or the account value multiplied by the death benefit corridor factor. TARGET Stated death benefit plus Stated death benefit plus Stated death benefit plus DEATH adjustable term insurance rider adjustable term insurance rider adjustable term insurance rider BENEFIT benefit. This amount remains benefit. This amount remains benefit. This amount remains level throughout the life of the level throughout the life of the level throughout the life of the policy. policy. policy. TOTAL DEATH This is the total death proceeds. This is the total death proceeds. This is the total death proceeds. BENEFIT It is the greater of the target It is the greater of the target It is the greater of the target death benefit or the base death death benefit plus the account death benefit plus the sum of all benefit. value, or the base death benefit. premiums you have paid minus partial withdrawals you have taken, or the base death benefit. ADJUSTABLE The adjustable term insurance The adjustable term insurance The adjustable term insurance TERM rider benefit is the total death rider benefit is the total death rider benefit is the total death INSURANCE benefit minus base death benefit minus the base death benefit minus the base death RIDER benefit, but it will not be less benefit, but it will not be less benefit, but it will not be less BENEFIT than zero. If the account value than zero. If the account value than zero. If the account value multiplied by the death benefit multiplied by the death benefit multiplied by the death benefit corridor factor is greater than corridor factor is greater than corridor factor is greater than the stated death benefit, the the stated death benefit plus the the stated death benefit plus the adjustable term insurance account value, the adjustable sum of all premiums you have benefit will be decreased. It term insurance rider benefit will paid minus partial withdrawals will be decreased so that the be decreased. It will be you have taken, the adjustable sum of the base death benefit decreased so that the sum of the term insurance rider benefit will and the adjustable term base death benefit and the be decreased. It will be insurance rider benefit is not adjustable term insurance rider decreased so that the sum of the greater than the target death benefit is not greater than the base death benefit and the benefit. If the base death target death benefit plus the adjustable term insurance rider benefit becomes greater than the account value. If the base death benefit is not greater than the target death benefit, then the benefit becomes greater than the target death benefit plus the adjustable term insurance rider target death benefit plus the sum of all premiums you have benefit is zero. account value, then the paid minus partial withdrawals adjustable term insurance rider you have taken. If the base benefit is zero. death benefit becomes greater than the target death benefit plus the sum of all premiums you have paid minus partial withdrawals you have taken, then the adjustable term insurance rider benefit is zero.
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 23 BASE DEATH BENEFIT Your base death benefit can be different from your stated death benefit as a result of: o your choice of death benefit option; o a change in your death benefit option; o increases 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 when the insured person dies. The beneficiary(ies) is(are) the person (people) you name to receive the death proceeds from your policy. The death proceeds are: o your base death benefit; plus o any rider benefits; minus o your outstanding policy loan with accrued loan interest; minus o outstanding policy charges due before the insured person's date of death. There could be outstanding policy charges if the insured dies while your policy is in the grace period. DEATH BENEFIT OPTIONS You have a choice of three death benefit options: option 1, option 2 or option 3 (described below). You may choose death benefit option 3 only prior to the issue of your policy. Your choice may result in your having a base death benefit which is greater than your stated death benefit. You may change your death benefit option after the policy date and before the continuation of coverage feature begins. SEE CHANGES IN DEATH BENEFIT OPTIONS, PAGE 25 AND SEE CONTINUATION OF COVERAGE, 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 insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under death benefit option 2, your base death benefit is the greater of: 1. your stated death benefit plus your account value on the date of the insured person's death; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Under option 1 positive investment performance is generally reflected in a reduced net amount at risk. This lowers your policy's total cost of insurance charges. Option 1 offers insurance coverage that is a set amount with potentially lower cost of insurance charges over time. Under option 2, investment performance is reflected in your insurance coverage. Under death benefit option 3, the base death benefit is the greater of: 1. your stated death benefit plus the sum of all premiums you have paid minus partial withdrawals you have taken under your policy; or 2. your account value on the date of the insured person's death multiplied by the appropriate factor from the definition of life insurance factors shown in Appendix A. Therefore, the base death benefit generally will increase as you pay premiums, and decrease as you take partial withdrawals. In no event will your base death benefit be less than your stated death benefit. Federal income tax law requires that your death benefit be at least as much as your account value multiplied by a factor defined by law. This factor is based on: o the insured person's age; and o the insured person's gender. We will adjust your policy to continue to qualify as life insurance under the federal income tax laws in existence at the time the policy was issued. If the insured person is 100 years of age or older and the continuation of coverage feature is in effect, only death benefit option 1 is available. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 24 CHANGES IN DEATH BENEFIT OPTIONS You may request a change in your death benefit option after the policy date and before the continuation of coverage feature. A death benefit option change applies to your entire stated or base death benefit. You may change from death benefit option 1 to option 2, or from option 2 to option 1. You may also change from death benefit option 3 to option 1. You may not change from death benefit option 1 to option 3, or option 2 to option 3, or option 3 to option 2. You may choose death benefit option 3 only prior to the issue of your policy. Your death benefit option change is effective on your next monthly processing date after we accept and approve your requested change, so long as at least five days remain before your monthly processing date. If fewer than five days remain before your monthly processing date, your death benefit option change is effective on your next monthly processing date. After we approve your request, we send a new policy schedule page to you. You should attach it to your policy. We may ask you to return your policy to our customer service center so that we can note the change in your schedule. For you to change from death benefit option 1 to option 2, you must provide to us proof that the insured person is insurable under our normal rules of underwriting for your policy class. We may not allow a change to your death benefit option if it reduces the target death benefit below the minimum we require to issue your policy. On the effective date of your option change, your stated death benefit is changed as follows: Change Change Stated Death Benefit From To Following Change: ---- -- ----------------- Option 1 Option 2 your stated death benefit before the change minus your account value as of the effective date of the change. Option 2 Option 1 your stated death benefit before the change plus your account value as of the effective date of the change. Option 3 Option 1 your stated death benefit before the change plus (a) the sum of the premiums you have paid, minus (b) partial withdrawals you have taken as of the effective date of the change. We increase or decrease your stated death benefit to keep the net amount at risk the same on the date of your death benefit option change. Additionally, there is no change to the amount of term insurance if you have an adjustable term insurance rider. SEE COST OF INSURANCE CHARGE, PAGE 44. If you change your death benefit option, we adjust the stated death benefit for each of your segments by allocating your account value to each benefit segment. For example, if you change from death benefit option 1 to option 2, your stated death benefit is decreased by the amount of your account value allocation to that segment. If you change from death benefit option 2 to option 1, your stated death benefit is increased by the amount allocated to that segment. We do not adjust the target premium when you change your death benefit option. CHANGES IN DEATH BENEFIT AMOUNTS You may increase the target or stated death benefit while your policy is in force and before the policy anniversary when the insured person turns age 75. You may request a decrease in the stated death benefit only after your first policy anniversary. Contact our customer service center to request an increase or decrease in death benefit. The request is effective as of the next monthly processing date after we receive your request and approve it. On the monthly processing date, we deduct the monthly deductions from your account value. Any requested change in your coverage must be for at least $1,000. After we approve your request, we will send you a new schedule page. Keep the new schedule with your policy. We may ask you to send your policy to us so that we can note the change in your schedule. We may not approve a requested change if it will disqualify your policy as life insurance under federal income tax law. If we disapprove a change for any - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 25 reason, we provide you with a notice of our decision. SEE TAX CONSIDERATIONS, PAGE 46. If you decrease your death benefit, you may not decrease your target death benefit below the minimum we require to issue your policy. There may be tax consequences as a result of a decrease in your death benefit. SEE TAX STATUS OF THE POLICY, PAGE 47 AND MODIFIED ENDOWMENT CONTRACTS, PAGE 48. Requested reductions in the death benefit will first be applied to decrease the target death benefit. We decrease your stated death benefit only after your adjustable term insurance rider coverage is reduced to zero. If you have more than one segment, we divide subsequent decreases in stated death benefit among your benefit segments pro rata unless state law requires differently. You must provide satisfactory evidence that the insured person is still insurable in order to increase your death benefit. Unless you tell us differently, we assume any request you make for an increase in your target death benefit is also a request for an increase to the stated death benefit. Thus, the amount of your adjustable term insurance rider will not change. You may change the target death benefit once in a policy year. The initial death benefit segment, or first segment, is the stated death benefit on the effective date of the policy. An increase in the stated death benefit (other than one caused by an option change) will cause a new segment to be created. The segment year begins on the segment effective date and ends one year later. The following may apply to each new segment: o a new sales charge; o a new deferred sales charge; o new cost of insurance charges, guaranteed and current; o a new incontestability period; o a new suicide exclusion period; and o a new target premium. A requested increase in your stated death benefit creates a new segment. Once we create a new segment, it is permanent unless state law requires differently. If an option change causes the stated death benefit to increase, no new segment is created. Instead, the size of each existing segment(s) is(are) changed. If it causes the stated death benefit to decrease, each segment is decreased. To determine the applicable sales charge and deferred sales charge, premiums you pay after an increase are applied to your policy segments in the same proportion as the target premiums for each segment bears to the sum of the target premium for all segments. For each coverage segment, your schedule shows your target premiums. We allocate the net amount at risk among segments in the same proportion that each segment bears to the total stated death benefit. ADJUSTABLE TERM INSURANCE RIDER You may increase your death proceeds by adding an adjustable term insurance rider on the insured person's life. A rider changes benefits under your policy. As the name suggests, the adjustable term insurance rider adjusts over time. You specify a target death benefit when you apply for this rider. The target death benefit can be level or can be scheduled to change at the beginning of any policy year. 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 26 OPTION 3: If option 3 is in effect, the total death benefit is the greater of: a. the target death benefit plus the sum of the premiums you have paid minus partial withdrawals you have taken; or b. the account value multiplied by the appropriate factor from the death benefit corridor factors in the policy. For example, under option 1, assume your base death benefit increases as a result of an increase in your account value. The adjustable term insurance rider adjusts to provide death proceeds equal to your total death benefit in each year: Adjustable Term Base Death Total Death Insurance Rider Benefit Benefit 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 25. We may deny any future, scheduled increases to your target death benefit if you cancel a scheduled change, or if you ask for an unscheduled decrease in your target death benefit. Partial withdrawals, changes from death benefit option 1 to option 2 and base decreases may reduce the amount of your target death benefit. SEE PARTIAL WITHDRAWALS, PAGE 33, AND CHANGES IN DEATH BENEFIT OPTIONS, PAGE 25. There is no defined premium for a given amount of adjustable term insurance coverage. Instead, we deduct a monthly cost of insurance charge from your account value. The cost of insurance for this rider is calculated as the monthly cost of insurance rate for the rider coverage multiplied by the adjustable term death benefit in effect that month. The cost of insurance rates will be determined by us from time to time. They will be based on the issue age, gender, and premium class of the person insured, as well as the length of time since your policy date. The monthly guaranteed maximum cost of insurance rates for this rider will be in the policy. SEE COST OF INSURANCE CHARGE, PAGE 44. The only charge for this coverage is the cost of insurance charge. The total charge that you pay may be less if you have coverage under an adjustable term insurance rider instead of the base death benefit. If the target death benefit is increased by you after the rider is issued, we use the same cost of insurance rate schedule for the entire coverage for this rider. These rates are based on the original premium class even though satisfactory new evidence of insurability is given to us for the increased schedule. Not all policy features apply to the adjustable term insurance rider. Under this rider, there is no surrender value and policy loans are not available. The adjustable term insurance rider does not contribute to the policy account value nor to investment performance under your policy. The adjustable term insurance rider provides benefits only at the insured person's death. SPECIAL FEATURES RIGHT TO EXCHANGE POLICY During the first 24 months after your policy date, you have the right to exchange your policy for a guaranteed policy, unless state law requires differently. To do this, we transfer the amount you have in the variable division to the guaranteed interest division. We allocate all of your future net premiums to the guaranteed interest division. We do not allow any future payments or transfers to the variable division after you exercise this right. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 27 We will not charge you for this exchange. SEE THE GUARANTEED INTEREST DIVISION, PAGE 18. POLICY MATURITY If the insured person reaches age 100 and you do not want the continuation of coverage feature, you may surrender the policy for the net account value. Your policy then ends. Some part of this payment may be taxable. You should consult your tax adviser. CONTINUATION OF COVERAGE The continuation of coverage feature allows your insurance coverage to continue beyond when the insured person reaches age 100. If you allow the continuation of coverage feature to become effective, we: o transfer your net account value (excluding the amount in the loan division) into the guaranteed interest division; o charge a one-time $200 administrative fee to your policy to cover future expenses; o terminate the adjustable term insurance rider and the target death benefit becomes the stated death benefit; o convert death benefit option 2 or option 3 to death benefit option 1, if applicable; and o terminate investment features. The adjustable term insurance rider then terminates. If you have no adjustable term insurance rider coverage, your stated death benefit is unchanged. You may make no further premium payments. Your insurance coverage continues until the insured person's death, unless the policy lapses or is surrendered. However, we deduct no further cost of insurance charges and your monthly deductions cease. SEE CONTINUATION OF COVERAGE ADMINISTRATIVE FEE, PAGE 45. Your net account value may not be transferred into the variable division after the insured person reaches age 100. During the continuation of coverage period, you may take policy loans or partial withdrawals from your policy. If you have outstanding policy loans, interest continues to accrue. If you fail to make sufficient loan or loan interest payments, it is possible that the loan plus accrued interest may become greater than your account value and cause your policy to lapse. To avoid this, you may repay loans and make loan interest payments during the continuation of coverage period. However, we will not accept additional premium payments. If you wish to stop coverage after the continuation of coverage feature begins, you may surrender your policy and receive the net account value. All other consequences of surrender apply. SEE SURRENDER, PAGE 35. The continuation of coverage feature may not be available in all states. If a state has approved this feature, it is automatic and you do not need to take any action to activate it. The tax consequences of coverage continuing beyond when the insured person reaches age 100 are uncertain. You should consult a tax adviser as to those consequences. POLICY VALUES ACCOUNT VALUE Your account value is the total amount you have in the guaranteed interest division, the variable division, and the loan division. Your account value reflects: o net premiums; o deductions for charges; o partial withdrawals; o investment performance of the variable investment options; o interest earned on the amount you have in the guaranteed interest division; and o interest earned on the amount you have in the loan division. NET ACCOUNT VALUE Your policy's net account value is your account value minus the amount of your outstanding policy loans and accrued loan interest, if any. Your surrender value is the same as your net account value. DETERMINING THE VALUE IN THE VARIABLE DIVISION The amounts included in the variable division are measured by accumulation units and accumulation unit values. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 28 The value of a variable investment option is the accumulation unit value for that option times the number of accumulation units you own in that option. Each variable investment option has a different accumulation unit value. You purchase accumulation units whenever you allocate premium or make transfers to a variable investment option. This includes transfers from the loan division. The valuation date is each date for which the net asset value of the investment portfolio shares and unit values of the variable investment options are determined. Valuation dates are each day the New York Stock Exchange and the company's customer service center are open for business and a corresponding investment portfolio values its shares, or as required by law. We redeem accumulation units: o when you take a partial withdrawal; o when amounts are transferred from a variable investment option (including transfers to the loan division); o for the monthly deductions from your account value; o for policy transaction charges; o on surrender; and o to pay the death benefit after the insured person dies. We calculate the number of variable investment option accumulation units purchased or redeemed by: 1. dividing the dollar amount of your transaction by: 2. the accumulation unit value calculated at the close of business on the valuation date of the transaction. The accumulation unit value is the value determined as of each valuation date. The accumulation unit value of each variable investment option varies with the investment performance of the underlying portfolio. It reflects: o investment income; o realized and unrealized capital gains and losses; and o investment portfolio expenses. SEE HOW WE CALCULATE ACCUMULATION UNIT VALUES, PAGE 29. The date of a transaction is the date we receive your premium or transaction request at our customer service center, so long as the date of receipt is a valuation date. Each valuation date ends at 4:00 p.m. Eastern time. We use the accumulation unit value which is next calculated after we receive your premium or transaction request and we use the number of accumulation units attributable to your policy on the date of receipt. We take monthly deductions from your account value as of the monthly processing date. If your monthly processing date is not a valuation date, the monthly deduction is processed on the next valuation date. The value of amounts allocated to the variable investment option goes up or down depending on investment performance. FOR AMOUNTS IN THE VARIABLE INVESTMENT OPTIONS, THERE IS NO GUARANTEED MINIMUM CASH VALUE. HOW WE CALCULATE ACCUMULATION UNIT VALUES We determine accumulation unit values on each valuation date. We generally set the accumulation unit value for a variable investment option at $10 when the investment option is first opened. After that, the accumulation unit value on any valuation date is: 1. the accumulation unit value for the preceding valuation date multiplied by 2. the accumulation experience factor for that variable investment option for the valuation period. Every valuation period begins at 4:00 p.m. Eastern time on a valuation date and ends at 4:00 p.m. Eastern time on the next valuation date. We calculate an accumulation experience factor for each variable investment option every valuation date as follows: 1. We take the share value of the underlying portfolio shares in the variable investment option as reported to us by the investment portfolio managers as of the close of business on that valuation date. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 29 2. We add dividends or capital gain distributions declared per share and reinvested by the investment portfolio on the date that the share value is affected. If applicable, we subtract a charge for taxes from this amount. 3. We divide the remaining amount by the value of the shares in the underlying investment portfolio for the variable investment option at the close of business on the previous valuation date. TRANSFERS OF ACCOUNT VALUE You may make up to twelve free transfers among the variable investment options, or the guaranteed interest division, in each policy year. You may not make transfers until after your free look period ends if your state requires a refund of premium during the free look period. We do not limit your number of transfers, but we may charge a $10 fee for each transfer that you make after the first twelve in each policy year. We do not include transfers for automatic rebalancing or dollar cost averaging toward your twelve free transfers. You may not make transfers during the continuation of coverage period. You may make transfer requests in writing, or by telephone if you have telephone privileges, to our customer service center. Your transfer takes effect on the valuation date we receive your request. The minimum amount you may transfer is $100. This minimum does not need to come from one 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 investment option is less than $100 when you make a transfer request, we transfer the entire amount out of that variable investment option. EXCESSIVE TRADING Excessive trading activity can disrupt investment portfolio management strategies and increase portfolio expenses by causing: o increased trading and transaction costs; o disruption of planned investment strategies; o forced and unplanned portfolio turnover; o lost opportunity costs; and o the investment portfolios to have large asset swings that decrease their ability to provide maximum investment return to all policyowners. In response to excessive trading, we may place restrictions or refuse transfers made by third-party agents acting on behalf of owners such as a market timing service. We will refuse or place restrictions on transfers when we determine, in our sole discretion, that transfers are harmful to the investment portfolios, or to policyowners as a whole. GUARANTEED INTEREST DIVISION TRANSFERS Transfers into the guaranteed interest division are not restricted. You may transfer from the guaranteed interest division only in the first 30 days of each policy year. Transfer requests received within 30 days before your policy anniversary are deemed to occur on your policy anniversary. A request received by us within 30 days after your policy anniversary is effective as of the valuation date we receive it. Transfer requests made at any other time will not be processed. Transfers from the guaranteed interest division are limited to the largest of: o 25% of your guaranteed interest division balance at the time of your first transfer or withdrawal out of it in that policy year; o the sum of the amounts you have transferred and withdrawn from the guaranteed interest division in the prior policy year; or o $100. DOLLAR COST AVERAGING If your policy has at least $10,000 invested in either the Liquid Asset Money Market Portfolio, or the Limited Maturity Bond Portfolio, you can elect dollar cost averaging. The main goal of dollar cost averaging is to protect your policy values from short- term price changes. Dollar cost averaging does not assure a profit nor does it protect you against a loss in a declining market. This systematic plan of transferring account values is intended to reduce the risk of investing too much - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 30 when the price of an investment portfolio's shares is high. It also reduces the risk of investing too little when the price of an investment portfolio's shares is low. Since you transfer the same dollar amount to other investment options each period, you purchase more units in an investment option if the unit value is low, and you purchase fewer units if the unit value is high. You may add dollar cost averaging to your policy at any time. The first dollar cost averaging date must be at least 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 investment option invested in either the Liquid Asset Money Market Portfolio or the Limited Maturity Bond Portfolio for automatic transfer. Each period, we automatically transfer the amount you select from your chosen source investment option to one or more other variable investment options. You may not make transfers to or from the guaranteed interest division or the loan division under dollar cost averaging. The minimum percentage you may transfer to any one investment option is 1% of the total amount you transfer to all investment options you select. You must transfer at least $100 for each dollar cost averaging transfer. Dollar cost averaging may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. Unless you tell us otherwise, dollar cost averaging automatically takes place monthly, on the monthly processing date. We do not count dollar cost averaging transfers toward your twelve free transfers per policy year. There is no charge for this feature. You may have both dollar cost averaging and automatic rebalancing at the same time. The 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 38. 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 investment option from which your dollar cost averaging transfers are taken reaches a dollar amount you set; or 3. on any dollar cost averaging date, the amount in the investment option from which you want to make a transfer is equal to or less than the amount to be transferred. We will transfer the remaining amount and dollar cost averaging ends. AUTOMATIC REBALANCING Automatic rebalancing provides you with a method for maintaining a consistent approach to investing account values over time, and simplifying the process of asset allocation by dividing amounts among the investment options you have chosen. Transfers made for automatic rebalancing do not count toward your twelve free transfers per policy year. There is no charge for this feature. If you choose this feature, on each rebalancing date we transfer amounts among the investment options to match your pre-set automatic rebalancing allocation percentages. After the transfers, the ratio of your account value in each division to your total account value for all investment options included in automatic rebalancing matches the automatic rebalancing allocation percentage for that investment option. This action rebalances the amounts in the investment options that do not match your set allocation. This happens if an investment option - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 31 outperforms other investment options for that time period. You may choose the automatic rebalancing feature on your application or later by completing our customer service form. Automatic rebalancing may occur on the same day of the month either monthly, quarterly, semi-annually, or annually. If you do not specify, automatic rebalancing will occur on the last valuation date of a calendar quarter. If you choose automatic rebalancing on your policy application, the first transfer occurs on the date you select (after your free look period if your state requires return of all premiums 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. You may have both automatic rebalancing and dollar cost averaging at the same time. The investment option from which your dollar cost averaging transfers are taken cannot be included in your automatic rebalancing allocation program. You may not include the loan division in your automatic rebalancing allocations. CHANGING AUTOMATIC REBALANCING You may change your allocation percentages for automatic rebalancing at any time. Your allocation change is effective on the valuation date that we receive it at our customer service center. If you reduce the amount allocated to the guaranteed interest division, it is considered a transfer from that division. You must meet the requirements for the maximum transfer amount and time limitations on transfers from the guaranteed interest division. See Transfers of Account Value, page 30. 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. 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, new policy loans must be at least $100. The maximum amount you can borrow on any valuation date, unless required differently by state law, is your net account value minus the monthly deductions to your next policy anniversary or 13 monthly deductions if you take a loan within thirty days before your next policy anniversary. Your request for a policy loan must be directed to our customer service center. If you have telephone privileges, you may request a policy loan for less than $25,000 by telephoning our customer service center. SEE TELEPHONE PRIVILEGES, PAGE 38. When you request a loan you may specify one investment option from which the loan will be taken. If you do not specify one, the loan will be taken proportionately from each active investment option you have. When you take a policy loan, we transfer an amount equal to your policy loan from the specified investment option proportionately or from the variable and the guaranteed interest divisions to the loan division. We follow this same process for loan interest due at your policy anniversary. We credit the loan division with interest at an annual rate of 3%. The loan division is part of our general account, separate from the guaranteed interest division. Loan interest charges on your policy loan accrue daily at an annual interest rate of 3.25%. Interest is due in arrears on each policy anniversary. If you do not pay your interest when it is due, we add it to your policy loan. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 32 If you request an additional loan, we add the amount you request to your existing outstanding policy loan. This way, there is only one loan outstanding on your policy at any time. Policy loans may cause your policy to lapse if your net account value is not enough to pay all deductions each month. SEE LAPSE, PAGE 34. Policy loans may have tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 48. LOAN REPAYMENT You may repay all or part of your policy loan at any time. We assume that any payments you make, other than scheduled premiums, are policy loan repayments. You must tell us otherwise if you want additional payments to be premium payments. When you make a loan repayment, we transfer an amount equal to your repayment from the loan division, the variable investment options and the guaranteed interest division in the same proportion as your current premium allocation, unless you tell us otherwise. LOANS AND YOUR BENEFITS Taking a loan decreases the amount you have in the investment options. Accruing loan interest will change your net account value as compared to what it would have been if you did not take a loan. Even if you repay your loan, it has a permanent effect on your account value. The benefits under your policy may be affected. The loan is a first lien on your policy. If you do not repay your policy loan, we deduct your outstanding policy loan and accrued loan interest from the death benefit payable, the surrender value payable. The policy lapses when the account value minus policy loans and accrued loan interest is not enough to cover your monthly deductions. If your policy lapses with a loan outstanding, you may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 48. If you use the continuation of coverage feature and you have a policy loan, loan interest continues to accrue. If you do not make loan payments your policy could lapse. PARTIAL WITHDRAWALS You may request a partial withdrawal on any valuation date after your first policy anniversary by contacting our customer service center. You make a partial withdrawal when you withdraw part of your net account value. If your request is by telephone, the partial withdrawal must be for an amount less than $25,000 and may not cause a decrease in your death benefit; otherwise, your request must be in writing. SEE TELEPHONE PRIVILEGES, PAGE 38. You may take only one partial withdrawal per policy year. The minimum partial withdrawal you may take is $100. The maximum partial withdrawal you may take is the amount which leaves $500 as your net account value. If you request a withdrawal of more than this maximum, we require you to surrender your policy. When you take a partial withdrawal, we deduct your withdrawal amount plus any service fee from your account value. SEE CHARGES, PAGE 42. Partial withdrawals may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 48. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1 If you selected death benefit option 1, and if no more than fifteen years have passed since your policy date and the insured person is not yet age 81, you may make a partial withdrawal of up to the greater of 10% of your account value, or 5% of your stated death benefit without decreasing the stated death benefit. Otherwise amounts you withdraw will reduce your stated death benefit by the amount of the withdrawal unless your policy death benefit has been increased due to the federal income tax definition of life insurance. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 33 If your policy death benefit has been increased due to the federal income tax definition of life insurance at the time of the partial withdrawal, then at least part of your partial withdrawal may be made without reducing your stated death benefit. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 2 If you have selected death benefit option 2, a partial withdrawal does not reduce your stated death benefit or target death benefit. However, we reduce the total death benefit by at least the partial withdrawal amount because your account value is reduced. PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 3 If you have selected death benefit option 3 and your partial withdrawal is less than the total of premiums you have paid less the total of your prior partial withdrawals, then your stated death benefit will not be reduced. However, your total death benefit will be reduced by at least the amount of your partial withdrawal. If your partial withdrawal is more than the amount of premiums you have paid less the total of your prior partial withdrawals, then the excess is treated in the same manner as partial withdrawals under death benefit option 1. SEE PARTIAL WITHDRAWALS UNDER DEATH BENEFIT OPTION 1, PAGE 33. 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 47. We require a minimum target death benefit to issue your policy. You are not allowed to take a partial withdrawal if it reduces your target death benefit below this minimum. SEE GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS, PAGE 46. PARTIAL WITHDRAWAL MECHANICS Unless you tell us otherwise, we will make a partial withdrawal from the guaranteed interest division and the variable division in the same proportion that each has to your net account value immediately before your withdrawal. The amount withdrawn from the guaranteed interest division may not be for more than your total withdrawal multiplied by the ratio of your account value in the guaranteed interest division to your total net account value immediately before the partial withdrawal transaction. We will send a new schedule page for your policy showing the effect of your withdrawal if there is any change to your stated death benefit or your target death benefit. Or, to make this change, we may ask that you return the policy to our customer service center. Your withdrawal and any reductions in the death benefits are effective as of the valuation date on which we receive your request. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 48. LAPSE Your insurance coverage continues as long as your net account value is enough to pay all deductions each month. In any policy year, if you have an outstanding policy loan, your policy will lapse if the loan plus the accrued interest owed is more than the account value. After the insured person reaches age 100 and if the continuation of coverage feature is active, the policy could lapse even though there are no further monthly deductions. GRACE PERIOD Your policy enters the 61-day lapse grace period if, on a monthly processing date your net account value is zero (or less). We notify you that the policy is in a grace period at least 30 days before the grace period ends. We provide this notice to you, or a person to whom you - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 34 have assigned your policy, at the last address in our records. We notify you of the required premium payment necessary to prevent your policy from lapsing. This amount is generally the amount of past due charges, plus the amount that covers your estimated monthly policy deductions for the next two months. If the insured person dies during the grace period, we pay death proceeds to your beneficiary(ies) with reductions for policy loans, accrued loan interest, and monthly deductions owed. If we receive payment of the required amount before the end of the grace period, we apply it to your account value in the same manner as your other premium payments, then we take the overdue deductions from your account balance. If you do not pay the full amount required within the 61-day grace period, your policy (and rider) lapse without value. We then withdraw your remaining account balance from the variable and guaranteed interest divisions. We deduct amounts you owe us and inform you that the policy has ended. REINSTATEMENT If you do not pay enough premium before the end of the grace period, your policy lapses. You may reinstate your policy and rider within five years after the grace period ends. Unless state law requires differently, we will reinstate your policy and rider if: 1. you have not surrendered your policy for its surrender value; 2. you provide satisfactory evidence to us that the insured person is still insurable according to our normal rules of underwriting; and 3. we receive enough premium from you to keep your policy and rider in force from the beginning to the end of the grace period and for two months after the reinstatement date. Reinstatement is effective as of the monthly processing date following our approval of your reinstatement application. If you had a policy loan when coverage ended, we reinstate it with accrued loan interest to the date of lapse. The cost of insurance charges in effect at the time of reinstatement for the age of the insured person are adjusted to reflect the time since the lapse. We apply 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 surrender value any time while the insured person is living. You do this by sending a written request and your policy or a lost policy form to our customer service center. We compute your surrender value as of the valuation date we receive your surrender request and policy at our customer service center. All insurance coverage ends on the date we receive your surrender request and policy. SEE POLICY VALUES, PAGE 10. We do not pro-rate or add back charges and expenses to your account value which we deducted on the monthly anniversary before the date your surrender is processed. A surrender of your policy may have adverse tax consequences. SEE DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM MODIFIED ENDOWMENT CONTRACTS, PAGE 48, AND DISTRIBUTIONS OTHER THAN DEATH BENEFITS FROM POLICIES THAT ARE NOT MODIFIED ENDOWMENT CONTRACTS, PAGE 48. GENERAL POLICY PROVISIONS FREE LOOK PERIOD OR RIGHT TO EXAMINE POLICY PERIOD You have the right to examine your policy. The right to examine your policy (or free look period) starts on the date you receive your policy. If for any reason you do not want it, you may return your policy to us or your registered representative within the period shown in the policy. If you return your policy to us within your state's specified time limit, we will consider it canceled as of your policy date. If you cancel your policy during this free look period, you will receive a refund as determined by state law. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 35 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 additional net premiums paid before the end of the free look period are invested into the variable investment options. SEE ALLOCATION OF NET PREMIUMS, PAGE 21. YOUR POLICY Some groups under this policy may choose to use a master policy and certificates rather than a series of individual policies. The entire contract between you and us is the combination of: o the policy (or certificate); o a copy of your original application and any applications for benefit increases or decreases; o the adjustable term insurance rider; o endorsements; o schedule pages; and o reinstatement applications. If you make a change to your coverage, we give you a copy of your changed application and new schedules. If you send us your policy, we attach these items to your policy and return it to you. Otherwise, you need to attach them to your policy. Unless there is fraud, we consider all statements made in an application to be representations and not guarantees. We use no statement to deny a claim, unless it is in an application. A president or an officer of our company and our secretary or assistant secretary must sign all changes or amendments we make to your policy. No other person may change the terms or conditions of your policy. GUARANTEED ISSUE We only offer this policy on a guaranteed issue basis. We issue these policies up to a preset face amount with evidence of insurability requirements. AGE We issue your policy at the insured person's age stated in your policy schedule. This is based on the insured person's age as of the nearest birth date to the policy date. We determine the insured person's age at any given time by adding the number of completed policy years to the age calculated at issue and shown in the schedule. At issue of your policy, the insured person must be no less than age 15 and no more than age 85. OWNERSHIP The original owner is the person named as the owner in the policy application. The owner can exercise all rights and receive the benefits during the insured person's lifetime before the maturity date. This includes the right to change the owner, beneficiaries, or method to pay proceeds. As a matter of law, all rights of ownership are limited by the rights of any person who has been assigned rights under the policy, and any irrevocable beneficiary(ies). You may name a new owner by giving us written notice. The effective date of the change to the new owner is the date the prior owner signs the notice. However, we will not be liable for any action we take before a change is recorded at our customer service center. A change in ownership may cause the prior owner to recognize taxable income on gain under the policy. BENEFICIARY(IES) You, as owner, name the beneficiary(ies) when you apply for your policy. The primary beneficiary(ies) who survives the insured person receives the death proceeds. Other surviving beneficiary(ies) receive death proceeds only if there is no surviving primary beneficiary(ies). If more than one beneficiary(ies) survives the insured person, they share the death proceeds equally, unless you have told us otherwise. If none of your policy beneficiaries has survived the insured person, we pay the death proceeds to you, or to your estate as owner. Once you tell us who the beneficiary(ies) is/are, we keep this information on file. You may name a new beneficiary during the insured person's lifetime. We pay the death proceeds to the most recent beneficiary(ies) whom you have most recently named - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 36 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) was made an irrevocable beneficiary(ies) under an earlier assignment) are subject to the assignment. It is your responsibility to make sure the assignment is valid. INCONTESTABILITY After your policy has been in force while the insured person is alive for two years from your policy date, we will not question the validity of the statements in your application. After your policy has been in force while the insured person is alive for two years from the effective date of any new segment or from the effective date of an increase in any other benefit, we will not contest the statements in your application for the new segment or other benefit increase. After this policy has been in force while the insured person is alive for two years from the effective date of any reinstatement, we will not contest the statements in your application for reinstatement. MISSTATEMENTS OF AGE OR GENDER If the insured person's age or gender has been misstated, we adjust the death benefit. We adjust death benefits to the amount which would have been purchased for the insured person's correct age and gender. We base the adjusted death benefit on the cost of insurance charges deducted from your account value on the last monthly processing date before the insured person's death, or as otherwise required by state law. If unisex cost of insurance rates apply, we do not make any adjustments for a misstatement of gender. SUICIDE If the insured person commits suicide, while that insured person is sane or insane within two years of your policy date, unless otherwise required by state law, we limit death benefits to: 1. the total of all 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. If the insured person has been changed, and the new insured person dies by suicide within two years of the change date, we then limit the death benefit to: 1. your net account value as of the change date; plus 2. the premiums you paid since the change date; minus 3. the sum of any increases in policy loans, accrued loan interest, and partial withdrawals taken since the change date. We make a limited payment to the beneficiary(ies) for a new segment or other increase if the insured person commits suicide, while sane or insane within two years of the effective date of a new segment, or within two years of an increase in any other benefit, unless otherwise required by state law. The limited payment we make is equal to the cost of insurance and monthly expense charges which were deducted for such increase. TRANSACTION PROCESSING Generally, within seven days of when we receive all information required to process a payment, we pay: o death proceeds; o surrender value; o partial withdrawals; and o loan proceeds. We may delay processing these transactions if: o the NYSE is closed for trading; o trading on the NYSE is restricted by the SEC; o there is an emergency so that it is not reasonably possible to sell securities in the variable investment options or to determine the value of a variable investment option's assets; or o a governmental body with jurisdiction over the separate account allows suspension by its order. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 37 SEC rules and regulations determine whether or not these conditions exist. We execute transfers among the variable investment options as of the valuation date of our receipt of your request at our customer service center. We determine death proceeds as of the insured person's date of death. The death proceeds are not affected by subsequent changes in the value of the variable investment options. We pay interest at our stated rate (or at a higher rate if required by law) from the insured person's date of death to the date of payment. We may delay payment from our guaranteed interest division for up to six months, unless state law requires otherwise, of: o surrender proceeds; o withdrawal amounts; or o loan amounts. We pay interest at our declared rate (or at a higher rate if required by law) from the date we receive the request if we delay payment more than 30 days. NOTIFICATION AND CLAIMS PROCEDURES Except for certain authorized telephone requests, we must receive in writing any election, designation, change, assignment or request made by the owner. You must use a form acceptable to us. We are not liable for actions taken before we receive and record the written notice. We may require you to return your policy for certain policy changes or if you surrender it. If the insured person dies while your policy is in force, please let us or your registered representative know as soon as possible. We will immediately send you instructions on how to make a claim. As proof of the deceased insured person's death, we may require you to provide proof of the deceased insured person's age, and a certified copy of the deceased insured person's death certificate. The beneficiary(ies) and the deceased insured person's next of kin may need to sign authorization forms. These forms allow us to get information about the deceased insured person. This information may include medical records of doctors and hospitals used by the deceased insured person. TELEPHONE PRIVILEGES Telephone privileges are automatically provided to you and your agent or registered representative, unless you decline it on the application or contact our customer service center. Telephone privileges allow you or your agent/registered representative, if applicable, to call our customer service center to: o make transfers; o change premium allocations; o change features in your dollar cost averaging and automatic rebalancing programs; o request partial withdrawals; or o request a policy loan. Our customer service center uses reasonable procedures to make sure that instructions received by telephone are genuine. These procedures may include: 1. requiring some form of personal identification; 2. providing written confirmation of any transactions; and 3. tape recording telephone calls. By accepting automatic telephone privileges, you authorize us to record your telephone calls to us. If we use reasonable procedures to confirm instructions, we are not liable for losses due to unauthorized or fraudulent instructions. We may discontinue this privilege at any time. NON-PARTICIPATION Your policy does not participate in the surplus earnings of Security Life. DISTRIBUTION OF THE POLICIES The principal underwriter (distributor) for our policies is ING America Equities, Inc. ING America Equities, Inc. is a wholly owned subsidiary of Security Life. It is registered as a broker-dealer with the SEC and the NASD. We pay ING America Equities, Inc. for acting as the principal underwriter under a distribution agreement. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 38 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; 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 broker-dealers, who then pay commissions to the registered representative who sells this policy. During the first policy year, the distribution allowance may be up to 12% of the target premium that you paid. For policy years two through four, the distribution allowance may be up to 10% of the target premium. For policy years five through ten, the distribution allowance may equal up to 2% of the target premiums that you have paid. After the tenth policy year, there is no distribution allowance. Broker-dealers may receive annual renewal payments of 0.20% of the net account value for the first twenty years of your policy and 0.10% each year thereafter. Compensation arrangements vary among broker-dealers and depend on particular circumstances. In addition to the above-described compensation, we may pay wholesaler fees and training allowances. We pay distribution and other allowances from our resources which includes sales charges deducted from premiums. ADVERTISING PRACTICES AND SALES LITERATURE We may use advertisements and sales literature to promote this product, including: o articles on variable life insurance and other information published in business or financial publications; o indices or rankings of investment securities; and o comparisons with other investment vehicles, including tax considerations. We may use information regarding the past performance of the variable investment options. Past performance is not indicative of future performance of the investment options or the policies and is not reflective of the actual investment experience of policyowners. We may feature certain investment options and their managers, as well as describe asset levels and sales volumes for our products. We may refer to past, current, or prospective economic trends and investment performance or other information we believe may be of interest to our customers. SETTLEMENT PROVISIONS You may elect to have the beneficiary(ies) receive the death proceeds other than in one payment. If you make this election, you must do so during the insured person's lifetime. If you have not made this election, the beneficiary(ies) may do so within 60 days after we receive proof of the insured person's death. You may take your surrender value in other than one payment. The investment performance of the variable investment options does not affect payments under these settlement options. Instead, interest accrues at a fixed rate based on the option you choose. Payment options are subject to our rules at the time you make your selection. A periodic payment must be at least $20. Currently, these alternate payment options are available if the proceeds are $2,000 or more. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 39 Option I: PAYOUTS FOR A DESIGNATED PERIOD: Payout payments may be made on a monthly, quarterly, semi-annual, or annual basis 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. 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 throughout the lifetime of the person receiving the payment, or if longer for guaranteed periods of five, ten, fifteen, or twenty years. You choose the length of time to receive the guaranteed payments. If you choose a longer guaranteed period, the amount of your periodic payments will be lower. 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 investment option's assets in shares of investment portfolios. We are the legal owner of the shares held in the separate account and we have the right to vote on certain issues. Among other things, we may vote on issues described in the fund's current prospectus, or issues requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, we give you the opportunity to tell us how to vote the number of shares attributable to your account value. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 40 We count fractional shares. If you have a voting interest, we send you proxy material and a form on which to give us your voting instructions. Each investment portfolio's shares have the right to one vote. The votes of all investment portfolios are cast together on a collective basis, except on issues for which the interests of the portfolios differ. In these cases, voting is done on a portfolio-by-portfolio basis. Examples of issues that require a portfolio-by-portfolio vote are: 1. changes in the fundamental investment policy of a particular investment portfolio; or 2. approval of an investment advisory agreement. We vote the shares in accordance with your instructions at meetings of investment portfolio shareholders. We vote any investment portfolio shares that are not attributable to policies, and any investment portfolio shares for which the owner does not give us instructions, the same way we vote as if we did receive owner instructions. We reserve the right to vote investment portfolio shares without getting instructions from policy owners if the federal securities laws, regulations, or their interpretations change to allow this. You may instruct us only on matters relating to the investment portfolios corresponding to divisions in which you have invested assets as of the record date set by the investment portfolio's Board for the portfolio's shareholders meeting. We determine the number of investment portfolio shares in each variable investment option that we attribute to your policy by dividing your account value allocated to that variable investment option by the net asset value of one share of the matching investment portfolio. MATERIAL CONFLICTS We are required to track events to identify any material conflicts arising from using investment portfolios for both variable life and variable annuity separate accounts. The boards of the investment portfolios, Security Life, and other insurance companies participating in the investment portfolios, have this same duty. There may be a material conflict if: o state insurance law or federal income tax law changes; o investment management of an investment portfolio changes; or o voting instructions given by owners of variable life insurance policies and variable annuity contracts differ. The investment portfolios may sell shares to certain qualified pension and retirement plans qualifying under Code Section 401. These include cash or deferred arrangements under Code Section 401(k). Therefore, there is a possibility that a material conflict may arise between the interests of owners in general, or between certain classes of owners, and these retirement plans or participants in these retirement plans. If there is a material conflict, we have the duty to determine appropriate action, including removing the portfolios involved from our variable investment options. We may take other action to protect policy owners. This could mean delays or interruptions of the variable operations. When state insurance regulatory authorities require us, we may ignore voting instructions relating to changes in an investment portfolio's adviser or its investment policies. If we do ignore voting instructions, we give you a summary of our actions in the next semi-annual report to owners. Under the Investment Company Act of 1940, we must get your approval for certain actions involving our separate account. In this case, you have one vote for every $100 of value you have in the variable investment options. We cast votes credited to amounts in the variable investment options, but not credited to policies in the same proportion as votes cast by owners. RIGHT TO CHANGE OPERATIONS Subject to state limitations, we may from time to time make any of the following changes to our separate account: 1. Change the investment objective. 2. Offer additional variable investment options which will invest in portfolios we find appropriate for policies we issue. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 41 3. Eliminate variable investment options. 4. Combine two or more variable investment options. 5. Substitute a new investment portfolio for a portfolio in which the division currently invests. A substitution may become necessary if, in our judgment: o a portfolio no longer suits the purposes of your policy; o there is a change in laws or regulations; o there is a change in a portfolio's investment objectives or restrictions; o the portfolio is no longer available for investment; or o another reason we deem a substitution is appropriate. 6. Transfer assets related to your policy class to another separate account. 7. Withdraw the separate account from registration under the 1940 Act. 8. Operate the separate account as a management investment company under the 1940 Act. 9. Cause one or more 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 wish to transfer the amount you have in the affected option to another variable investment option, or to the guaranteed interest division, you may do so free of charge. Just notify us at our customer service center. REPORTS TO OWNERS At the end of each policy year we send a report to you that shows: o your total net policy death benefit (your stated death benefit plus adjustable term insurance rider death benefit, if any); o your account value; o your policy loan if any, plus accrued interest; o your surrender value; o information about the variable investment options; and o your account transactions during the previous year showing net premiums, transfers, deductions, 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 AND DEDUCTIONS 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 insured person is not yet age 100 and you do not have an outstanding policy loan. After we deduct certain expenses from your premium payment, we add the remaining net premium to your account value. TAX CHARGES We pay state and local taxes in almost all states. These taxes vary in amount from state to state and - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 42 may vary from jurisdiction to jurisdiction within a state. Currently, state and local taxes range from 0% to 5%. In the first policy or segment year, we deduct 2.5% of each premium payment you make up to target premium to cover these taxes. Thereafter, we deduct 2.5% of all premium payments you make. This charge approximates the average tax rate we expect to pay. In the first policy or segment year, we deduct 1.5% of each premium payment you make up to target premium. Thereafter, we deduct 1.5% of premiums you make to cover our estimated costs for the federal income tax treatment of deferred acquisition costs. This cost is determined solely by a portion of the amount of life insurance premiums we receive. We reserve the right to increase or decrease your premium expense charge for taxes as a result of changes in the tax law, within limits set by state law. We also reserve the right to increase or decrease your premium expense charge for the federal income tax treatment of deferred acquisition costs based on any change in that cost to us. SALES CHARGE We deduct a percentage from each of your premium payments to compensate us for the costs we incur in selling the policies. In the first policy or segment year this charge is 2% of the premiums you pay up to target premium and 0.5% of the premiums you pay for each policy or segment year thereafter. The sales charge helps to cover the costs of distribution, preparing our sales literature, promotional expenses, and other direct and indirect expenses. The amount charged is not specifically related to sales expenses in a particular year. SINGLE WITHDRAWAL INVESTMENT OPTION You have the option to designate a single withdrawal investment option from which we will take your monthly deductions and your deferred sales charge. You may make this designation at policy application or later. You may not use the loan division as your designated withdrawal investment option from which to deduct monthly deductions and the deferred sales charge. If you do not choose a single withdrawal investment option from which to deduct monthly deductions and deferred sales charge, or if the amount in your designated withdrawal investment option is not enough to cover the monthly deductions and deferred sales charge, these charges are taken from the variable and guaranteed interest divisions in the same proportion that your account value in each division has to your total net account value as of the monthly processing date. If you change your designated withdrawal investment option from which monthly deductions and the deferred sales charge are deducted, we consider this a premium allocation change for which there may be a charge. SEE POLICY TRANSACTION FEES, PAGE 45. DEFERRED SALES CHARGE We deduct a deferred sales charge that is based on a percentage of the premium payments you make in each of the first ten policy years as specified in your schedule pages. The charge is based on premium payments, but is deducted from your account value in equal installments on each of the seven policy anniversaries following the date on which you make the premium payment. Each policy segment has its own target premium and deferred sales charge. We allocate your premium payments to determine the deferred sales charges under your policy if you have more than one segment. SEE CHANGES IN DEATH BENEFIT AMOUNTS, PAGE 25. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 43 The deferred sales charge compensates us for a portion of the costs we incur in selling the policies. See Changes in Death Benefit Amounts, page 25. |Deferred Sales Charge| Policy or | as a Percentage* | Segment |---------------------| Deducted at Year |up to in Excess | Beginning of Premium |Target of Target | Policy or Paid |Premium Premium | Segment Years ----------------------------------------------------- 1 | 2% 1% | 2 - 8 2 |1.75% N/A | 3 - 9 3 |1.75% N/A | 4 - 10 4 |1.75% N/A | 5 - 11 5 | 0.5% N/A | 6 - 12 6 | 0.5% N/A | 7 - 13 7 | 0.5% N/A | 8 - 14 8 | 0.5% N/A | 9 - 15 9 | 0.5% N/A | 10 - 16 10 | 0.5% N/A | 11 - 17 * These are the percentages used to determine the annual deduction. The deduction will be made once each year for seven years. MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE We deduct charges from your account value on each monthly processing date. MORTALITY AND EXPENSE RISK CHARGE We deduct a charge each month for the mortality and expense risks we assume. This charge is 0.01667% per month of the amount you have in the variable investment options on the monthly processing date. This is an annual rate of 0.20%. The mortality risk we assume is that insured people, as a group, may live less time than we estimated. We assume risk that expenses we incur in issuing and administering the policies and in operating the variable investment options are greater than the amount we estimated when we set these charges. 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 ADMINISTRATIVE CHARGE For this policy, we charge an administrative charge of $12 per month for the first policy year and $6 per month for each policy year beyond that. The monthly administrative charge is designed to compensate us for ongoing costs such as: o premium billing and collections; o claim processing; o policy transactions; o record keeping; o reporting and communications with policy owners; and o other expenses and overhead. COST OF INSURANCE CHARGE The cost of insurance charge compensates us for the ongoing costs of providing insurance coverage under the policy, including the expected cost of paying death proceeds that are more than your account value at the insured person's death. The cost of insurance rates may depend on the: o issue age of the insured people in the group; o risk class of the insured people in the group; o size of the group; and o total premium the group pays. The cost of insurance charge is equal to our current monthly cost of insurance rate times the net amount at risk for each portion of your death benefit. We calculate the net amount at risk monthly, at the beginning of each policy month. For the base death benefit, the net amount at risk is calculated using the difference between the current base death benefit and your account value. We determine the amount of your account value after we deduct your policy charges due on that date, other than cost of insurance charges for the base death benefit and adjustable term insurance rider. If your base death benefit at the beginning of a month increases (due to requirements of the federal income tax law definition of life insurance), the net amount at risk for your base death benefit for that month also increases. Similarly, the net amount at risk for your adjustable term insurance rider decreases. This means that the amount of your cost of insurance charge varies from month to month with changes in your net amount at risk, changes in the death benefit and with the increasing age of the insured person. We allocate the net amount at risk to any segments in the same proportion that each - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 44 segment has to the total stated death benefit for all coverage segments as of the monthly processing date. We apply unisex rates where appropriate under the law. This currently includes the State of Montana and policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Separate cost of insurance rates apply to each segment of the base death benefit and your adjustable term insurance rider. These rates are never more than the guaranteed maximum rates shown in your policy; however, they may change from time to time. The guaranteed maximum rates for base coverage are based on the 1980 Commissioner's Standard Ordinary Sex Distinct Mortality Table. The maximum rates for the initial and any new segment will be printed in the schedule which we will provide to you. This may result in higher cost of insurance charges than those that would apply if the policy were on an individual instead of group basis. CHANGES IN MONTHLY CHARGES Changes we make in the cost of insurance charges or charges for additional benefits are for a class of insured persons. We base the new charge on changes in expectations about: o investment earnings; o mortality; o the time policies remain in effect; o expenses; and o taxes. New monthly charges will never be more than the guaranteed maximum rates shown in your policy. CONTINUATION OF COVERAGE ADMINISTRATIVE FEE When the insured person reaches age 100, if your policy has not been surrendered, the continuation of coverage period begins. We will charge a one-time administrative fee of $200. This charge compensates us for maintaining and servicing your policy until the death of the insured person. We then no longer charge you a monthly administrative 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 deduct a service fee of $25 of the amount you request from your account value for each partial withdrawal you take to cover our costs. SEE PARTIAL WITHDRAWALS, PAGE 33. TRANSFERS There may be a $10 fee for each additional transfer over twelve per policy year to cover our costs. If you include multiple transfers in one request, it counts as one transfer. There is no transfer fee if you are exercising the right to exchange feature in your policy. SEE TRANSFERS OF ACCOUNT VALUE, PAGE 30, AND RIGHT TO EXCHANGE POLICY, PAGE 27. 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 may charge you $25 for each additional premium allocation change per policy year. If you change your designated withdrawal investment option, we consider this a premium allocation charge for which there may be a charge. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 44. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 45 Divisions From Which We Deduct Charges
ACCOUNT VALUE MONTHLY CHARGES OF COST OF INSURANCE CHARGES POLICY LOANS AND ADMINISTRATION FEES TRANSACTION FEES PARTIAL WITHDRAWALS - --------------- ------------------------------------------ ------------------------- --------------------------------- CHOICE May choose one withdrawal investment Proportionally among May choose any withdrawal option, including guaranteed interest variable and guaranteed investment options or division interest divisions combination of investment options, subject to requirements - --------------- ------------------------------------------ ------------------------- --------------------------------- DEFAULT Proportionally among variable and Proportionally among Proportionally among variable guaranteed interest divisions variable and guaranteed and guaranteed interest divisions interest divisions
GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS Groups of individuals, corporations or other institutions may purchase this policy. For some group or sponsored arrangements (including employees and certain family members of employees of Security Life of Denver, its affiliates and appointed sales agents), or special exchange programs which we may offer from time to time, we may reduce or waive the: o administrative charge; o minimum target death benefit; o target premium; o sales charges; o cost of insurance charges; or o other charges normally assessed. We can reduce or waive these items due to expected economies based on the characteristics of the group or sponsored arrangement or with a corporate purchaser. Group arrangements include those in which there is a trustee, an employer or an association. The group may either purchase policies covering a group of individuals or endorse a policy to a group of individuals. Sponsored arrangements include those in which an employer or association allows us to offer policies to its employees or members on an individual basis. Our sales, administration and mortality costs generally vary with the size and stability of the group, among other factors which we take into account when we reduce charges. We make reductions to charges based on our rules in effect when we approve a policy application. We may change these rules from time to time. We will not be unfairly discriminatory in the variation in the administrative charge, or other charges, fees and privileges. These variations are based on differences in costs or services. OTHER CHARGES Under current law, we pay no tax on investment income and capital gains included in variable life insurance policy reserves. This means that no charge is currently made to any variable investment option for our federal income taxes. If the tax law changes and we have federal income tax chargeable to the variable investment options, we may make such a charge in the future. TAX CONSIDERATIONS The following summary provides a general description of the federal income tax considerations associated with the policy and does not purport to be complete or to cover all tax situations. This discussion is not intended as tax advice. Counsel or other competent tax advisers should be consulted for more complete information. This discussion is based upon our understanding of the present federal income tax laws. No representation is made as to the likelihood of continuation of the present federal income tax laws or as to how they may be interpreted by the Internal Revenue Service. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 46 TAX STATUS OF THE POLICY This policy is designed to qualify as a life insurance contract under the Internal Revenue Code. All terms and provisions of the policy shall be construed in a manner which is consistent with that design. In order to qualify as a life insurance contract for federal income tax purposes and to receive the tax treatment normally accorded life insurance contracts under federal tax law, a policy must satisfy certain requirements which are set forth in Internal Revenue Code Section 7702. However, there is very little guidance, with respect to policies issued on a substandard basis. Nevertheless, we believe it is reasonable to conclude that our policies satisfy the applicable requirements. If it is subsequently determined that a policy does not satisfy the applicable requirements, we will take appropriate and reasonable steps to bring the policy into compliance with such requirements and we reserve the right to restrict policy transactions or modify your policy in order to do so. Specifically this policy must meet the requirements of the "cash value accumulation test" as specified in Code Section 7702. Under the cash value accumulation test, there is no limit to the amount that may be paid in premiums as long as there is enough death benefit in relation to account value at all times. The death benefit at all times must be at least equal to an actuarially determined factor, depending on the insured person's age and sex at any point in time, multiplied by the account value. SEE APPENDIX A, PAGE 244, FOR A TABLE OF THE CASH VALUE ACCUMULATION TEST FACTORS. We will at all times assure that the policy meets the statutory definition which qualifies the policy as life insurance for federal income tax purposes. In addition, as long as the policy remains in force, increases in account value as a result of interest or investment experience will not be subject to federal income tax unless and until there is a distribution from the policy, such as a partial withdrawal or loan. SEE TAX TREATMENT OF POLICY DEATH BENEFITS, PAGE 48. DIVERSIFICATION REQUIREMENTS In addition to meeting the Code Section 7702 tests, 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 investment option must meet certain tests. If your variable life policy is not adequately diversified under these regulations, it is not treated as life insurance under Code Section 7702. You would then be subject to federal income tax on your policy income as you earn it. Our variable investment options' investment portfolios have promised they will meet the diversification standards that apply to your policy. In certain circumstances, you, as owner of a variable life insurance contract, may be considered the owner for federal income tax purposes of the separate account assets used to support your contract. Any income and gains from the separate account assets are includable in the gross income from your policy under these circumstances. The IRS has stated in published rulings that a variable contract owner is considered the owner of separate account assets if the contract owner has "indicia of ownership" in those assets. "Indicia of ownership" includes the ability to exercise investment control over the assets. Your ownership rights under your policy are similar to, but different in some ways from those described by the IRS in rulings in which it determined that policy owners are not owners of separate account assets. For example, you have flexibility in allocating your premium payments and in your policy values. These differences could result in the IRS treating you as the owner of a pro rata share of the 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 47 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. 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 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 48 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 mortality charge used to calculate whether your policy qualifies as life insurance for federal income tax purposes. We must base these calculations on reasonable mortality charges expected to be paid. The Treasury issued proposed regulations on what it considers reasonable mortality charges. We believe that the charges used for your policy should meet the Treasury's current requirement for "reasonableness." We reserve the right to make changes to the mortality charges used in the calculation if future regulations have standards which make changes necessary in order to continue to qualify your policy as life insurance for federal income tax purposes. Additionally, assuming that you do not want your policy to be or to become a modified endowment contract, we include a policy endorsement under which we have the right to amend your policy, including riders. We do this to attempt to enable your policy to continue to meet the seven-pay test for federal income tax purposes. If the policy premium you pay is more than the seven-pay limit, we have the right to remove any excess premium or to make - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 49 any appropriate adjustments to your policy's account value and death benefit. It is not clear, however, whether we can take effective action pursuant to this endorsement under all possible circumstances to prevent a policy that has exceeded the premium limitation from being classified as a modified endowment contract. Any increase in your death benefit will cause an increase in your cost of insurance charges. Other Policy owners may use our policies in various arrangements, including: o qualified plans; o non-qualified deferred compensation or salary continuance plans; o split dollar insurance plans; o executive bonus plans; o retiree medical benefit plans; and o other plans. The tax consequences of these plans may vary depending on the particular facts and circumstances of each arrangement. If you want to use any of your policies in this type of arrangement, you should consult a qualified tax adviser regarding the tax issues of your particular arrangement. In recent years, Congress has adopted new rules relating to life insurance owned by businesses. Any business contemplating the purchase of a new policy or a change in an existing policy should consult a tax adviser. The IRS requires us to withhold income taxes from any portion of the amounts individuals receive in a taxable transaction. We do not withhold income taxes if you elect in writing not to have withholding apply. If the amount withheld for you is insufficient to cover income taxes, you may have to pay income taxes and possibly penalties later. The transfer of the policy or designation of a beneficiary may have federal, state, and/or local transfer and inheritance tax consequences, including the imposition of gift, estate, and generation-skipping transfer taxes. For example, the transfer of the policy to, or the designation as a beneficiary of, or the payment of proceeds to a person who is assigned to a generation which is two or more generations below the generation assignment of the policy owner may have generation skipping transfer tax consequences under federal tax law. The individual situation of each policy owner or beneficiary will determine the extent, if any, to which federal, state, and local transfer and inheritance taxes may be imposed and how ownership or receipt of policy proceeds will be treated for purposes of federal, state and local estate, inheritance, generation skipping and other taxes. YOU SHOULD CONSULT QUALIFIED LEGAL OR TAX ADVISERS FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL, AND OTHER TAX CONSIDERATIONS. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 50 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 policies illustrated include:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Gender Age Status Option Test Benefit Premium Benefit ------ --- ------ ------ ---- ------- ------- ------- Male 35 Non-tobacco user 1 CVAT 251,206 $10,000 251,206 Male 35 Non-tobacco user 1 CVAT 125,603 $10,000 251,206 Male 45 Non-tobacco user 1 CVAT 180,524 $10,000 180,524 Male 45 Non-tobacco user 1 CVAT 90,262 $10,000 180,524 Male 55 Non-tobacco user 1 CVAT 131,692 $10,000 131,692 Male 55 Non-tobacco user 1 CVAT 65,846 $10,000 131,692
The tables show how death benefits, account values, and surrender values of a hypothetical policy could vary over an extended period of time, assuming the variable divisions had constant hypothetical gross annual investment returns of 0%, 6%, or 12% over the periods indicated in each table. Values would differ from those shown in the tables if the annual investment returns were not constant. The amounts shown would differ if we had used female or unisex rates. These illustrations assume there are no policy loans. We illustrate premium payments as if they were made at the beginning of the year. The third column of each table shows what would happen if an amount equal to the assumed premiums earned interest, after taxes, of 5% compounded annually. The net investment return on your policy is lower than the gross investment return on the variable division. This is due to the portfolio charge for management fees and portfolio expenses. We show the effect of the net investment return in the amounts for death benefits, account values and surrender values. The tables reflect annual investment management fees of 0.78% of the portfolios' aggregate average daily net assets. This hypothetical rate is a simple average of the investment advisory fees applying to the investment portfolios for the year ending December 31, 1998. We assume other portfolio expenses at the rate of 0.13% of the portfolios' average daily net assets. This is an average of all the portfolios' other expenses for the year ending December 31, 1998, after any absorption by investment portfolio managers has been made. The average of all portfolios' total expenses is 0.91%. Actual fees vary by portfolio. The portfolio fees and expenses used in the illustrations are the net amounts shown after absorption of fees and expenses by the portfolio's investment manager. Absent such absorption, the total - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 51 average investment management fees, average other portfolio expenses and the average of all portfolios' total expenses used in the illustrations would have been higher (0.78%, 0.82% and 1.60%, respectively). The tables assume that the current expense reimbursement arrangements will continue. However, they may not continue through 1999. The effect of these portfolio charges and expenses results in a net rate of return of: o (0.91)% on a 0% gross rate of return; o 5.09% on a 6% gross rate of return; and o 11.09% on a 12% gross rate of return. The tables assume that charges have been deducted including deductions from premiums, cost of insurance rider charges, monthly deductions and annual deferred sales charge, mortality and expense risk charge, administrative and sales charges. The tables show charges at our current rates. The tables also show charges at the maximum rates we guarantee in our policies. SEE MONTHLY DEDUCTIONS FROM YOUR ACCOUNT VALUE, PAGE 44. The tables reflect that we do not currently charge against the separate account for state or federal taxes. If we charge for the taxes in the future, it will take a higher gross rate of return than the rates shown to produce the same death benefits, account values, and surrender values. If we are asked to do so, we will give you a comparable personal illustration based on: o each insured person's age and gender; o standard premium class assumptions; o initial stated death benefit; o the chosen death benefit option; o scheduled premiums consistent with your policy form; and o special features elected on your policy. For individual policies, at issue we deliver an individualized illustration showing the scheduled premium you chose and the insured person's actual risk class. This Corporate Benefits policy is issued only to groups. For this policy, we deliver an illustration similar to the individualized illustration. However, this illustration shows a single life scheduled premium and risk class that is representative of the particular group covered by this policy. We base these hypothetical future benefits on both guaranteed and current cost factor assumptions and actual account value. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 52 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $251,206 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%-------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8646 8646 251206 9731 9731 251206 9188 9188 251206 2 10000 21525 16909 16909 251206 19976 19976 251206 18415 18415 251206 3 10000 33101 24889 24889 251206 31127 31127 251206 27894 27894 251206 4 10000 45256 32587 32587 251206 43286 43286 251206 37635 37635 251206 5 10000 58019 40002 40002 251206 56563 56563 251206 47650 47650 251206 6 10000 71420 47260 47260 251206 71223 71223 251206 58084 58084 251206 7 10000 85491 54357 54357 251206 87336 87336 290829 68958 68958 251206 8 - 89766 51820 51820 251206 94477 94477 304784 70247 70247 251206 9 - 94254 49736 49736 251206 103072 103072 322099 72179 72179 251206 10 - 98967 47777 47777 251206 112684 112684 341207 74338 74338 251206 15 - 126309 38832 38832 251206 178753 178753 464578 88063 88063 251206 20 - 161206 27853 27853 251206 282963 282963 635534 104367 104367 251206 25 - 205745 11867 11867 251206 443071 443071 869306 122350 122350 251206 30 - 262588 - - 2512066 685684 685684 1187606 141945 141945 251206 AGE 65 - 275717 - - - 746915 746915 1263781 146004 146004 251206
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 53 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $251,206 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 9040 9040 251206 10149 10149 251206 9594 9594 251206 2 10000 21525 17904 17904 251206 21424 21424 251206 19470 19470 251206 3 10000 33101 26495 26495 251206 33731 33731 251206 29644 29644 251206 4 10000 45256 34817 34817 251206 47182 47182 251206 40130 40130 251206 5 10000 58019 42872 42872 251206 61904 61904 251206 50944 50944 251206 6 10000 71420 50787 50787 251206 78170 78170 268828 62235 62235 251206 7 10000 85491 58560 58560 251206 96121 96121 320082 74022 74022 251206 8 - 89766 56742 56742 251206 105358 105358 339886 76308 76308 251206 9 - 94254 55226 55226 251206 115796 115796 361864 79113 79113 251206 10 - 98967 53883 53883 251206 127532 127532 386166 82227 82227 251206 15 - 126309 48846 48846 251206 209971 209971 545714 102086 102086 265322 20 - 161206 43766 43766 251206 346275 346275 777734 127313 127313 285945 25 - 205745 37420 37420 251206 568854 568854 1116092 158175 158175 310338 30 - 262588 28265 28265 251206 928225 928225 1607686 195230 195230 338138 AGE 65 - 275717 25906 25906 251206 1022755 1022755 1730502 203435 203435 344213
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 54 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $125,603 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $125,603 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%-------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8876 8876 251206 9993 9993 251206 9434 9434 251206 2 10000 21525 17116 17116 251206 20247 20247 251206 18654 18654 251206 3 10000 33101 25155 25155 251206 31501 31501 251206 28210 28210 251206 4 10000 45256 32992 32992 251206 43884 43884 251206 38128 38128 251206 5 10000 58019 40640 40640 251206 57532 57532 251206 48437 48437 251206 6 10000 71420 48164 48164 251206 72665 72665 251206 59227 59227 251206 7 10000 85491 55560 55560 251206 89321 89321 297440 70524 70524 251206 8 - 89766 53330 53330 251206 97087 97087 313204 72283 72283 251206 9 - 94254 51485 51485 251206 106313 106313 332228 74654 74654 251206 10 - 98967 49658 49658 251206 116522 116522 352829 77184 77184 251206 15 - 126309 40156 40156 251206 185354 185354 481734 92017 92017 251206 20 - 161206 27885 27885 251206 293429 293429 659042 109443 109443 251206 25 - 205745 9895 9895 251206 459477 459477 901493 129105 129105 253303 30 - 262588 - - - 711090 711090 1231607 151023 151023 261573 AGE 65 - 275717 - - - 774592 774592 1310610 155567 155567 263219
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 55 PROSPECT: INSURED PERSON'S NAME MALE 35 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $125,603 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $125,603 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 9336 9336 251206 10482 10482 251206 9909 9909 251206 2 10000 21525 18246 18246 251206 21848 21848 251206 19853 19853 251206 3 10000 33101 26970 26970 251206 34354 34354 251206 30189 30189 251206 4 10000 45256 35509 35509 251206 48123 48123 251206 40938 40938 251206 5 10000 58019 43866 43866 251206 63294 63294 251206 52120 52120 251206 6 10000 71420 52104 52104 251206 80084 80084 275408 63823 63823 251206 7 10000 85491 60223 60223 251206 98640 98640 328471 76069 76069 253311 8 - 89766 58771 58771 251206 108576 108576 350267 78863 78863 254411 9 - 94254 57568 57568 251206 119732 119732 374161 82149 82149 256714 10 - 98967 56448 56448 251206 132164 132164 400192 85674 85674 259420 15 - 126309 51585 51585 251206 218129 218129 566918 106806 106806 277588 20 - 161206 46380 46380 251206 359748 359748 807994 133217 133217 299206 25 - 205745 39931 39931 251206 591005 591005 1159552 165529 165529 324767 30 - 262588 30708 30708 251206 964388 964388 1670320 204326 204326 353892 AGE 65 - 275717 28341 28341 251206 1062603 1062603 1797925 212917 212917 360255
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 56 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,524 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8378 8378 180524 9447 9447 180524 8912 8912 180524 2 10000 21525 16365 16365 180524 19369 19369 180524 17841 17841 180524 3 10000 33101 24067 24067 180524 30165 30165 180524 27003 27003 180524 4 10000 45256 31488 31488 180524 41941 41941 180524 36417 36417 180524 5 10000 58019 38629 38629 180524 54812 54812 180524 46098 46098 180524 6 10000 71420 45618 45618 180524 69054 69054 180524 56197 56197 180524 7 10000 85491 52452 52452 1805244 84704 84704 207440 66737 66737 180524 8 - 89766 49611 49611 180524 91305 91305 217122 67654 67654 180524 9 - 94254 47179 47179 180524 99266 99266 229404 69171 69171 180524 10 - 98967 44813 44813 180524 108132 108132 242864 70863 70863 180524 15 - 126309 32771 32771 1805244 168120 168120 329851 81407 81407 180524 20 - 161206 15904 15904 180524 259897 259897 450141 92771 92771 180524 25 - 205745 - - - 396021 396021 613832 103209 103209 180524 30 - 262588 - - - 594104 594104 835310 110839 110839 180524 AGE 65 - 169267 11447 11447 180524 283058 283058 478935 94966 94966 180524
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 57 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $180,524 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 9009 9009 180524 10116 10116 180524 9562 9562 180524 2 10000 21525 17826 17826 180524 21339 21339 180524 19389 19389 180524 3 10000 33101 26360 26360 180524 33578 33578 180524 29500 29500 180524 4 10000 45256 34614 34614 180524 46947 46947 180524 39911 39911 180524 5 10000 58019 42593 42593 180524 61573 61573 180524 50639 50639 180524 6 10000 71420 50425 50425 180524 77729 77729 196034 61835 61835 180524 7 10000 85491 58109 58109 180524 95529 95529 233951 73522 73522 180524 8 - 89766 56187 56187 180524 104581 104581 248692 75693 75693 180524 9 - 94254 54554 54554 180524 114794 114794 265288 78373 78373 181119 10 - 98967 53079 53079 180524 126259 126259 283577 81348 81348 182708 15 - 126309 47059 47059 180524 206258 206258 404678 100212 100212 196615 20 - 161206 39906 39906 180524 336263 336263 582408 123541 123541 213973 25 - 205745 29400 29400 180524 543848 543848 842964 151100 151100 234204 30 - 262588 12063 12063 180524 870638 870638 1224117 182955 182955 257234 AGE 65 - 169267 38146 38146 180524 370460 370460 626818 128706 128706 217771
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 58 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,262 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,262 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8573 8573 180524 9671 9671 180524 9122 9122 180524 2 10000 21525 16496 16496 180524 19556 19556 180524 17998 17998 180524 3 10000 33101 24213 24213 180524 30397 30397 180524 27189 27189 180524 4 10000 45256 31726 31726 180524 42339 42339 180524 36726 36726 180524 5 10000 58019 39056 39056 180524 55533 55533 180524 46655 46655 180524 6 10000 71420 46275 46275 180524 70215 70215 180524 57074 57074 180524 7 10000 85491 53380 53380 180524 86374 86374 211531 68014 68014 180524 8 - 89766 50807 50807 180524 93562 93562 222489 69375 69375 180524 9 - 94254 48563 48563 180524 102110 102110 235977 71306 71306 180524 10 - 98967 46266 46266 180524 111522 111522 250477 73343 73343 180524 15 - 126309 33132 33132 180524 173890 173890 341173 84836 84836 180524 20 - 161206 14012 14012 180524 268832 268832 465618 97118 97118 180524 25 - 205745 - - - 409652 409652 634961 108979 108979 180524 30 - 262588 - - - 614569 614569 864084 119077 119077 180524 AGE 65 - 169267 8942 8942 180524 292793 292793 495406 99547 99547 180524
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 59 PROSPECT: INSURED PERSON'S NAME MALE 45 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $90,262 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $90,262 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 9305 9305 180524 10449 10449 180524 9877 9877 180524 2 10000 21525 18169 18169 180524 21764 21764 180524 19772 19772 180524 3 10000 33101 26835 26835 180524 34201 34201 180524 30045 30045 180524 4 10000 45256 35307 35307 180524 47888 47888 180524 40720 40720 180524 5 10000 58019 43589 43589 180524 62965 62965 180524 51817 51817 180524 6 10000 71420 51745 51745 180524 79643 79643 200860 63427 63427 180524 7 10000 85491 59777 59777 180524 98046 98046 240116 75574 75574 185080 8 - 89766 58223 58223 180524 107792 107792 256330 78253 78253 186085 9 - 94254 56905 56905 180524 118717 118717 274356 81411 81411 188140 10 - 98967 55657 55657 180524 130872 130872 293939 84792 84792 190443 15 - 126309 49840 49840 180524 214323 214323 420502 104883 104883 205781 20 - 161206 42614 42614 180524 349430 349430 605213 129319 129319 223980 25 - 205745 32098 32098 180524 565161 565161 875999 158185 158185 245187 30 - 262588 14858 14858 180524 904777 904777 1272116 191552 191552 269323 AGE 65 - 169267 40847 40847 180524 384969 384969 651367 134729 134729 227961
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 60 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $131,692 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 7875 7875 131692 8914 8914 131692 8394 8394 131692 2 10000 21525 15352 15352 131692 18242 18242 131692 16771 16771 131692 3 10000 33101 22546 22546 131692 28393 28393 131692 25359 25359 131692 4 10000 45256 29462 29462 131692 39483 39483 131692 34184 34184 131692 5 10000 58019 36109 36109 131692 51646 51646 131692 43271 43271 131692 6 10000 71420 42615 42615 131692 65179 65179 131692 52783 52783 131692 7 10000 85491 48983 48983 131692 80086 80086 149280 62763 62763 131692 8 - 89766 45591 45591 131692 85835 85835 156048 63049 63049 131692 9 - 94254 42510 42510 131692 92818 92818 164659 63865 63865 131692 10 - 98967 39385 39385 131692 100562 100562 174173 64779 64779 131692 15 - 126309 21175 21175 131692 152064 152064 235699 70012 70012 131692 20 - 161206 - - - 227849 227849 320356 72199 72199 131692 25 - 205745 - - - 334856 334856 434978 64117 64117 131692 30 - 262588 - - - 484522 484522 590148 25667 25667 131692 AGE 65 - 103915 36184 36184 131692 109124 109124 184637 65791 65791 131692
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and should not be deemed as a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including the investment allocations made to the 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 61 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $131,692 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8854 8854 131692 9953 9953 131692 9403 9403 131692 2 10000 21525 17519 17519 131692 20998 20998 131692 19065 19065 131692 3 10000 33101 25903 25903 131692 33047 33047 131692 29005 29005 131692 4 10000 45256 34003 34003 131692 46212 46212 131692 39238 39238 131692 5 10000 58019 41825 41825 131692 60626 60626 131692 49781 49781 131692 6 10000 71420 49497 49497 131692 76547 76547 146357 60790 60790 131692 7 10000 85491 57023 57023 131692 94039 94039 175289 72295 72295 134757 8 - 89766 54909 54909 131692 102717 102717 186740 74260 74260 135004 9 - 94254 53047 53047 131692 112477 112477 199534 76705 76705 136075 10 - 98967 51301 51301 131692 123395 123395 213720 79415 79415 137547 15 - 126309 43088 43088 131692 198574 198574 307789 96362 96362 149361 20 - 161206 31300 31300 131692 317601 317601 446547 116533 116533 163845 25 - 205745 11940 11940 131692 503653 503653 654245 139732 139732 181512 30 - 262588 - - - 791836 791836 964456 166133 166133 202350 AGE 65 - 103915 49660 49660 131692 135580 135580 229401 82396 82396 139414
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 62 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $65,846 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $65,846 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 8000 8000 131692 9065 9065 131692 8532 8532 131692 2 10000 21525 15336 15336 131692 18264 18264 131692 16773 16773 131692 3 10000 33101 22460 22460 131692 28350 28350 131692 25293 25293 131692 4 10000 45256 29375 29375 131692 39486 39486 131692 34128 34128 131692 5 10000 58019 36116 36116 131692 51866 51866 131692 43363 43363 131692 6 10000 71420 42766 42766 131692 65756 65756 131692 53109 53109 131692 7 10000 85491 49333 49333 131692 81112 81112 151192 63427 63427 131692 8 - 89766 46112 46112 131692 87378 87378 158852 64090 64090 131692 9 - 94254 43095 43095 131692 94869 94869 168297 65244 65244 131692 10 - 98967 39877 39877 131692 103070 103070 178518 66418 66418 131692 15 - 126309 19370 19370 131692 156337 156337 242322 71939 71939 131692 20 - 161206 - - - 234264 234264 329376 73376 73376 131692 25 - 205745 - - - 344297 344297 447241 61040 61040 131692 30 - 262588 - - - 498194 498194 606801 3585 3585 131692 AGE 65 - 103915 36422 36422 131692 112033 112033 189560 67604 67604 131692
The expense charges and cost of insurance rates will never be greater than those which were used to calculate the above values. The hypothetical gross rates of return shown are illustrative only and should not be deemed as a representation of past or future investment results. Actual investment results may be more or less than those shown and will depend on a number of factors, including the investment allocations made to the 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 63 PROSPECT: INSURED PERSON'S NAME MALE 55 NON-TOBACCO USER PRESENTED BY: SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $65,846 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $65,846 ANNUAL PREMIUM: $10,000 CASH VALUE ACCUMULATION TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-----------0.00%-------- ---------12.00%--------- -----------6.00%---------- PREMIUM CASH CASH CASH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 10000 10500 9151 9151 131692 10286 10286 131692 9718 9718 131692 2 10000 21525 17863 17863 131692 21424 21424 131692 19448 19448 131692 3 10000 33101 26379 26379 131692 33672 33672 131692 29553 29553 131692 4 10000 45256 34699 34699 131692 47157 47157 131692 40050 40050 131692 5 10000 58019 42826 42826 131692 62026 62026 131692 50966 50966 131692 6 10000 71420 50826 50826 131692 78465 78465 150026 62394 62394 131692 7 10000 85491 58705 58705 131692 96557 96557 179982 74351 74351 138590 8 - 89766 56967 56967 131692 105923 105923 192568 76814 76814 139647 9 - 94254 55431 55431 131692 116385 116385 206467 79724 79724 141430 10 - 98967 53925 53925 131692 127979 127979 221660 82824 82824 143452 15 - 126309 46014 46014 131692 206475 206475 320036 100919 100919 156424 20 - 161206 34339 34339 131692 330256 330256 464340 122063 122063 171620 25 - 205745 15292 15292 131692 523740 523740 680338 146382 146382 190150 30 - 262588 - - - 823435 823435 1002943 174057 174057 212002 AGE 65 - 103915 52438 52438 131692 140812 140812 238254 86121 86121 145716
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 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, ING Reinsurance Michael W. Cunningham* Director, Executive Vice President Linda B. Emory* Director P. Randall Lowery* Director Jess A. Skriletz Chief Executive Officer and General Manager, ING Reinsurance and ING Institutional Markets Gregory G. McGreevey President, ING Institutional Markets Jerome J. Cwiok* Executive Vice President and Chief Operations Officer James L. Livingston, Jr. Executive Vice President and Chief Actuary Jeffrey R. Messner Executive Vice President and Chief Marketing Officer John R. Barmeyer* Senior Vice President, Chief Legal Officer Wayne D. Bidelman Senior Vice President, CCRC Eugene L. Copeland Senior Vice President and General Counsel, ING Reinsurance Arnold A. Dicke Senior Vice President, Chief Actuary, ING Reinsurance Charles LeDoyen** Senior Vice President, Structured Settlements - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 65 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Terry L. Morrison Senior Vice President, New Business Operations Jeffery W. Seel* Senior Vice President, Chief Investment Officer Mark A. Smith Senior Vice President, Customer Service Operations Lawrence D. Taylor Senior Vice President, Product Management Group William D. Tyler* Senior Vice President, Chief Information Officer Katherine Anderson Vice President, Chief Product Actuary, ING Reinsurance Evelyn A. Bentz Vice President, M Financial Sales Joseph H. Bradford, III Vice President, Communications Thomas Kirby Brown, Jr. Vice President, Operations, ING Institutional Markets Douglas W. Campbell Vice President, Agency Sales Kim M. Curley Vice President, Valuation Stanley F. Eckert Vice President, National Marketing Shari A. Enger Vice President and Controller Larry D. Erb Vice President, Information Technology Nathan E. Eshelman Vice President, Product Development Martha K. Evans Vice President, Variable Operations Fitz E. 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 Thomas D. Hull Vice President, Product Development - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 66 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Kenneth R. Kiefer** Vice President, Structured Settlements, Operations Stephen F. Kraysler Vice President, Structured Reinsurance 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 Shelley Ray Schaal-Pettet Vice President, Human Resources Casey J. Scott Vice President, National Marketing Alan C. Singer Vice President, Customer Relations and Regulatory Compliance 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 Jay Thomas Wolfmeier Vice President and Chief Underwriter Eric G. Banta Assistant Secretary Roger O. Beebe Actuarial Officer 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 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 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. Other financial statements included in the prospectus are unaudited. Actuarial matters in this prospectus have been examined by James L. Livingston, Jr., F.S.A., M.A.A.A., who is Executive Vice President and Chief Actuary of Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. REGISTRATION STATEMENT We have filed a Registration Statement relating to the 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 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 71. The financial statements included for the Security Life Separate Account L1 at December 31, 1998 and for each of the three years in the period ended December 31, 1998, are prepared in accordance with generally accepted accounting principles and represent those divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statements included for the Security Life Separate Account L1 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the policies. They should not be considered as bearing upon the investment experience of the divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 69 [THIS PAGE INTENTIONALLY LEFT BLANK] - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 70 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 71 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ...............................................73 Audited Consolidated Financial Statements Consolidated Balance Sheets ..................................................74 Consolidated Statements of Income ............................................76 Consolidated Statements of Comprehensive Income...............................77 Consolidated Statements of Stockholder's Equity ..............................78 Consolidated Statements of Cash Flows ........................................79 Notes to Consolidated Financial Statements ...................................81 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 72 [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 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 73 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 ================================
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 74
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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 75 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 76 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 77 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 78 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 --
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 79 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 80 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 81 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the valuation for long-lived assets that are identified for disposal. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. This Statement is effective for years beginning after December 15, 1997, with the restatement of disclosures for prior periods provided for comparative purposes, unless prior period information is not readily available. During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive Income, which requires an entity to divide comprehensive income into net income and other comprehensive income in the period recognized. This Statement is effective for fiscal years beginning after December 15, 1997, with the restatement of prior period disclosures for comparative purposes. As a result of implementing this Statement, the Company has classified items of other comprehensive income by their nature in the statements of comprehensive income and the accumulated balance of other comprehensive income in the equity section of the balance sheet. This Statement affects the presentation of the financial statements, with no effect on the valuation of total stockholder's equity. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 82 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 83 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance, including reinsurance assumed, universal life insurance (including interest sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business, have been deferred. Traditional life insurance acquisition costs are being amortized using assumptions consistent with those used in computing policy benefit reserves. The period of amortization is normally over the premium-paying period. In the case of policies with no first year premium, the period of amortization includes the first year, in addition to the premium-paying period. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting rate) of - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 84 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 85 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 the balance sheet date. 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 the balance sheet date. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment are present and the estimated undiscounted cash flows are less than the assets' carrying value. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $5,816,000 and $6,074,000 at December 31, 1998 and 1997, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,233,000; $3,377,000; and $3,307,000 were incurred in 1998, 1997, and 1996, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 86 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 87 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1998 and 1997:
December 31, 1998 --------------------------------------------------------- Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value --------------------------------------------------------- (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 166,611 $ 3,829 $ 589 $ 169,851 States, municipalities and political subdivisions 23,368 959 1,803 22,524 Public utilities securities 172,968 4,885 904 176,949 Debt securities issued by foreign governments 952 -- -- 952 Corporate securities 1,251,462 46,292 23,512 1,274,242 Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295 Other asset-backed securities 635,539 19,968 3,578 651,929 Redeemable preferred stocks 312 42 -- 354 Derivatives hedging fixed maturities (Note 3) 312 6,434 312 6,434 ---------- -------- ------- ---------- Total fixed maturities 3,383,582 157,568 37,620 3,503,530 Preferred stocks (nonredeemable) 4,251 6 52 4,205 Common stocks 2,510 1,780 95 4,195 ---------- -------- ------- ---------- Total equity securities 6,761 1,786 147 8,400 ---------- -------- ------- ---------- Total $3,390,343 $159,354 $37,767 $3,511,930 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 88 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
December 31, 1997 ------------------------------------------------------ Cost or Gross Gross Amortized Unrealized Unrealized Fair Cost Gains Losses Value ------------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 -- -- 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Redeemable preferred stocks -- -- -- -- Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ---------- -------- ------- ---------- Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ---------- -------- ------- ---------- Total equity securities 6,754 1,513 248 8,019 ---------- -------- ------- ---------- Total $3,013,766 $163,138 $16,530 $3,160,374 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 89 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1998, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Amortized Cost Fair Value ------------------------------ Available for sale: Due in one year or less $ 18,024 $ 18,156 Due after one year through five years 187,198 183,735 Due after five years through ten years 695,842 702,563 Due after ten years 714,609 740,418 ---------- ---------- 1,615,673 1,644,872 Mortgage-backed securities 1,132,058 1,200,295 Other asset-backed securities 635,539 651,929 Derivatives 312 6,434 ---------- ---------- Total available-for-sale $3,383,582 $3,503,530 ========== ========== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands): December 31, 1998 -------------------------------------------- Fixed Equity Total -------------------------------------------- Gross unrealized gains $ 157,568 $ 1,786 $ 159,354 Gross unrealized (losses) (37,620) (147) (37,767) --------- ------- --------- Net unrealized gains 119,948 1,639 121,587 Deferred income tax (41,982) (574) (42,556) --------- ------- --------- Net unrealized gains after taxes 77,966 1,065 79,031 Less: Balance at beginning of year 94,470 822 95,292 --------- ------- --------- Change in net unrealized gains (losses) $ (16,504) $ 243 $ (16,261) ========= ======= ========= - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 90 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) December 31, 1997 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 161,625 $ 1,513 $ 163,138 Gross unrealized (losses) (16,282) (248) (16,530) --------- ------- --------- Net unrealized gains 145,343 1,265 146,608 Deferred income tax (50,873) (443) (51,316) --------- ------- --------- Net unrealized gains after taxes 94,470 822 95,292 Less: Balance at beginning of year 71,237 289 71,526 --------- ------- --------- Change in net unrealized gains (losses) $ 23,233 $ 533 $ 23,766 ========= ======= ========= December 31, 1996 ------------------------------------------ Fixed Equity Total ------------------------------------------ Gross unrealized gains $ 140,089 $ 822 $ 140,911 Gross unrealized (losses) (30,493) (376) (30,869) --------- ------- --------- Net unrealized gains 109,596 446 110,042 Deferred income tax (38,359) (157) (38,516) --------- ------- --------- Net unrealized gains after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 --------- ------- --------- Change in net unrealized gains (losses) $ (28,152) $ 436 $ (27,716) ========= ======= ========= As part of its overall investment management strategy, the Company has entered into agreements to purchase $79,175,000 in mortgage loans as of December 31, 1998. These agreements were settled during 1999. The Company had no agreements to sell securities at December 31, 1998. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 91 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 --------------------------------------------- Fixed maturities $ 278,227 $ 259,936 $ 240,931 Mortgage loans on real estate 47,567 40,908 29,143 Policy loans 58,016 56,087 52,205 Other investments 2,911 3,159 2,197 --------- --------- --------- 386,721 360,090 324,476 Investment expenses (24,725) (19,192) (12,355) --------- --------- --------- Net investment income $ 361,996 $ 340,898 $ 312,121 ========= ========= ========= Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 ---------------------------------------------- Fixed maturities $ 9,691 $ 27,717 $4,540 Equity securities 168 (57) 79 Real estate and other 959 985 151 ------- -------- ------ Net realized gains on investments $10,818 $ 28,645 $4,770 ======= ======== ====== During 1998, 1997 and 1996, fixed maturities and marketable equity securities available-for-sale were sold with fair values at the date of sale of $5,018,240,000; $2,281,886,000 and $334,482,000, respectively. Gross gains of $44,314,000; $41,017,000 and $7,248,000 and gross losses of $34,455,000; $13,357,000 and $2,629,000 were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, bonds with an amortized cost of $29,081,000 and $28,434,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 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 The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 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) The table below summarizes the Company's interest rate contracts at December 31, 1998 and 1997 (in thousands): December 31, 1998 ------------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ------------------------------------------------- Interest rate contracts: Swaps $ 767,873 $ (155) $(2,952) $(2,952) Swaps-affiliates 734,176 155 5,440 5,440 ---------- ------- ------- ------- Total swaps 1,502,049 -- 2,488 2,488 Caps owned 560,000 312 11 11 ---------- ------- ------- ------- Total caps owned 560,000 312 11 11 Floors owned 422,485 (72) 3,768 3,768 Floors owned-affiliates 8,485 72 167 167 ---------- ------- ------- ------- Total floors owned 430,970 -- 3,935 3,935 Options owned 418,300 5,268 2,664 2,664 Options owned-affiliates 418,300 (5,268) (2,664) (2,664) ---------- ------- ------- ------- Total options owned 836,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ========== ======= ======= ======= - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 94 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) December 31, 1997 ----------------------------------------------- Notional Amortized Fair Balance Amount Cost Value Sheet ---------------------------------------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 ---------- ------- ------- ------- Total swaps 1,793,375 -- 804 804 Caps owned 760,000 986 766 766 ---------- ------- ------- ------- Total caps owned 760,000 986 766 766 Floors owned 354,000 311 1,730 1,730 Floors owned-affiliates -- -- -- -- ---------- ------- ------- ------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 Options owned-affiliates 384,300 (6,192) (4,312) (4,312) ---------- ------- ------- ------- Total options owned 768,600 -- -- -- ---------- ------- ------- ------- Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300 ========== ======= ======= ======= 4. CONCENTRATIONS OF CREDIT RISK At December 31, 1998, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $277,793,000. These holdings amounted to 7.9% of the Company's investments in fixed maturity securities and 2.8% of total assets. The holdings of less-than-investment-grade bonds are widely diversified and of satisfactory quality based on the Company's investment policies and credit standards. At December 31, 1998, the Company's mortgages involved a concentration of properties located in Florida (15.5%), Texas (9.7%), and Georgia (7.5%). The remaining mortgages relate to properties located in 35 other states. The portfolio is well diversified, covering many different types of income-producing properties on which the Company has first mortgage liens. The maximum mortgage outstanding on any individual property is $16,068,000. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 95 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 96 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). - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 97 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 98 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. LEASES In 1997, the Company terminated a significant operating lease agreement relating to electronic data processing equipment due to outsourcing of computer operations. The Company incurred $4,819,000 in lease expense in 1997 related to that agreement prior to termination. The Company does not have any other significant lease obligations. Total rental expense for all equipment leases was approximately $0, $4,993,000 and $6,151,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1998, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion retroceded. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from retrocessionaire insolvencies, the Company evaluates the financial condition of the retrocessionaire and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The use of reinsurance pools with retrocessionaires also minimizes the Company's exposure to significant losses from retrocessionaire insolvencies. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. As of December 31, 1998, $2.7 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 99 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE (CONTINUED) These GIC transactions are summarized as follows (in thousands):
1998 1997 ------------------------------------------------------------ Policy Policy Deposits Liabilities Deposits Liabilities ------------------------------------------------------------ Direct (nonaffiliated) $ 2,773,952 $ 3,112,460 $ 1,673,471 $2,527,957 Assumed from Life Insurance Company of Georgia -- 97,552 35,000 106,698 ----------- ----------- ----------- --------- 2,773,952 3,210,012 1,708,471 2,634,655 Ceded to Columbine Life Insurance Company (2,547,743) (2,696,409) (1,479,371) (2,231,118) Ceded to Life Insurance Company of Georgia (225,083) (512,477) (116,100) (403,537) Ceded to First Columbine Life Insurance Company (1,126) (1,126) -- -- ----------- ----------- ----------- --------- Net $ -- $ -- $ 113,000 $ -- =========== =========== =========== ==========
Ceded GIC policy liabilities totaling $3,210 and $2,635 million as of December 31, 1998 and 1997, respectively, are classified as part of prepaid reinsurance premiums. During 1998 and 1997, the Company had ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "financial reinsurance," represent financial arrangements and, in accordance with generally accepted accounting principles, are not reflected in the accompanying financial statements except for the risk fees paid to or received from reinsurers. Financial reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1998, the Company entered into a new financial reinsurance contract with an affiliated company. 9. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 100 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): December 31 1998 1997 ------------------------ Deferred tax liabilities: Deferred policy acquisition costs $(272,970) $(239,678) Unrealized gains/losses (42,556) (51,312) --------- --------- Total deferred tax liabilities (315,526) (290,990) Deferred tax assets: Benefit reserves and surplus relief 102,177 111,610 Tax-basis deferred policy acquisition costs 83,836 71,241 Investment income 13,712 13,459 Unearned investment income -- 9,208 Nonqualified deferred compensation 14,667 14,129 Postretirement employee benefits 2,501 3,979 Separate accounts 18,775 8,571 Other, net 19,796 4,964 --------- --------- Total deferred tax assets 255,464 237,161 --------- --------- Net deferred tax liabilities $ (60,062) $ (53,829) ========= ========= The components of federal income tax expense consist of the following (in thousands): December 31 1998 1997 1996 --------------------------------- Current $24,111 $37,542 $10,340 Deferred 9,955 9,477 11,536 ------- ------- ------- Federal income tax expense $34,066 $47,019 $21,876 ======= ======= ======= The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 101 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) The Company had net income tax payments (receipts) of $18,283,000 during 1998, $55,468,000 during 1997, and $(61,467,000) during 1996 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the stockholder exceed amounts in the Stockholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 10. LONG-TERM DEBT Long-term indebtedness to related parties for $100,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1998. This subordinated note bears interest at a variable rate equal to the prevailing rate for 10-year U.S. Treasury Bonds plus 1/4% adjusted annually. The repayment of this note requires approval of the Commissioner of Insurance of the State of Colorado and is payable only out of surplus funds of the Company and only at such time as the surplus of the Company, after payment is made, does not fall below the prescribed level. The principal and interest is scheduled to be repaid in five annual installments beginning April 15, 2000 and continuing through April 15, 2004, with the option of prepaying any outstanding principal and accrued interest. As of December 31, 1998, the Company accrued interest of $5,387,000. Upon receiving approval from the Commissioner of Insurance of the State of Colorado, the Company made a $5,128,000 payment for accrued interest during 1998. The Company recognized interest expense of $5,387,000; $5,096,000; and $3,644,000 for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 102 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 103 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1998, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $386,607,000 and $403,239,000 at December 31, 1998 and 1997, respectively. Combined net income, determined in accordance with SAP, was $11,712,000; $22,261,000; and $9,141,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1998. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 104 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 105 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
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 106 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair values. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 4.5% - 14.0% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 107 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's deferred annuity contracts are estimated based on the cash surrender value. The carrying values of other liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies and premium deposits, approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS: The Company accepted additional deposits on existing synthetic guaranteed investment contracts in the amounts of $66,480,000 and $1,000,000 in 1998 and 1997, respectively, from trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such assets had a value of $433,689,000 and $493,757,000 at December 31, 1998 and 1997, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT The Company is the beneficiary of letters of credit totaling $197,254,000 which have a market value to the Company of $0 and two lines of credit totaling $284,471,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 108 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 109 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. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 110 Consolidated Financial Statements Security Life of Denver Insurance Company and Subsidiaries Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 111 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................113 Audited Consolidated Financial Statements Consolidated Balance Sheets .................................................114 Consolidated Statements of Income ...........................................116 Consolidated Statements of Comprehensive Income..............................117 Consolidated Statements of Stockholder's Equity .............................118 Consolidated Statements of Cash Flows .......................................119 Notes to Consolidated Financial Statements ..................................121 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 112 Report of Independent Auditors Board of Directors and Stockholder Security Life of Denver Insurance Company We have audited the accompanying consolidated balance sheets of Security Life of Denver Insurance Company (a wholly-owned subsidiary of ING America Insurance Holdings, Inc.) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of income, comprehensive income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Security Life of Denver Insurance Company and subsidiaries at December 31, 1998 and 1997, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. /s/ Ernst & Young LLP Denver, Colorado April 5, 1999 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 113 Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
SEPTEMBER 30 DECEMBER 31 1999 1998 1997 ----------------------------------------------------------- (Unaudited) ASSETS Investments (Notes 2 and 3): Fixed maturities, at fair value (amortized cost of $3,615,488, $3,383,582 and $3,007,012 respectively) $3,515,341 $ 3,503,530 $3,152,355 Equity securities, at fair value (cost of $5,074, $6,761 and $6,754, respectively) 5,915 8,400 8,019 Mortgage loans on real estate 917,129 784,108 576,620 Investment real estate, at cost, less accumulated depreciation of $556, $667 and $706, respectively 1,033 1,740 1,767 Policy loans 925,721 925,623 875,405 Other long-term investments 18,201 17,671 14,307 Short-term investments 27,958 747 55,466 ----------------------------------------------------------- Total investments 5,411,298 5,241,819 4,683,939 Cash 40,719 31,644 22,299 Accrued investment income 77,687 52,440 49,726 Reinsurance recoverable: Paid benefits 22,925 11,364 11,170 Unpaid benefits 32,897 24,312 14,988 Prepaid reinsurance premiums (Note 8) 3,571,315 3,329,901 2,744,863 Deferred policy acquisition costs (DPAC) 826,369 778,126 682,905 Property and equipment, at cost, less accumulated depreciation of $26,147, $25,981 and $22,925, respectively 34,508 36,141 37,943 Federal income tax recoverable (Note 9) 32,060 - 5,722 Deferred tax assets 6,860 - - Indebtedness from related parties 5,113 4,339 2,443 Other assets 189,015 113,019 87,298 Separate account assets (Note 6) 512,189 423,474 263,035 ----------------------------------------------------------- Total assets $10,762,955 $10,046,579 $8,606,331 ===========================================================
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 114
SEPTEMBER 30 DECEMBER 31 1999 1998 1997 ----------------------------------------------------------- (Unaudited) LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits: Life and annuity reserves $ 5,097,013 $ 4,857,141 $4,328,577 Guaranteed investment contracts 3,613,312 3,210,012 2,634,654 Policyholders' funds 90,025 81,064 82,291 Advance premiums 196 272 365 Accrued dividends and dividends on deposit 27,280 21,268 21,129 Policy and contract claims 147,686 130,100 103,525 ----------------------------------------------------------- Total future policy benefits 8,975,512 8,299,857 7,170,541 Accounts payable and accrued expenses 107,276 108,165 99,335 Indebtedness to related parties 21,344 13,755 7,704 Long-term debt to related parties (Note 10) 100,000 100,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 9,653 5,387 5,128 Other liabilities 213,521 109,593 61,424 Federal income taxes payable (Note 9) - 106 - Deferred federal income taxes (Note 9) - 60,062 53,829 Separate account liabilities (Note 6) 512,189 423,474 263,035 ----------------------------------------------------------- Total liabilities 9,939,495 9,120,399 7,735,996 Commitments and contingencies (Notes 8 and 13) Stockholder's equity (Note 11): Common stock, $20,000 par value: Authorized - 149 shares Issued and outstanding - 144 shares 2,880 2,880 2,880 Additional paid-in capital 315,722 315,722 315,722 Retained earnings 597,385 563,553 500,795 Accumulated other comprehensive income (92,527) 44,025 50,938 ----------------------------------------------------------- Total stockholder's equity 823,460 926,180 870,335 ----------------------------------------------------------- Total liabilities and stockholder's equity $10,762,955 $10,046,579 $8,606,331 ===========================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 115 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Revenues: Traditional life insurance premiums $ 79,526 $ 120,675 $ 122,429 $118,200 Universal life and investment product charges 186,444 229,226 217,108 202,081 Reinsurance premiums assumed 389,463 431,267 446,434 339,335 ------------------------------------------------------------------ 655,433 781,168 785,971 659,616 Reinsurance premiums ceded (113,971) (143,211) (124,815) (117,880) ------------------------------------------------------------------ 541,462 637,957 661,156 541,736 Net investment income 296,973 361,996 340,898 312,121 Net realized gains (losses) on investments (26,374) 10,818 28,645 4,770 Other revenues 2,640 11,771 6,743 526 ------------------------------------------------------------------ 814,701 1,022,542 1,037,442 859,153 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 244,240 239,921 299,305 235,828 Other benefits 83,932 77,209 79,849 71,939 Universal life and investment contracts: Interest credited to account balances 193,542 236,136 217,614 186,908 Death benefits incurred in excess of account balances 80,398 63,103 73,260 54,004 Increase in future policy benefits 53,654 102,875 72,685 121,946 Reinsurance recoveries (106,888) (84,506) (98,376) (80,276) Product conversions 2,247 10,578 7,014 16,379 ------------------------------------------------------------------ 551,125 645,316 651,351 606,728 Expenses: Commissions 60,213 49,569 46,516 25,846 Insurance operating expenses 63,672 125,194 89,075 69,580 Amortization of deferred policy acquisition costs 87,349 105,639 116,495 94,685 ------------------------------------------------------------------ 762,359 925,718 903,437 796,839 ------------------------------------------------------------------ Income before federal income taxes 52,342 96,824 134,005 62,314 Federal income taxes (Note 9) 18,510 34,066 47,019 21,876 ------------------------------------------------------------------ Net income $ 33,832 $ 62,758 $ 86,986 $ 40,438 ==================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 116 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Comprehensive Income (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Net income $ 33,832 $62,758 $86,986 $40,438 ----------------------------------------------------------------- Other comprehensive income (loss): Unrealized gains (losses) on securities: Net change in unrealized holding gains (losses), net of tax (151,530) (11,251) 28,367 (25,294) Reclassification adjustment for realized gains included in net income, net of tax 7,216 (5,010) (4,601) (2,422) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 8,133 7,236 (37,522) 13,461 Reclassification effect on DPAC of realized gains and losses included in net income, net of tax (371) 3,075 5,976 - Net change in pension liability, net of tax - (963) - - ----------------------------------------------------------------- Total other comprehensive income (loss) (136,552) (6,913) (7,780) (14,255) ----------------------------------------------------------------- Comprehensive income (loss) $(102,720) $55,845 $79,206 $26,183 =================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 117 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) Common stock: Balance at beginning and end of period $ 2,880 $ 2,880 $ 2,880 $ 2,880 ================================================================= Additional paid-in capital: Balance at beginning of period $315,722 $315,722 $302,722 $297,422 Capital contributions - - 13,000 5,300 ----------------------------------------------------------------- Balance at end of period $315,722 $315,722 $315,722 $302,722 ================================================================= Accumulated other comprehensive income (loss): Net unrealized gains (losses) on investments: Balance at beginning of period $ 44,988 $ 50,938 $ 58,718 $ 72,973 Unrealized gains (losses) on securities: Change in unrealized gains (losses), net of tax (144,314) (16,261) 23,766 (27,716) Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax 7,762 10,311 (31,546) 13,461 ----------------------------------------------------------------- Balance at end of period (91,564) 44,988 50,938 58,718 Accumulated net pension liability: Balance at beginning of period (963) - - - Net change in pension liability, net of tax - (963) - - ----------------------------------------------------------------- Balance at end of period (963) (963) - - ----------------------------------------------------------------- Total accumulated other comprehensive income (loss) $(92,527) $ 44,025 $ 50,938 $ 58,718 ================================================================= Retained earnings: Balance at beginning of period $563,553 $500,795 $413,809 $373,371 Net income 33,832 62,758 86,986 40,438 ----------------------------------------------------------------- Balance at end of period $597,385 $563,553 $500,795 $413,809 ================================================================= Total stockholder's equity $823,460 $926,180 $870,335 $778,129 =================================================================
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 118 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) OPERATING ACTIVITIES Net income $ 33,832 $ 62,758 $ 86,986 $ 40,438 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 556,093 874,765 995,632 585,581 Net decrease (increase) in federal income taxes (98,982) 12,061 (12,317) 78,668 Increase (decrease) in accounts payable and accrued expenses 89,983 55,361 21,033 (1,361) Increase in accrued interest on long-term debt 4,266 259 1,428 3,676 Increase in accrued investment income (25,247) (2,714) (4,300) (7,294) (Increase) decrease in reinsurance recoverable (20,146) (9,518) 3,733 (5,214) Increase in prepaid reinsurance premiums (241,414) (585,038) (793,851) (336,053) Net realized investment losses (gains) 26,513 (10,818) (28,645) (4,770) Depreciation and amortization expense 1,713 3,174 3,630 3,857 Policy acquisition costs deferred (124,167) (184,993) (174,374) (152,299) Amortization of deferred policy acquisition costs 87,349 105,639 116,495 94,685 Increase in accrual for postretirement benefits (506) 675 557 484 Other, net 17,372 (7,053) 43,538 (15,539) ----------------------------------------------------------------- Net cash provided by operating activities 310,653 314,558 259,545 284,859 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 2,005,376 5,015,989 2,279,598 334,482 Equity securities 1,747 2,251 648 4,198 Maturities--fixed maturities 154,269 274,463 410,632 727,937 Purchases: Fixed maturities (2,428,189) (5,670,994) (2,919,145) (1,522,369) Equity securities - (2,089) (2,561) (428) Sale, maturity or repayment of investments: Mortgage loans on real estate 29,618 51,235 38,756 18,102 Investment real estate 1,109 - - 1,354 Other long-term investments 4,312 10,678 2,002 -
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 119 Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
NINE MONTHS ENDED SEPTEMBER 30 YEAR ENDED DECEMBER 31 1999 1998 1997 1996 ------------------------------------------------------------------ (Unaudited) INVESTING ACTIVITIES (CONTINUED) Purchase or issuance of investments: Mortgage loans on real estate $ (163,968) $ (259,945) $ (163,528) $ (186,228) Investment real estate (1) (13) (35) - Policy loans, net (98) (50,218) (80,094) (41,071) Other long-term investments (4,855) (14,042) (5,248) 809 Short-term investments, net (27,215) 55,115 (48,447) 3,942 Additions to property and equipment (59) (1,418) (2,687) (4,482) Disposals of property and equipment - 68 145 2,389 ----------------------------------------------------------------- Net cash used by investing activities (427,954) (588,920) (489,964) (661,365) FINANCING ACTIVITIES Increase in indebtedness to related parties 6,814 29,156 5,217 42,206 Cash contributions from parent - - 13,000 5,300 Receipts from interest sensitive products credited to policyholder account balances 317,897 505,728 555,223 434,726 Return of policyholder account balances on interest sensitive policies (198,335) (251,177) (334,543) (123,949) ----------------------------------------------------------------- Net cash provided by financing activities 126,376 283,707 238,897 358,283 ----------------------------------------------------------------- Net increase (decrease) in cash 9,075 9,345 8,478 (18,223) Cash at beginning of period 31,644 22,299 13,821 32,044 ----------------------------------------------------------------- Cash at end of period $ 40,719 $ 31,644 $ 22,299 $ 13,821 =================================================================
See accompanying notes. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 120 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (Information subsequent to December 31, 1998 is unaudited) 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc. NATURE OF OPERATIONS Security Life of Denver Insurance Company and its subsidiaries (the Company) is a wholly-owned subsidiary of ING America Insurance Holdings, Inc. (ING America). The Company focuses on two markets, the advanced market and reinsurance to other insurers. The life insurance products offered for the advanced market include wealth transfer and estate planning, executive benefits, charitable giving and corporate owned life insurance. These products include traditional life, interest sensitive life, universal life and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 121 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the valuation for long-lived assets that are identified for disposal. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. During 1998, the Company adopted FASB Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. This Statement is effective for years beginning after December 15, 1997, with the restatement of disclosures for prior periods provided for comparative purposes, unless prior period information is not readily available. During 1998, the Company adopted FASB Statement No. 130, Reporting Comprehensive Income, which requires an entity to divide comprehensive income into net income and other comprehensive income in the period recognized. This Statement is effective for fiscal years beginning after December 15, 1997, with the restatement of prior period disclosures for comparative purposes. As a result of implementing this Statement, the Company has classified items of other comprehensive income by their nature in the statements of comprehensive income and the accumulated balance of other comprehensive income in the equity section of the balance sheet. This Statement affects the presentation of the financial statements, with no effect on the valuation of total stockholder's equity. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 122 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) PENDING ACCOUNTING STANDARDS During 1998, the FASB issued Statement No. 133, Accounting for Derivative Financial Instruments and Hedging Activities, which establishes a new model for accounting and reporting for derivatives and hedging activities. Statement 133 requires all derivatives to be recognized on the balance sheet and measured at fair value. Based on the type of hedging relationship (fair value, cash flow, or foreign currency), Statement 133 requires the recognition of offsetting changes in value or cash flows of both the derivative and the hedged item in earnings in the same period. Changes in the fair value of derivatives that are not designated as hedges or that do not meet the hedge accounting criteria in Statement 133 are included in earnings in the period of change. In June 1999, the FASB issued Statement No. 137, Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133, which delayed the effective date of Statement 133 until June 15, 2000. Upon the initial application of Statement 133 all derivatives are required to be recognized in the balance sheet as either assets or liabilities and measured at fair value. The Company plans to adopt this Statement during 2000, and the effect of implementation on the Company's financial statements has not yet been determined. INVESTMENTS Investments are presented on the following bases: The carrying value of fixed maturities depends on the classification of the security: securities held-to-maturity, securities available-for-sale, and trading securities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available-for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, and deferred policy acquisition cost adjustments, reported net of tax as a component of other comprehensive income in stockholder's equity. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 123 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than-temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance, including reinsurance assumed, universal life insurance (including interest sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business, have been deferred. Traditional life insurance acquisition costs are being amortized using assumptions consistent with those used in computing policy benefit reserves. The period of amortization is normally over the premium-paying period. In the case of policies with no first year premium, the period of amortization includes the first year, in addition to the premium-paying period. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting rate) of expected - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 124 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. Deferred policy acquisition costs are adjusted to reflect changes that would have been necessary if unrealized investment gains and losses related to available-for-sale securities had been realized. The Company has reflected those adjustments in the asset balance with the offset as a direct adjustment to accumulated other comprehensive income in stockholder's equity. FUTURE POLICY BENEFITS Benefit reserves for traditional life insurance products (other than reinsurance assumed) are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on Company and industry experience. These assumptions include provisions for adverse deviation and are modified as necessary to reflect anticipated trends. Reserve interest assumptions are those deemed appropriate at the time of policy issue, and range from 3% to 7.5%. Policy benefit claims are charged to expense in the year that the claims are incurred. Benefit reserves for reinsurance assumed are computed using pricing assumptions with provisions for adverse deviation. Benefits for level-term reinsurance assumed are computed to recognize profits in proportion with revenue. Benefit reserves for all other reinsurance assumed are computed to recognize profits in proportion to the coverage provided. Benefit reserves for universal life-type policies (including fixed premium interest sensitive products) and investment products are computed under a retrospective deposit method and represent policy account balances before applicable surrender charges. Policy benefits and claims that are charged to expense include benefit claims incurred during the year in excess of related policy account balances. Interest crediting rates for universal life and investment products range from 3.80% to 7.81% during 1998, 4.60% to 7.81% during 1997, and 4.60% to 7.45% during 1996. Included in life and annuity reserves is an unearned revenue reserve that reflects the unamortized balance of excess heaped expense loads over ultimate renewal expense loads on universal life and investment products. These excess fees have been deferred and are being recognized in income over the periods benefited, using the same assumptions and factors used to amortize deferred policy acquisition costs. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 125 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) POLICY AND CONTRACT CLAIMS The liabilities for unpaid claims include estimates of amounts due on reported claims and claims that have been incurred but were not reported as of December 31. Such estimates are based on actuarial projections applied to historical claim payment data and are considered reasonable and adequate to discharge the Company's obligations for claims incurred but unpaid as of December 31. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment are present and the estimated undiscounted cash flows are less than the assets' carrying value. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $5,816,000 and $6,074,000 at December 31, 1998 and 1997, respectively. Participating business approximates .2% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,233,000, $3,377,000, and $3,307,000 were incurred in 1998, 1997, and 1996, respectively. FEDERAL INCOME TAXES Deferred federal income taxes have been provided or credited to reflect significant temporary differences between income reported for tax and financial reporting purposes using reasonable assumptions. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 126 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) CASH FLOW INFORMATION Cash includes cash on hand and demand deposits. Included as a component of operating activities is interest paid of $10,121,000, $10,110,000, and $1,016,000 for 1998, 1997, and 1996, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations, generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. RECLASSIFICATIONS Certain amounts in the 1997 and 1996 financial statements have been reclassified to conform to the 1998 presentation. UNAUDITED INTERIM FINANCIAL STATEMENTS The accompanying consolidated balance sheet at September 30, 1999 and the consolidated statements of income, stockholders equity, comprehensive income, and cash flows for the nine-month period ended September 30, 1999 are unaudited and have been prepared on the same basis as the audited financial statements included herein. In the opinion of management, such unaudited financial statements include all adjustments necessary to present fairly the information set forth therein, which consists solely of normal recurring adjustments. The results of operations for such interim periods are not necessarily indicative of results for the full respective year. - ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 127 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1998 and 1997:
DECEMBER 31, 1998 ----------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------------------- (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 166,611 $ 3,829 $ 589 $ 169,851 States, municipalities and political subdivisions 23,368 959 1,803 22,524 Public utilities securities 172,968 4,885 904 176,949 Debt securities issued by foreign governments 952 - - 952 Corporate securities 1,251,462 46,292 23,512 1,274,242 Mortgage-backed securities 1,132,058 75,159 6,922 1,200,295 Other asset-backed securities 635,539 19,968 3,578 651,929 Redeemable preferred stocks 312 42 - 354 Derivatives hedging fixed maturities (Note 3) 312 6,434 312 6,434 ----------------------------------------------------------------------- Total fixed maturities 3,383,582 157,568 37,620 3,503,530 Preferred stocks (nonredeemable) 4,251 6 52 4,205 Common stocks 2,510 1,780 95 4,195 ----------------------------------------------------------------------- Total equity securities 6,761 1,786 147 8,400 ----------------------------------------------------------------------- Total $3,390,343 $159,354 $37,767 $3,511,930 =======================================================================
- ------------------------------------------------------------------------------ Corporate Benefits Variable Universal Life 128 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1997 ----------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ----------------------------------------------------------------------- (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 - - 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Redeemable preferred stocks - - - - Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ----------------------------------------------------------------------- Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ----------------------------------------------------------------------- Total equity securities 6,754 1,513 248 8,019 ----------------------------------------------------------------------- Total $3,013,766 $163,138 $16,530 $3,160,374 =======================================================================
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 129 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1998, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. AMORTIZED COST FAIR VALUE ----------------- ------------------ Available for sale: Due in one year or less $ 18,024 $ 18,156 Due after one year through five years 187,198 183,735 Due after five years through ten years 695,842 702,563 Due after ten years 714,609 740,418 ----------------- ------------------ 1,615,673 1,644,872 Mortgage-backed securities 1,132,058 1,200,295 Other asset-backed securities 635,539 651,929 Derivatives 312 6,434 ----------------- ------------------ Total available-for-sale $3,383,582 $3,503,530 ================= ================== Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands): DECEMBER 31, 1998 ------------------------------------------- FIXED EQUITY TOTAL -------------- -------------- ------------- Gross unrealized gains $157,568 $1,786 $159,354 Gross unrealized (losses) (37,620) (147) (37,767) -------------- -------------- ------------- Net unrealized gains 119,948 1,639 121,587 Deferred income tax (41,982) (574) (42,556) -------------- -------------- ------------- Net unrealized gains after taxes 77,966 1,065 79,031 Less: Balance at beginning of year 94,470 822 95,292 -------------- -------------- ------------- Change in net unrealized gains (losses) $ (16,504) $ 243 $ (16,261) ============== ============== ============= - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 130 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) DECEMBER 31, 1997 -------------------------------------------- FIXED EQUITY TOTAL -------------- -------------- -------------- Gross unrealized gains $161,625 $1,513 $163,138 Gross unrealized (losses) (16,282) (248) (16,530) -------------- -------------- -------------- Net unrealized gains 145,343 1,265 146,608 Deferred income tax (50,873) (443) (51,316) -------------- -------------- -------------- Net unrealized gains after taxes 94,470 822 95,292 Less: Balance at beginning of year 71,237 289 71,526 -------------- -------------- -------------- Change in net unrealized gains (losses) $ 23,233 $ 533 $ 23,766 ============== ============== ============== DECEMBER 31, 1996 -------------------------------------------- FIXED EQUITY TOTAL -------------- -------------- -------------- Gross unrealized gains $140,089 $822 $140,911 Gross unrealized (losses) (30,493) (376) (30,869) -------------- -------------- -------------- Net unrealized gains 109,596 446 110,042 Deferred income tax (38,359) (157) (38,516) -------------- -------------- -------------- Net unrealized gains after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 -------------- -------------- -------------- Change in net unrealized gains (losses) $ (28,152) $436 $ (27,716) ============== ============== ============== As part of its overall investment management strategy, the Company has entered into agreements to purchase $79,175,000 in mortgage loans as of December 31, 1998. These agreements were settled during 1999. The Company had no agreements to sell securities at December 31, 1998. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 131 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 -------------- --------------- --------------- Fixed maturities $278,227 $259,936 $240,931 Mortgage loans on real estate 47,567 40,908 29,143 Policy loans 58,016 56,087 52,205 Other investments 2,911 3,159 2,197 -------------- --------------- --------------- 386,721 360,090 324,476 Investment expenses (24,725) (19,192) (12,355) ============== =============== =============== Net investment income $361,996 $340,898 $312,121 ============== =============== =============== Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands): 1998 1997 1996 ---------------- ---------------- ---------------- Fixed maturities $ 9,691 $27,717 $4,540 Equity securities 168 (57) 79 Real estate and other 959 985 151 ---------------- ---------------- ---------------- Net realized gains on investments $10,818 $28,645 $4,770 ================ ================ ================ During 1998, 1997 and 1996, fixed maturities and marketable equity securities available-for-sale were sold with fair values at the date of sale of $5,018,240,000, $2,281,886,000 and $334,482,000, respectively. Gross gains of $44,314,000, $41,017,000 and $7,248,000 and gross losses of $34,455,000, $13,357,000 and $2,629,000 were realized on those sales in 1998, 1997 and 1996, respectively. At December 31, 1998 and 1997, bonds with an amortized cost of $29,081,000 and $28,434,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 132 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 133 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) The table below summarizes the Company's interest rate contracts at December 31, 1998 and 1997 (in thousands):
DECEMBER 31, 1998 ---------------------------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET ---------------- --------------- --------------- --------------- Interest rate contracts: Swaps $ 767,873 $ (155) $(2,952) $(2,952) Swaps-affiliates 734,176 155 5,440 5,440 ---------------- --------------- --------------- --------------- Total swaps 1,502,049 - 2,488 2,488 Caps owned 560,000 312 11 11 ---------------- --------------- --------------- --------------- Total caps owned 560,000 312 11 11 Floors owned 422,485 (72) 3,768 3,768 Floors owned-affiliates 8,485 72 167 167 ---------------- --------------- --------------- --------------- Total floors owned 430,970 - 3,935 3,935 Options owned 418,300 5,268 2,664 2,664 Options owned-affiliates 418,300 (5,268) (2,664) (2,664) ---------------- --------------- --------------- --------------- Total options owned 836,600 - - - ---------------- --------------- --------------- --------------- Total derivatives $3,329,619 $ 312 $ 6,434 $ 6,434 ================ =============== =============== ===============
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 134 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
DECEMBER 31, 1997 ---------------------------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET ---------------- --------------- --------------- --------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 ---------------- --------------- --------------- --------------- Total swaps 1,793,375 - 804 804 Caps owned 760,000 986 766 766 ---------------- --------------- --------------- --------------- Total caps owned 760,000 986 766 766 Floors owned 354,000 311 1,730 1,730 Floors owned-affiliates - - - - ---------------- --------------- --------------- --------------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 Options owned-affiliates 384,300 (6,192) (4,312) (4,312) ---------------- --------------- --------------- --------------- Total options owned 768,600 - - - ---------------- --------------- --------------- --------------- Total derivatives $3,675,975 $1,297 $3,300 $3,300 ================ =============== =============== ===============
4. CONCENTRATIONS OF CREDIT RISK At December 31, 1998, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $277,793,000. These holdings amounted to 7.9% of the Company's investments in fixed maturity securities and 2.8% of total assets. The holdings of less-than-investment-grade bonds are widely diversified and of satisfactory quality based on the Company's investment policies and credit standards. At December 31, 1998, the Company's mortgages involved a concentration of properties located in Florida (15.5%), Texas (9.7%), and Georgia (7.5%). The remaining mortgages relate to properties located in 35 other states. The portfolio is well diversified, covering many different types of income-producing properties on which the Company has first mortgage liens. The maximum mortgage outstanding on any individual property is $16,068,000. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 135 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS PENSION PLANS AND POSTRETIREMENT BENEFITS The Company has a qualified noncontributory defined benefit retirement plan covering substantially all employees. In addition, the Company maintains a non-qualified unfunded Supplemental Employees' Retirement Plan (SERP). In addition to providing pension plans, the Company provides certain health care and life insurance benefits for retired employees. The funded status and the amounts recognized in the balance sheets for the defined benefit plans and other postretirement benefit plans are as follows (in thousands):
DECEMBER 31 1998 1997 -------------------------------------- ------------------------------------ QUALIFIED POST- QUALIFIED POST- PLAN SERP RETIREMENT PLAN SERP RETIREMENT ------------ ------------ ------------- ------------ ------------ ------------- Projected benefit obligation $(38,685) $(8,320) $ (8,949) $(37,801) $(9,154) $ (7,590) Less plan assets at fair value 47,230 - - 40,150 - - ------------ ------------ ------------- ------------ ------------ ------------- Plan assets in excess (deficient) of projected benefit ogligation $ 8,545 $(8,320) $ (8,949) $ 2,349 $(9,154) $ (7,590) ============ ============ ============= ============ ============ ============= Net asset (liability) $ 1,240 $(4,918) $(12,044) $ 1,322 $(4,135) $(11,369) ============ ============ ============= ============ ============ =============
As of December 31, 1998 and 1997, the Company recognized an additional minimum net liability on the SERP of $1,482,000 and $3,848,000, respectively, as this plan is unfunded and the actuarial present value of accumulated benefit obligation exceeds the net pension liability. Prior to 1998, the change in the additional minimum net liability was reported in net income. Beginning in 1998, the change in the additional minimum net liability is recorded net of tax as a component of other comprehensive income directly in stockholder's equity, net of tax. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 136 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The net periodic pension cost, employer contributions, plan participant contributions, and benefits paid for the defined benefit plans are as follows (in thousands):
1998 1997 1996 -------------------------------- -------------------------------- ------------------------------- QUALIFIED POST- QUALIFIED POST- QUALIFIED POST- PLAN SERP RETIREMENT PLAN SERP RETIREMENT PLAN SERP RETIREMENT ---------- --------- ----------- --------- --------- ------------ --------- --------- ----------- Net periodic pension expense $ 82 $1,109 $893 $607 $1,502 $755 $ 390 $1,109 $669 Employer contributions - 325 218 - 317 198 - 320 Not available Plan participants' contributions - - 77 - - 71 - - Not available Benefits paid 890 325 296 811 317 268 1,466 320 187
The information for employer and plan participant contributions to the postretirement plan for 1996 is not readily available. Assumptions used in accounting for the defined benefit plans as of December 31, 1998, 1997, and 1996 were as follows: 1998 1997 1996 -------------------------------- Weighted-average discount rate 6.75% 7.25% 7.50% Rate of increase in compensation level 4.00% 4.25% 4.50% Expected long-term rate of return on assets 9.50% 9.50% 9.50% Plan assets of the defined benefit plans at December 31, 1998 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. The annual assumed rate of increase in the per capita cost of covered benefits (i.e., health care cost trend rate) for the medical plan is 9.75% graded to 5.25% over 9 years. The health care cost trend rate assumption has a significant effect on the amounts reported. For example, increasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1998 by $1,015,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1998 by $136,000. Decreasing the assumed health care cost trend rates by one percentage point in each year would increase the accumulated postretirement benefit obligation for the medical plan as of December 31, 1998 by $(862,000) and the aggregate of the service and - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 137 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) interest cost components of net periodic postretirement benefit cost for 1998 by $(113,000). The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 6.75% at December 31, 1998 and 7.50% at December 31, 1997 and December 31, 1996. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution plan which is available to substantially all home office employees. Participants may make contributions to the plan through salary reductions up to a maximum of $10,000 for 1998, and $9,500 for both 1997 and 1996. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participants' contributions, plus 50% of contributions which exceed 3% of participants' compensation, subject to a maximum matching percentage of 4 1/2% of the individual's salary. Company matching contributions were $1,343,000 for 1998, $1,211,000 for 1997, and $1,143,000 for 1996. Plan assets of the Savings Plan at December 31, 1998 are invested in a group deposit administration contract (the Contract) with the Company, various stock funds maintained by the Principal Financial Group, and loans to participants. The Contract is a policyholder liability of the Company and had a balance of $27.8 million and $26.6 million at December 31, 1998 and 1997, respectively. 6. SEPARATE ACCOUNTS Separate account assets and liabilities represent funds segregated by the Company for the benefit of certain policy and contract holders who bear the investment risk. Revenues and expenses on the separate account assets and related liabilities equal the benefits paid to the separate account policy and contract holders, and are excluded from the amounts reported in the consolidated statements of income except for fees charged for administration services and mortality risk. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 138 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. LEASES In 1997, the Company terminated a significant operating lease agreement relating to electronic data processing equipment due to outsourcing of computer operations. The Company incurred $4,819,000 in lease expense in 1997 related to that agreement prior to termination. The Company does not have any other significant lease obligations. Total rental expense for all equipment leases was approximately $0, $4,993,000 and $6,151,000 for the years ended December 31, 1998, 1997 and 1996, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1998, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion retroceded. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from retrocessionaire insolvencies, the Company evaluates the financial condition of the retrocessionaire and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The use of reinsurance pools with retrocessionaires also minimizes the Company's exposure to significant losses from retrocessionaire insolvencies. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. As of December 31, 1998, $2.7 billion of an affiliate's invested assets were held in trust pursuant to these agreements. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 139 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE (CONTINUED) These GIC transactions are summarized as follows (in thousands):
1998 1997 ---------------------------- --------------------------- POLICY POLICY DEPOSITS LIABILITIES DEPOSITS LIABILITIES ------------- -------------- ------------- -------------- Direct (nonaffiliated) $2,773,952 $3,112,460 $1,673,471 $2,527,957 Assumed from Life Insurance Company of Georgia - 97,552 35,000 106,698 ------------- -------------- ------------- -------------- 2,773,952 3,210,012 1,708,471 2,634,655 Ceded to Columbine Life Insurance Company (2,547,743) (2,696,409) (1,479,371) (2,231,118) Ceded to Life Insurance Company of Georgia (225,083) (512,477) (116,100) (403,537) Ceded to First Columbine Life Insurance Company (1,126) (1,126) - - ============= ============== ============= ============== Net $ - $ - $ 113,000 $ - ============= ============== ============= ==============
Ceded GIC policy liabilities totaling $3,210 and $2,635 million as of December 31, 1998 and 1997, respectively, are classified as part of prepaid reinsurance premiums. During 1998 and 1997, the Company had ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "financial reinsurance," represent financial arrangements and, in accordance with generally accepted accounting principles, are not reflected in the accompanying financial statements except for the risk fees paid to or received from reinsurers. Financial reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1998, the Company entered into a new financial reinsurance contract with an affiliated company. 9. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 140 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands): DECEMBER 31 1998 1997 ---------------- -------------- Deferred tax liabilities: Deferred policy acquisition costs $(272,970) $(239,678) Unrealized gains/losses (42,556) (51,312) ---------------- -------------- Total deferred tax liabilities (315,526) (290,990) Deferred tax assets: Benefit reserves and surplus relief 102,177 111,610 Tax-basis deferred policy acquisition costs 83,836 71,241 Investment income 13,712 13,459 Unearned investment income - 9,208 Nonqualified deferred compensation 14,667 14,129 Postretirement employee benefits 2,501 3,979 Separate accounts 18,775 8,571 Other, net 19,796 4,964 ---------------- -------------- Total deferred tax assets 255,464 237,161 ---------------- -------------- Net deferred tax liabilities $ (60,062) $ (53,829) ================ ============== The components of federal income tax expense consist of the following (in thousands): DECEMBER 31 1998 1997 1996 ----------------- ----------------- ---------------- Current $24,111 $37,542 $10,340 Deferred 9,955 9,477 11,536 ================= ================= ================ Federal income tax expense $34,066 $47,019 $21,876 ================= ================= ================ The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 141 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) The Company had net income tax payments (receipts) of $18,283,000 during 1998, $55,468,000 during 1997, and $(61,467,000) during 1996 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the stockholder exceed amounts in the Stockholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 10. LONG-TERM DEBT Long-term indebtedness to related parties for $100,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1998. This subordinated note bears interest at a variable rate equal to the prevailing rate for 10-year U.S. Treasury Bonds plus 1/4% adjusted annually. The repayment of this note requires approval of the Commissioner of Insurance of the State of Colorado and is payable only out of surplus funds of the Company and only at such time as the surplus of the Company, after payment is made, does not fall below the prescribed level. The principal and interest is scheduled to be repaid in five annual installments beginning April 15, 2000 and continuing through April 15, 2004, with the option of prepaying any outstanding principal and accrued interest. As of December 31, 1998, the Company accrued interest of $5,387,000. Upon receiving approval from the Commissioner of Insurance of the State of Colorado, the Company made a $5,128,000 payment for accrued interest during 1998. The Company recognized interest expense of $5,387,000, $5,096,000, and $3,644,000 for the years ended December 31, 1998, 1997, and 1996, respectively. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 142 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. LONG-TERM DEBT (CONTINUED) Future minimum payments, assuming a current effective interest rate of 5.41%, are as follows (in thousands): TOTAL PAYMENTS YEAR ----------------------------------------- ----------------- 2000 $ 25,946 2001 25,946 2002 25,946 2003 25,946 2004 25,946 ----------------- Total 129,730 Less imputed interest (29,730) ================= Present value of payments $100,000 ================= 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES Security Life and its insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by their state of domicile. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within the state, and may change in the future. During 1998, the NAIC completed the process of codifying statutory accounting practices ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that Security Life uses to prepare its statutory-basis financial statements. Codification will require adoption by the various states before it becomes the prescribed statutory basis of accounting for insurance companies domiciled within those states. Accordingly, before Codification becomes effective for Security Life, the State of Colorado must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Department. At this time it is unknown whether the State of Colorado will adopt Codification. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 143 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1998, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $386,607,000 and $403,239,000 at December 31, 1998 and 1997, respectively. Combined net income, determined in accordance with SAP, was $11,712,000, $22,261,000, and $9,141,000 for the years ended December 31, 1998, 1997, and 1996, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1998. Additionally, the amount of dividends which can be paid by each company to its stockholder without prior approval of the various state insurance departments is generally limited to the greater of 10% of statutory surplus or the statutory net gain from operations. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 144 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 145 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at December 31, 1998 and 1997 are summarized below (in thousands):
DECEMBER 31, 1998 DECEMBER 31, 1997 ------------------------------- --------------------------------- CARRYING CARRYING AMOUNT AMOUNT FAIR VALUE FAIR VALUE --------------- --------------- ---------------- ---------------- ASSETS Fixed maturities (Note 2) $3,503,530 $3,503,530 $3,152,355 $3,152,355 Equity securities (Note 2) 8,400 8,400 8,019 8,019 Mortgage loans 784,108 832,629 576,620 630,019 Policy loans 925,623 925,623 875,405 875,405 Short-term investments 747 747 55,466 55,466 Cash 31,644 31,644 22,299 22,299 Indebtedness from related parties 4,339 4,339 2,443 2,443 Separate account assets 423,474 423,474 263,035 263,035 LIABILITIES Supplemental contracts without life contingencies 3,966 3,966 4,240 4,240 Other policyholder funds left on deposit 98,638 98,638 99,545 99,545 Individual and group annuities, net of reinsurance 87,096 86,007 43,313 43,077 Indebtedness to related parties 13,755 13,755 7,704 7,704 Long-term debt to related parties 100,000 100,000 75,000 75,000 Accrued interest on long-term debt to related parties 5,387 5,387 5,128 5,128 Separate account liabilities 423,474 423,474 263,035 263,035
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 146 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair values. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 4.5% - 14.0% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 147 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) OTHER INVESTMENT-TYPE INSURANCE CONTRACTS: The fair values of the Company's deferred annuity contracts are estimated based on the cash surrender value. The carrying values of other liabilities, including immediate annuities, dividend accumulations, supplementary contracts without life contingencies and premium deposits, approximate their fair values. OFF-BALANCE-SHEET INSTRUMENTS: The Company accepted additional deposits on existing synthetic guaranteed investment contracts in the amounts of $66,480,000 and $1,000,000 in 1998 and 1997, respectively, from trustees of 401(k) plans. Pursuant to the terms of these contracts, the trustees own and retain the assets related to these contracts. Such assets had a value of $433,689,000 and $493,757,000 at December 31, 1998 and 1997, respectively. Under synthetic guaranteed investment contracts, the synthetic issuer may assume interest rate risk on individual plan participant initiated withdrawals from stable value options of 401(k) plans. Approximately 85% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT The Company is the beneficiary of letters of credit totaling $197,254,000 which have a market value to the Company of $0 and two lines of credit totaling $284,471,000 which have a market value to the Company of $0 (see Note 14). 13. COMMITMENTS AND CONTINGENCIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims, consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 148 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 13. COMMITMENTS AND CONTINGENCIES (CONTINUED) In 1998, the Company established an accrued liability of $40,000,000 related to certain potential litigation similar to that faced by other major life insurers. This litigation relates to sales practices of interest sensitive policies. The Company is vigorously defending its position in these cases. No such litigation reserve was established in 1997. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a material adverse effect on the Company's financial position or interfere with its operations. 14. OTHER FINANCING ARRANGEMENTS The Company has a $144,471,000 line of credit issued by the Company's parent to provide short-term liquidity. The Company has an additional non-affiliated line of credit of $140,000,000, also to provide short-term liquidity, which expires July 31, 1999. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1998 or 1997. The weighted-average balance outstanding of short-term debt was $37.5 million during 1998. The weighted-average interest rate paid on this debt during 1998 was 5.63% (see Note 12). The Company is the beneficiary of letters of credit totaling $197,254,000 that were established in accordance with the terms of reinsurance agreements. Such letters of credit are unconditional, irrevocable, and provide for automatic renewal for the following year at December 31. The letters were unused during both 1998 and 1997. 15. YEAR 2000 (UNAUDITED) Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management is committed to ensuring that information processing and delivery systems will be Year 2000 compliant before December 31, 1999. Our project team implemented the Year 2000 project plan which included the analysis, remediation and testing of our in-house source code. We followed our normal project management methodology, including communication with senior management on a monthly and as-needed basis and we allocated sufficient funds to ensure Year 2000 processing capabilities. On June 28, 1999, the analysis, remediation and system testing phases of the plan were completed. We will continue to do precautionary testing throughout 1999. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 149 Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 15. YEAR 2000 (UNAUDITED) (CONTINUED) Security Life has developed a contingency plan with established manual procedures that we believe will allow us to continue to do business in the event our systems do not perform as expected. However, there is no assurance Security Life's efforts will be successful, or that interaction with other service providers will not impact our services. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 150 Financial Statements Security Life Separate Account L1 of Security Life of Denver Insurance Company Years ended December 31, 1998, 1997 and 1996 with Report of Independent Auditors - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 151 Security Life Separate Account L1 Financial Statements Years ended December 31, 1998, 1997 and 1996 CONTENTS Report of Independent Auditors ..............................................153 Audited Financial Statements Statement of Net Assets .....................................................154 Statements of Operations ....................................................161 Statements of Changes in Net Assets .........................................180 Notes to Financial Statements ...............................................199 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 152 [Logo of Ernst & Young LLP appears here] Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Divisions) ("NB"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged AllCap Divisions) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Divisions) ("Fidelity"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Industrial Income, High Yield, Utilities and Small Company Growth Divisions) ("INVESCO"), the Van Eck Worldwide Trust (comprising the Worldwide Balanced, Worldwide Hard Assets, Worldwide Bond, Worldwide Emerging Markets and Worldwide Real Estate Divisions) ("Van Eck") and AIM Advisors, Inc. (comprising the Capital Appreciation and Government Securities Divisions) ("AIM")) as of December 31, 1998, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1998, by correspondence with the transfer agents. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Security Life Separate Account L1 at December 31, 1998, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with generally accepted accounting principles. Denver, Colorado /s/ Ernst & Young LLP April 5, 1999 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 153 Security Life Separate Account L1 Statement of Net Assets December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ----------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ------------ ----------- ----------- ------------ ----------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 154 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
NB ------------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- ----------------- --------------- --------------- ------------- Assets Investments in mutual funds at market value (Note C) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- Net assets $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ------------ -------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 47,067,751 $ 15,578,349 $ 9,026,160 $ -- $22,463,242 ============ ============== ============ =========== =========== Number of division units outstanding (Note G) 1,245,559.121 447,486.376 -- 986,298.018 ============== ============ =========== =========== Value per divisional unit $ 12.51 $ 20.17 $ -- $ 22.78 ============== ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 155 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------- ------------ Assets Investments in mutual funds at market value (Note C) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- Net assets $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 ----------- ----------- ---------- ----------- ---------- TOTAL POLICYHOLDER RESERVES $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ========== Number of division units outstanding (Note G) 838,692.418 402,532.472 923,696.066 221,642.446 =========== ========== =========== ========== Value per divisional unit $ 18.49 $ 22.91 $ 24.80 $ 30.69 =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 156 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Fidelity ---------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 600,255.213 1,293,480.338 1,429,659.907 1,526,404.399 3,215,990.519 =========== =========== =========== =========== =========== Value per divisional unit $ 17.05 $ 25.44 $ 14.40 $ 12.06 $ 26.79 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 157 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
INVESCO ---------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ---------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 450,557.216 473,616.752 486,858.648 110,379.616 67,506.441 =========== =========== =========== =========== =========== Value per divisional unit $ 17.99 $ 22.92 $ 16.19 $ 18.49 $ 11.09 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 158 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Assets Investments in mutual funds at market value (Note C) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- Net assets $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ------------ ----------- ----------- ----------- ----------- ----------- TOTAL POLICYHOLDER RESERVES $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== =========== Number of division units outstanding (Note G) 0.000 132,513.824 18,656.317 67,354.295 8,765.232 =========== =========== =========== =========== =========== Value per divisional unit $ 0.00 $ 8.10 $ 11.03 $ 6.85 $ 8.70 =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 159 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Assets Investments in mutual funds at market value (Note C) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- Net assets $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,800,153 $1,204,436 $2,595,717 ---------- ---------- ---------- TOTAL POLICYHOLDER RESERVES $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== Number of division units outstanding (Note G) 105,457.867 246,150.062 ========== ========== Value per divisional unit $ 11.42 $ 10.55 ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 160 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM ------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $17,747,833 $ 4,273,690 $ 4,617,072 $ 6,943,854 $1,625,860 $ 189,620 $ 97,737 Less valuation period deductions (Note B) 1,740,661 291,487 290,412 971,160 162,321 11,393 13,888 ----------- ----------- ----------- ----------- ---------- --------- -------- Net investment income (loss) 16,007,172 3,982,203 4,326,660 5,972,694 1,463,539 178,227 83,849 ----------- ----------- ----------- ----------- ---------- --------- -------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ----------- ----------- ----------- ----------- ---------- --------- -------- Net realized and unrealized gains (losses) on investments 27,303,251 (1,975,813) 7,511,094 21,633,430 604,461 (628,607) 158,686 ----------- ----------- ----------- ----------- ---------- --------- -------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $43,310,423 $ 2,006,390 $11,837,754 $27,606,124 $2,068,000 $(450,380) $242,535 =========== =========== =========== =========== ========== ========= ========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 161 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
NB ------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,273,690 $ 409,268 $1,579,109 $ 136,565 $2,148,748 Less valuation period deductions (Note B) 291,487 87,183 52,660 3,213 148,431 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 3,982,203 322,085 1,526,449 133,352 2,000,317 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments (1,975,813) 69,372 (345,724) (114,848) (1,584,613) ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,006,390 $ 391,457 $1,180,725 $ 18,504 $ 415,704 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 162 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Alger ------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,617,072 $ 1,681,373 $ 593,045 $ 2,196,712 $ 145,942 Less valuation period deductions (Note B) 290,412 95,588 53,316 113,376 28,132 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 4,326,660 1,585,785 539,729 2,083,336 117,810 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 7,511,094 353,953 1,339,272 4,015,300 1,802,569 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $11,837,754 $ 1,939,738 $1,879,001 $ 6,098,636 $1,920,379 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 163 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Fidelity --------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 --------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 6,943,854 $ 808,986 $ 2,663,618 $ 1,015,626 $ 830,137 $ 1,625,487 Less valuation period deductions (Note B) 971,160 63,669 183,002 129,504 116,932 478,053 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 5,972,694 745,317 2,480,616 886,122 713,205 1,147,434 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 -- 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 -- 9,762,177 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 21,633,430 335,949 5,978,805 1,005,777 -- 14,312,899 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 27,606,124 $ 1,081,266 $ 8,459,421 $ 1,891,899 $ 713,205 $15,460,333 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 164 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 1,625,860 $ 312,534 $ 514,174 $ 769,805 $ 29,058 $ 289 Less valuation period deductions (Note B) 162,321 40,898 60,678 49,140 10,730 875 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 1,463,539 271,636 453,496 720,665 18,328 (586) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 604,461 210,162 701,861 (692,507) 317,745 67,200 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,068,000 $ 481,798 $ 1,155,357 $ 28,158 $ 336,073 $ 66,614 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 165 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998
Van Eck ----------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bond Markets Estate ----------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 189,620 $ 45,674 $ 143,946 $ -- $ -- $ -- Less valuation period deductions (Note B) 11,393 1,050 8,170 212 1,736 225 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 178,227 44,624 135,776 (212) (1,736) (225) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments (628,607) (18,721) (557,808) 4,083 (54,296) (1,865) ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ (450,380) $ 25,903 $ (422,032) $ 3,871 $ (56,032) $ (2,090) ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 166 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- Investment income Dividends from mutual funds $ 97,737 $ 27,109 $ 70,628 Less valuation period deductions (Note B) 13,888 3,056 10,832 ---------- ---------- ---------- Net investment income (loss) 83,849 24,053 59,796 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 158,686 115,910 42,776 ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 242,535 $ 139,963 $ 102,572 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 167 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck --------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 4,158,702 $ 678,740 $ 323,895 $ 2,094,346 $ 1,039,818 $ 21,903 Less valuation period deductions (Note B) 813,630 135,310 141,930 461,022 67,625 7,743 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 3,345,072 543,430 181,965 1,633,324 972,193 14,160 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 13,842,525 2,679,881 2,542,807 7,796,838 822,618 381 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 17,187,597 $ 3,223,311 $ 2,724,772 $ 9,430,162 $ 1,794,811 $ 14,541 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 168 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 678,740 $ 156,667 $ 183,497 $ 72,086 $ 266,490 Less valuation period deductions (Note B) 135,310 33,725 24,959 10,366 66,260 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 543,430 122,942 158,538 61,720 200,230 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 2,679,881 139,095 548,903 52,644 1,939,239 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 3,223,311 $ 262,037 $ 707,441 $ 114,364 $2,139,469 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 169 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ------------------------------------------------------------------------ Investment income Dividends from mutual funds $ 323,895 $ 218,789 $ 55,945 $ 49,161 $ -- Less valuation period deductions (Note B) 141,930 51,004 28,138 48,785 14,003 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 181,965 167,785 27,807 376 (14,003) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 2,542,807 598,169 474,852 1,207,783 262,003 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 2,724,772 $ 765,954 $ 502,659 $ 1,208,159 $ 248,000 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 170 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
Fidelity ---------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ---------------------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 2,094,346 $ 204,696 $ 274,868 $ 451,874 $ 764,538 $ 398,370 Less valuation period deductions (Note B) 461,022 27,097 91,298 60,714 107,253 174,660 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 1,633,324 177,599 183,570 391,160 657,285 223,710 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 -- 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) -- 5,083,667 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 7,796,838 383,408 2,010,229 27,088 -- 5,376,113 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 9,430,162 $ 561,007 $ 2,193,799 $ 418,248 $ 657,285 $ 5,599,823 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 171 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO --------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 1,039,818 $ 76,461 $ 417,376 $ 519,369 $ 26,612 Less valuation period deductions (Note B) 67,625 12,921 27,525 23,478 3,701 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 972,193 63,540 389,851 495,891 22,911 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 822,618 249,670 441,718 16,568 114,662 ----------- ----------- ---------- ----------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 1,794,811 $ 313,210 $ 831,569 $ 512,459 $ 137,573 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 172 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997 Van Eck ------------------------------------------ Total Worldwide Worldwide Van Eck Balanced Hard Assets ------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897 Less valuation period deductions (Note B) 7,743 3,329 4,414 ---------- ---------- ---------- Net investment income (loss) 14,160 5,677 8,483 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) ---------- ---------- ---------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,541 $ 47,584 $ (33,043) ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 173 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck -------------------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 1,183,779 $ 292,143 $ 56,842 $ 593,973 $ 238,653 $ 2,168 Less valuation period deductions (Note B) 241,127 50,116 44,898 128,637 14,752 2,724 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 4,019,811 $ 885,779 $ 470,917 $ 2,299,336 $ 324,175 $ 39,604 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 174 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
NB -------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners -------------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 292,143 $ 127,305 $ 76,287 $ 35,420 $ 53,131 Less valuation period deductions (Note B) 50,116 13,218 9,400 8,882 18,616 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 885,779 $ 68,196 $ 109,347 $ 30,848 $ 677,388 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 175 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------------- Investment income Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less valuation period deductions (Note B) 44,898 18,457 7,398 16,087 2,956 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 470,917 $ 55,738 $ 102,371 $ 271,036 $ 41,772 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 176 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
Fidelity ------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------- ------------- -------------- ------------- -------------- ------------- Investment income Dividends from mutual funds $ 593,973 $ 9,800 $ 109,786 $ 27,966 $ 246,349 $ 200,072 Less valuation period deductions (Note B) 128,637 3,818 25,455 16,972 35,006 47,386 ------------ ----------- ----------- ----------- ----------- ----------- Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 ------------ ----------- ----------- ----------- ----------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 -- 1,207,167 ------------ ----------- ----------- ----------- ----------- ----------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 2,299,336 $ 76,955 $ 367,427 $ 283,758 $ 211,343 $ 1,359,853 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 177 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO ----------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ----------------------------------------------------------------------- Investment income Dividends from mutual funds $ 238,653 $ 25,285 $ 93,816 $ 114,676 $ 4,876 Less valuation period deductions (Note B) 14,752 3,402 4,272 6,357 721 ----------- ----------- ---------- ----------- ---------- Net investment income (loss) 223,901 21,883 89,544 108,319 4,155 ----------- ----------- ---------- ----------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 ----------- ----------- ---------- ----------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 324,175 $ 61,103 $ 113,391 $ 137,747 $ 11,934 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 178 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996 Van Eck ---------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ---------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less valuation period deductions (Note B) 2,724 1,304 1,420 ---------- ---------- ---------- Net investment income (loss) (556) (1,135) 579 ---------- ---------- ---------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 ---------- ---------- ---------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 39,604 $ 21,192 $ 18,412 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 179 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1998
Total All Total Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck AIM -------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 16,007,172 $ 3,982,203 $ 4,326,660 $ 5,972,694 $ 1,463,539 $ 178,227 $ 83,849 Net realized gains (losses) on investments 8,536,274 347,823 1,685,294 6,403,348 355,780 (260,570) 4,599 Net unrealized gains (losses) on investments 18,766,977 (2,323,636) 5,825,800 15,230,082 248,681 (368,037) 154,087 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Increase (decrease) in net assets from operations 43,310,423 2,006,390 11,837,754 27,606,124 2,068,000 (450,380) 242,535 ------------ ----------- ----------- ------------ ----------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 128,820,440 12,563,792 13,089,164 92,335,231 8,092,294 875,501 1,864,458 Cost of insurance and administrative charges (14,458,798) (2,063,802) (2,525,683) (8,200,381) (1,481,570) (108,634) (78,728) Benefit payments (306,862) (11,220) (26,492) (259,989) (9,161) -- -- Surrenders (10,842,736) (725,767) (859,454) (8,654,377) (586,533) (15,198) (1,407) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (3,936,799) 8,461,193 4,831,250 (25,231,056) 6,011,967 216,552 1,773,295 Other (41,582) (87,331) (18,626) 54,208 9,107 1,060 -- ------------ ----------- ----------- ------------ ----------- ---------- ---------- Increase (decrease) from principal transactions 99,233,663 18,136,865 14,490,159 50,043,636 12,036,104 969,281 3,557,618 ------------ ----------- ----------- ------------ ----------- ---------- ---------- Total increase (decrease) in net assets 142,544,086 20,143,255 26,327,913 77,649,760 14,104,104 518,901 3,800,153 Net assets at beginning of year 162,486,020 26,924,496 28,100,608 90,636,169 15,526,649 1,298,098 -- ------------ ----------- ----------- ------------ ----------- ---------- ---------- Net assets at end of year $305,030,106 $47,067,751 $54,428,521 $168,285,929 $29,630,753 $1,816,999 $3,800,153 ============ =========== =========== ============ =========== ========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 180 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
NB ----------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------- --------------- ------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,982,203 $ 322,085 $1,526,449 $ 133,352 $2,000,317 Net realized gains (losses) on investments 347,823 10,003 (264,148) (53,894) 655,862 Net unrealized gains (losses) on investments (2,323,636) 59,369 (81,576) (60,954) (2,240,475) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 2,006,390 391,457 1,180,725 18,504 415,704 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,563,792 3,839,599 2,578,265 31,593 6,114,335 Cost of insurance and administrative charges (2,063,802) (492,782) (393,894) (14,839) (1,162,287) Benefit payments (11,220) -- -- -- (11,220) Surrenders (725,767) (15,922) (419,497) (3,243) (287,105) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,461,193 5,212,588 513,663 (894,126) 3,629,068 Other (87,331) (31,757) 3,226 (31,566) (27,234) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 18,136,865 8,511,726 2,281,763 (912,181) 8,255,557 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 20,143,255 8,903,183 3,462,488 (893,677) 8,671,261 Net assets at beginning of year 26,924,496 6,675,166 5,563,672 893,677 13,791,981 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $47,067,751 $15,578,349 $9,026,160 $ -- $22,463,242 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 181 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Alger ---------------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap ---------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 4,326,660 $ 1,585,785 $ 539,729 $ 2,083,336 $ 117,810 Net realized gains (losses) on investments 1,685,294 186,963 316,932 915,872 265,527 Net unrealized gains (losses) on investments 5,825,800 166,990 1,022,340 3,099,428 1,537,042 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 11,837,754 1,939,738 1,879,001 6,098,636 1,920,379 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,089,164 4,154,774 2,573,424 5,298,963 1,062,003 Cost of insurance and administrative charges (2,525,683) (803,988) (473,224) (989,260) (259,211) Benefit payments (26,492) (14,248) (12,244) -- -- Surrenders (859,454) (196,345) (376,263) (216,867) (69,979) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 4,831,250 (35,168) 528,261 3,094,366 1,243,791 Other (18,626) (504) (14,286) 1,597 (5,433) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 14,490,159 3,104,521 2,225,668 7,188,799 1,971,171 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 26,327,913 5,044,259 4,104,669 13,287,435 3,891,550 Net assets at beginning of year 28,100,608 10,459,112 5,115,538 9,616,179 2,909,779 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $54,428,521 $15,503,371 $9,220,207 $22,903,614 $6,801,329 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 182 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Fidelity ------------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 5,972,694 $ 745,317 $2,480,616 $ 886,122 $ 713,205 $ 1,147,434 Net realized gains (losses) on investments 6,403,348 20,247 1,534,000 298,379 -- 4,550,722 Net unrealized gains (losses) on investments 15,230,082 315,702 4,444,805 707,398 -- 9,762,177 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 27,606,124 1,081,266 8,459,421 1,891,899 713,205 15,460,333 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 92,335,231 2,713,832 8,443,426 5,709,711 55,421,815 20,046,447 Cost of insurance and administrative charges (8,200,381) (490,838) (1,358,671) (939,010) (1,769,895) (3,641,967) Benefit payments (259,989) -- (8,890) (8,379) (240,733) (1,987) Surrenders (8,654,377) (652,157) (2,494,098) (438,536) (2,335,262) (2,734,324) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (25,231,056) 1,440,884 1,798,160 2,169,798 (48,429,964) 17,790,066 Other 54,208 7,219 (14,128) (29,375) 39,827 50,665 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 50,043,636 3,018,940 6,365,799 6,464,209 2,685,788 31,508,900 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 77,649,760 4,100,206 14,825,220 8,356,108 3,398,993 46,969,233 Net assets at beginning of year 90,636,169 6,137,073 18,074,922 12,225,779 15,013,259 39,185,136 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $168,285,929 $10,237,279 $32,900,142 $20,581,887 $18,412,252 $86,154,369 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 183 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
INVESCO ------------------------------------------------------------------------------------------- Small Total Total Industrial Company INVESCO Return Income High Yield Utilities Growth ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,463,539 $ 271,636 $ 453,496 $ 720,665 $ 18,328 $ (586) Net realized gains (losses) on investments 355,780 136,473 342,342 (151,382) 35,245 (6,898) Net unrealized gains (losses) on investments 248,681 73,689 359,519 (541,125) 282,500 74,098 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 2,068,000 481,798 1,155,357 28,158 336,073 66,614 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 8,092,294 2,104,849 3,170,236 2,297,048 435,105 85,056 Cost of insurance and administrative charges (1,481,570) (425,176) (567,563) (389,895) (87,692) (11,244) Benefit payments (9,161) -- (9,161) -- -- -- Surrenders (586,533) (56,509) (192,220) (329,292) (8,210) (302) Net transfers among divisions (including the loan division and Guaranteed interest division in the general account) 6,011,967 2,955,200 1,315,595 931,519 201,017 608,636 Other 9,107 556 22,617 (18,840) 4,856 (82) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 12,036,104 4,578,920 3,739,504 2,490,540 545,076 682,064 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 14,104,104 5,060,718 4,894,861 2,518,698 881,149 748,678 Net assets at beginning of year 15,526,649 3,044,610 5,958,144 5,364,084 1,159,811 -- ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 29,630,753 $ 8,105,328 $10,853,005 $ 7,882,782 $ 2,040,960 $ 748,678 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 184 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998
Van Eck ------------------------------------------------------------------------------------------- Worldwide Worldwide Worldwide Total Worldwide Hard Worldwide Emerging Real Van Eck Balanced Assets Bonds Markets Estate ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 178,227 $ 44,624 $ 135,776 $ (212) $ (1,736) $ (225) Net realized gains (losses) on investments (260,570) 4,682 (162,110) 130 (101,436) (1,836) Net unrealized gains (losses) on investments (368,037) (23,403) (395,698) 3,953 47,140 (29) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations (450,380) 25,903 (422,032) 3,871 (56,032) (2,090) ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 875,501 (1,347) 571,430 129,336 137,102 38,980 Cost of insurance and administrative charges (108,634) (9,423) (86,867) (1,544) (7,777) (3,023) Benefit payments -- -- -- -- -- -- Surrenders (15,198) (3,105) (11,871) -- -- (222) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 216,552 (399,466) 111,286 74,151 387,960 42,621 Other 1,060 90 1,059 (7) (97) 15 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 969,281 (413,251) 585,037 201,936 517,188 78,371 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 518,901 (387,348) 163,005 205,807 461,156 76,281 Net assets at beginning of year 1,298,098 387,348 910,750 -- -- -- ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 1,816,999 $ -- $ 1,073,755 $ 205,807 $ 461,156 $ 76,281 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 185 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1998 AIM --------------------------------------- Total Capital Government AIM Appreciation Securities --------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 83,849 $ 24,053 $ 59,796 Net realized gains (losses) on investments 4,599 (3,315) 7,914 Net unrealized gains (losses) on investments 154,087 119,225 34,862 ---------- ---------- ---------- Increase (decrease) in net assets from operations 242,535 139,963 102,572 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,864,458 329,635 1,534,823 Cost of insurance and administrative charges (78,728) (28,940) (49,788) Benefit payments -- -- -- Surrenders (1,407) (1,407) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,773,295 765,185 1,008,110 Other -- -- -- ---------- ---------- ---------- Increase (decrease) from principal transactions 3,557,618 1,064,473 2,493,145 ---------- ---------- ---------- Total increase (decrease) in net assets 3,800,153 1,204,436 2,595,717 Net assets at beginning of year -- -- -- ---------- ---------- ---------- Net assets at end of year $3,800,153 $1,204,436 $2,595,717 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 186 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160 Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716 Cost of insurance and administrative charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222) Benefit payments (406,386) (20,591) (63,369) (322,263) (163) -- Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748 Other 5,891 9,817 11,046 (21,999) 11,180 (4,153) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067 Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $ 1,298,098 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 187 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
NB ------------------------------------------------------------------------ Total Limited Government NB Maturity Bond Growth Income Partners ------------------------------------------------------------------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230 Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 3,223,311 262,037 707,441 114,364 2,139,469 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680 Cost of insurance and administrative charges (957,887) (163,472) (219,117) (62,075) (513,223) Benefit payments (20,591) -- -- -- (20,591) Surrenders (146,698) (3,761) (71,838) (792) (70,307) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988 Other 9,817 (2,202) 11,700 (6,404) 6,723 ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739 Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $26,924,496 $ 6,675,166 $5,563,672 $ 893,677 $13,791,981 =========== =========== ========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 188 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Alger ------------------------------------------------------------------------------ American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap -------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003) Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 2,724,772 765,954 502,659 1,208,159 248,000 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316 Cost of insurance and administrative charges (1,466,664) (526,742) (299,891) (479,902) (160,129) Benefit payments (63,369) -- (62,593) (776) -- Surrenders (412,252) (255,386) (74,317) (58,850) (23,699) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582 Other 11,046 (6,069) 19,072 2,082 (4,039) ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031 Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $ 9,616,179 $2,909,779 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 189 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710 Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 -- 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) -- 5,083,667 ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) in net assets from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968 Cost of insurance and administrative charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331) Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142) Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828 Other (21,999) 7,567 3,217 10,563 (35,219) (8,127) ------------ ----------- ----------- ----------- ----------- ----------- Increase (decrease) from principal transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249 ------------ ----------- ----------- ----------- ----------- ----------- Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072 Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 90,636,169 $ 6,137,073 $18,074,922 $12,225,779 $15,013,259 $39,185,136 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 190 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO ------------------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities --------------- --------------- --------------- --------------- --------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 972,193 $ 63,540 $ 389,851 $ 495,891 $ 22,911 Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 ----------- ----------- ---------- ----------- ---------- Increase (decrease) in net assets from operations 1,794,811 313,210 831,569 512,459 137,573 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,683,620 517,831 1,250,551 835,890 79,348 Cost of insurance and administrative charges (614,145) (133,107) (266,208) (177,612) (37,218) Benefit payments (163) -- -- (163) -- Surrenders (112,699) (28,672) (37,810) (9,783) (36,434) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 7,796,299 1,498,300 2,804,344 2,695,587 798,068 Other 11,180 2,581 6,081 2,305 213 ----------- ----------- ---------- ----------- ---------- Increase (decrease) from principal transactions 9,764,092 1,856,933 3,756,958 3,346,224 803,977 ----------- ----------- ---------- ----------- ---------- Total increase (decrease) in net assets 11,558,903 2,170,143 4,588,527 3,858,683 941,550 Net assets at beginning of year 3,967,746 874,467 1,369,617 1,505,401 218,261 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $15,526,649 $ 3,044,610 $5,958,144 $ 5,364,084 $1,159,811 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 191 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997 Van Eck -------------------------------------- Worldwide Total Worldwide Hard Van Eck Balanced Assets ---------- ---------- ---------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------- ---------- ---------- Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments -- -- -- Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ---------- ---------- ---------- Increase (decrease) from principal transactions 689,526 11,959 677,567 ---------- ---------- ---------- Total increase (decrease) in net assets 704,067 59,543 644,524 Net assets at beginning of year 594,031 327,805 266,226 ---------- ---------- ---------- Net assets at end of year $1,298,098 $ 387,348 $ 910,750 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 192 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
Total All Total Total Total Total Total Divisions NB Alger Fidelity INVESCO Van Eck ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 4,019,811 885,779 470,917 2,299,336 324,175 39,604 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative charges (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) -- (9,457) (184) -- -- Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 57,856,827 $10,539,346 $11,356,089 $31,399,615 $ 3,967,746 $ 594,031 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 193 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
NB --------------------------------------------------------------------------- Total Limited Government NB Maturity Bond Growth Income Partners --------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative charges (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments -- -- -- -- -- Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $10,539,346 $ 2,492,076 $1,835,714 $ 1,548,314 $4,663,242 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 194 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Alger --------------------------------------------------------------------- American American American Total Small MidCap American Leveraged Alger Capitalization Growth Growth AllCap --------------------------------------------------------------------- Increase (decrease) in net assets OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative charges (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) -- -- (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $11,356,089 $ 4,332,108 $2,335,055 $ 3,814,178 $ 874,748 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 195 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
Fidelity ----------------------------------------------------------------------------------------- Total Asset Money Fidelity Manager Growth Overseas Market Index 500 ----------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 -- 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 -- 1,161,135 ------------ ----------- ----------- ----------- ----------- ----------- Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 ------------ ----------- ----------- ----------- ----------- ----------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative charges (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) -- -- -- -- (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) ------------ ----------- ----------- ----------- ----------- ----------- Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 ------------ ----------- ----------- ----------- ----------- ----------- Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 ------------ ----------- ----------- ----------- ----------- ----------- Net assets at end of year $ 31,399,615 $ 1,545,337 $ 7,049,419 $ 4,275,129 $ 8,295,666 $10,234,064 ============ =========== =========== =========== =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 196 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ---------------------------------------------------------------------- Total Total Industrial INVESCO Return Income High Yield Utilities ---------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------- ----------- ---------- ----------- ---------- Increase in net assets from operations 324,175 61,103 113,391 137,747 11,934 ----------- ----------- ---------- ----------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative charges (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments -- -- -- -- -- Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ----------- ----------- ---------- ----------- ---------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ----------- ----------- ---------- ----------- ---------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ----------- ----------- ---------- ----------- ---------- Net assets at end of year $ 3,967,746 $ 874,467 $1,369,617 $ 1,505,401 $ 218,261 =========== =========== ========== =========== ==========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 197 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996 Van Eck ----------------------------------------- Total Worldwide Worldwide Van Eck Balanced Hard Assets ----------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ---------- ---------- ---------- Increase in net assets from operations 39,604 21,192 18,412 ---------- ---------- ---------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative charges (41,236) (29,480) (11,756) Benefit payments -- -- -- Surrenders (1,584) (1,584) -- Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ---------- ---------- ---------- Increase from principal transactions 459,361 229,801 229,560 ---------- ---------- ---------- Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ---------- ---------- ---------- Net assets at end of year $ 594,031 $ 327,805 $ 266,226 ========== ========== ========== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 198 Security Life Separate Account L1 Notes to Financial Statements December 31, 1998 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of December 31, 1998, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 199 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio INVESCO VIF Small Company Growth Portfolio Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold and Natural Resources Portfolio") Van Eck Worldwide Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio Effective May 1, 1997, the Divisions of the Separate Account investing in the Neuberger Berman Government Income Portfolio and the Van Eck Worldwide Balanced Portfolio stopped accepting new investments. These divisions were discontinued during 1998. Effective February 19, 1998, six new divisions became available to the policyholders for investment in the following funds: Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Small Company Growth Portfolio - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 200 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) The FirstLine and FirstLine policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 201 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A daily deduction, at an annual rate of .75% of the daily asset value of the Separate Account divisions, is charged to the Separate Account for mortality and expense risks assumed by the Company. Total mortality and expense charges for the years ended December 31, 1998, 1997 and 1996 were $1,740,661; $813,630 and $241,127, respectively. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 202 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS Fund shares are purchased at net asset value with net premiums (premium payments, less sales and tax loads charged by the Company) and divisional transfers from other divisions. Fund shares are redeemed for the payment of benefits, for surrenders, for transfers to other divisions, and for charges by the Company for certain cost of insurance and administrative charges. The cost of insurance and administrative charges for the years ended December 31, 1998, 1997 and 1996 were $14,458,798; $8,284,944 and $2,843,666, respectively. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of December 31, 1998:
Number Net Value of Asset of Shares Cost of FUND Shares Value at Market Shares - ---------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 1,127,232.206 $13.82 $ 15,578,349 $ 15,334,595 Growth 343,330.535 $26.29 9,026,160 8,510,696 Government Income -- $11.14 -- -- Partners 1,186,647.771 $18.93 22,463,242 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 352,589.754 $43.97 15,503,371 14,851,950 American MidCap Growth 319,369.785 $28.87 9,220,207 7,858,579 American Growth 430,357.281 $53.22 22,903,614 18,608,688 American Leveraged AllCap 194,880.482 $34.90 6,801,329 5,293,171 Fidelity Management & Research Co.: Asset Manager 563,726.801 $18.16 10,237,279 9,501,494 Growth 733,232.497 $44.87 32,900,142 26,845,882 Overseas 1,026,528.069 $20.05 20,581,887 19,913,166 Money Market 18,412,252.400 $1.00 18,412,252 18,412,252 Index 500 609,942.422 $141.25 86,154,369 70,067,500 INVESCO Funds Group, Inc.: Total Return 488,861.727 $16.58 8,105,328 7,814,990 Industrial Income 583,181.351 $18.61 10,853,005 10,163,306 High Yield 696,358.875 $11.32 7,882,782 8,752,765 Utilities 114,789.679 $17.78 2,040,960 1,727,429 Small Company Growth 64,989.440 $11.52 748,678 674,581 Van Eck Associates Corporation: Worldwide Balanced -- $12.03 -- -- Worldwide Hard Assets 116,712.440 $9.20 1,073,755 1,517,809 Worldwide Bond 16,759.491 $12.28 205,807 201,853 Worldwide Emerging Markets 64,769.133 $7.12 461,156 414,017 Worldwide Real Estate 7,995.940 $9.54 76,281 76,310 AIM Advisors, Inc.: Capital Appreciation 47,795.065 $25.20 1,204,436 1,085,211 Government Securities 232,175.030 $11.18 2,595,717 2,560,855 ----------------- ----------------- Total $305,030,106 $272,757,896 ================= =================
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 203 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the year ended December 31, 1998, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
Beginning End FUND of Year Purchases Sales of Year - ------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $6,490,167 $11,289,258 ($2,444,830) $15,334,595 Growth 4,895,677 7,029,074 (3,414,055) 8,510,696 Government Income 833,365 137,502 (970,867) -- Partners 11,515,832 13,300,529 (2,245,564) 22,570,797 Fred Alger Management, Inc.: American Small Capitalization 10,791,047 8,512,969 (4,452,066) 14,851,950 American MidCap Growth 4,680,691 5,007,799 (1,829,911) 7,858,579 American Growth 8,426,205 12,330,367 (2,147,884) 18,608,688 American Leveraged AllCap 2,939,669 4,357,148 (2,003,646) 5,293,171 Fidelity Management & Research Co.: Asset Manager 5,638,123 5,278,809 (1,415,438) 9,501,494 Growth 16,477,099 23,941,147 (13,572,364) 26,845,882 Overseas 12,237,937 23,905,882 (16,230,653) 19,913,166 Money Market 14,300,455 74,696,311 (70,584,514) 18,412,252 Index 500 32,789,297 45,050,855 (7,772,652) 70,067,500 INVESCO Funds Group, Inc.: Total Return 2,812,500 5,585,718 (583,228) 7,814,990 Industrial Income 5,602,678 5,964,437 (1,403,809) 10,163,306 High Yield 4,793,052 10,924,985 (6,965,272) 8,752,765 Utilities 1,129,569 919,214 (321,354) 1,727,429 Small Company Growth -- 775,726 (101,145) 674,581 Van Eck Associates Corporation: Worldwide Balanced 364,193 72,504 (436,697) -- Worldwide Hard Assets 959,451 1,175,104 (616,746) 1,517,809 Worldwide Bond -- 222,604 (20,751) 201,853 Worldwide Emerging Markets -- 771,909 (357,892) 414,017 Worldwide Real Estate -- 95,356 (19,046) 76,310 AIM Advisors, Inc. Capital Appreciation -- 1,174,137 (88,926) 1,085,211 Government Securities -- 2,744,143 (183,288) 2,560,855 --------------- ------------ -------------- ------------ Total $147,677,007 $265,263,487 ($140,182,598) $272,757,896 =============== ============ ============== ============
Aggregate proceeds from sales of investments for the year ended December 31, 1998 were $148,718,872. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 204 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and Strategic Advantage products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and Strategic Advantage policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 205 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the year ended December 31, 1998:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - ----------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 552,985.394 801,233.327 (108,659.600) 1,245,559.121 Growth 316,146.084 250,854.619 (119,514.327) 447,486.376 Government Income 75,811.559 58.537 (75,870.096) -- Partners 626,285.721 455,096.290 (95,083.993) 986,298.018 Fred Alger Management, Inc.: American Small Capitalization 648,733.740 333,770.247 (143,811.569) 838,692.418 American MidCap Growth 288,809.482 167,037.228 (53,314.238) 402,532.472 American Growth 569,990.309 442,313.190 (88,607.433) 923,696.066 American Leveraged AllCap 148,542.639 102,168.282 (29,068.475) 221,642.446 Fidelity Management & Research Co.: Asset Manager 410,906.106 270,972.780 (81,623.673) 600,255.213 Growth 983,842.388 614,542.294 (304,904.344) 1,293,480.338 Overseas 950,328.899 861,220.218 (381,889.210) 1,429,659.907 Money Market 1,303,059.881 5,059,561.984 (4,836,217.466) 1,526,404.399 Index 500 1,863,056.104 1,617,935.444 (265,001.029) 3,215,990.519 INVESCO Funds Group, Inc.: Total Return 184,042.238 307,178.543 (40,663.565) 450,557.216 Industrial Income 297,553.033 216,644.366 (40,580.647) 473,616.752 High Yield 333,501.857 283,205.205 (129,848.414) 486,858.648 Utilities 78,118.685 41,701.114 (9,440.183) 110,379.616 Small Company Growth -- 71,535.065 (4,028.624) 67,506.441 Van Eck Associates Corporation: Worldwide Balanced 32,139.282 190.627 (32,329.909) -- Worldwide Hard Assets 77,046.773 68,491.375 (13,024.324) 132,513.824 Worldwide Bond -- 18,882.425 (226.108) 18,656.317 Worldwide Emerging Markets -- 105,064.405 (37,710.110) 67,354.295 Worldwide Real Estate -- 9,848.072 (1,082.840) 8,765.232 AIM Advisors, Inc.: Capital Appreciation -- 108,895.839 (3,437.972) 105,457.867 Government Securities -- 261,432.015 (15,281.953) 246,150.062
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 206 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1997:
(Decrease) for Outstanding Increase Withdrawals Outstanding At Beginning for Payments and Other At End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 218,725.891 334,572.082 (312.579) 552,985.394 Growth 133,567.983 187,433.957 (4,855.856) 316,146.084 Government Income 142,773.403 30,012.660 (96,974.504) 75,811.559 Partners 275,892.457 354,159.052 (3,765.788) 626,285.721 Fred Alger Management, Inc.: American Small Capitalization 297,073.322 368,659.345 (16,998.927) 648,733.740 American MidCap Growth 150,480.473 143,410.236 (5,081.227) 288,809.482 American Growth 282,175.287 292,019.948 (4,204.926) 569,990.309 American Leveraged AllCap 53,044.470 96,743.489 (1,245.320) 148,542.639 Fidelity Management & Research Co.: Asset Manager 123,908.168 294,115.342 (7,117.404) 410,906.106 Growth 470,285.667 522,440.765 (8,884.044) 983,842.388 Overseas 367,948.109 589,863.772 (7,482.982) 950,328.899 Money Market 753,707.969 6,017,484.702 (5,468,132.790) 1,303,059.881 Index 500 640,890.650 1,227,420.261 (5,254.807) 1,863,056.104 INVESCO Funds Group, Inc.: Total Return 64,490.483 121,436.060 (1,884.305) 184,042.238 Industrial Income 87,035.356 212,619.908 (2,102.231) 297,553.033 High Yield 108,999.107 225,144.290 (641.540) 333,501.857 Utilities 18,008.490 63,007.328 (2,897.133) 78,118.685 Van Eck Associates Corporation: Worldwide Balanced 29,808.787 5,838.562 (3,508.067) 32,139.282 Worldwide Hard Assets 21,966.093 55,323.208 (242.528) 77,046.773
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 207 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1996:
(Decrease) for Outstanding Increase Withdrawals Outstanding at Beginning or Payments and Other at End Division of Year Received Deductions of Year - -------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 162,009.578 57,300.933 (584.620) 218,725.891 Growth 60,162.107 74,132.806 (726.930) 133,567.983 Government Income 77,187.706 65,930.987 (345.290) 142,773.403 Partners 73,535.288 203,456.199 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 218,770.486 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 131,814.883 (1,027.270) 150,480.473 American Growth 69,805.233 214,057.614 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 51,210.999 (661.260) 53,044.470 Fidelity Management & Research Co.: Asset Manager 11,627.088 112,576.840 (295.760) 123,908.168 Growth 102,248.988 369,855.299 (1,818.620) 470,285.667 Overseas 93,906.733 275,584.696 (1,543.320) 367,948.109 Money Market 178,653.159 3,174,656.740 (2,599,601.930) 753,707.969 Index 500 91,903.027 551,031.963 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.664 52,659.359 (771.540) 64,490.483 Industrial Income 20,026.102 67,339.104 (329.850) 87,035.356 High Yield 45,708.358 63,646.889 (356.140) 108,999.107 Utilities 1,879.859 16,197.511 (68.880) 18,008.490 Van Eck Associates Corporation: Worldwide Balanced 7,739.274 22,412.363 (342.850) 29,808.787 Worldwide Hard Assets 1,765.913 20,257.020 (56.840) 21,966.093
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 208 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1998 consisted of the following:
Accumulated Net Accumulated Net Realized Unrealized Investment Gains Gains Principal Income (Losses) On (Losses) On Division Transactions (Loss) Investments Investments Net Assets - ------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $ 14,798,256 $ 554,555 $ (18,215) $ 243,753 $ 15,578,349 Growth 7,028,181 1,750,191 (267,675) 515,463 9,026,160 Government Income (197,709) 219,245 (21,536) - - Partners 19,164,868 2,232,497 1,173,430 (107,553) 22,463,242 Fred Alger Management, Inc.: American Small Capitalization 12,782,408 1,740,285 329,258 651,420 15,503,371 American MidCap Growth 6,729,922 570,025 558,634 1,361,626 9,220,207 American Growth 15,328,177 2,102,491 1,178,019 4,294,927 22,903,614 American Leveraged AllCap 4,597,430 102,339 593,403 1,508,157 6,801,329 Fidelity Management & Research Co.: Asset Manager 8,511,070 928,642 61,784 735,783 10,237,279 Growth 21,880,758 2,745,144 2,220,029 6,054,211 32,900,142 Overseas 17,959,130 1,286,196 667,842 668,719 20,581,887 Money Market 16,762,206 1,650,046 - - 18,412,252 Index 500 63,645,284 1,521,424 4,900,792 16,086,869 86,154,369 INVESCO Funds Group, Inc.: Total Return 7,241,724 359,909 213,358 290,337 8,105,328 Industrial Income 8,730,383 941,544 491,379 689,699 10,853,005 High Yield 7,183,287 1,366,993 202,483 (869,981) 7,882,782 Utilities 1,554,382 45,485 127,560 313,533 2,040,960 Small Company Growth 682,064 (586) (6,898) 74,098 748,678 Van Eck Associates Corporation: Worldwide Balanced (94,857) 49,411 45,446 - - Worldwide Hard Assets 1,509,491 144,822 (136,502) (444,056) 1,073,755 Worldwide Bond 201,935 (212) 130 3,954 205,807 Worldwide Emerging Markets 517,189 (1,736) (101,436) 47,139 461,156 Worldwide Real Estate 78,370 (225) (1,836) (28) 76,281 AIM Advisors, Inc.: Capital Appreciation 1,064,475 24,052 (3,314) 119,223 1,204,436 Government Securities 2,493,145 59,796 7,914 34,862 2,595,717 ------------ ----------- ----------- ----------- ------------ Total $240,151,569 $20,392,333 $12,214,049 $32,272,155 $305,030,106 ============ =========== =========== =========== ============
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 209 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer software systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 210 Financial Statements - Unaudited Security Life Separate Account L1 of Security Life of Denver Insurance Company Nine months ended September 30, 1999 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 211 Security Life Separate Account L1 Financial Statements - Unaudited Nine months ended September 30, 1999 CONTENTS Financial Statements - Unaudited Statement of Net Assets .....................................................213 Statement of Operations .....................................................220 Statement of Changes in Net Assets ..........................................227 Notes to Financial Statements ...............................................234 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 212 Security Life Separate Account L1 Statement of Net Assets (Unaudited) September 30, 1999
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM ------------- ------------ ------------ ------------- ------------ ----------- ----------- ASSETS Investments in mutual funds at market value (Note C) $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ------------- ------------ ------------ ------------- ------------ ----------- ----------- Net assets $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============= ============ ============ ============= ============ =========== =========== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ------------- ------------ ------------ ------------- ------------ ----------- ----------- TOTAL POLICYHOLDER RESERVES $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============= ============ ============ ============= ============ =========== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 213 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS -------------- -------------- ------------ -------------- ASSETS Investments in mutual funds at market value (Note C) $47,839,833 $13,068,057 $9,619,934 $25,151,842 ------------- ------------- ------------ -------------- Net assets $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============== ============ ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $47,839,833 $13,068,057 $9,619,934 $25,151,842 ------------- -------------- ------------ -------------- TOTAL POLICYHOLDER RESERVES $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============== ============ ============== Number of division units outstanding (Note G) 1,039,622.674 473,888.373 1,125,362.057 ============== ============ ============== Value per divisional unit $12.57 $20.30 $22.35 ============== ============ ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 214 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ -------------- ------------- ASSETS Investments in mutual funds at market value (Note C) $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ------------- -------------- ------------ ------------- ------------- Net assets $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============== ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ------------- -------------- ------------ -------------- ------------- TOTAL POLICYHOLDER RESERVES $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============== ============= Number of division units outstanding (Note G) 969,591.252 521,645.131 1,155,621.285 341,422.339 ============== ============ ============== ============= Value per divisional unit $20.11 $23.91 $27.11 $38.77 ============== ============ ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 215 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
FIDELITY -------------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 -------------- ------------ ------------- ------------- ------------- ------------- ASSETS Investments in mutual funds at market value (Note C) $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 -------------- ------------ ------------- ------------- ------------- ------------- Net assets $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============== ============ ============= ============= ============= ============= POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 -------------- ------------ ------------- ------------- ------------- ------------- TOTAL POLICYHOLDER RESERVES $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============== ============ ============= ============== ============= ============= Number of division units outstanding (Note G) 605,216.916 1,505,409.839 1,623,779.218 2,804,989.794 4,294,530.144 ============ ============= ============= ============= ============= Value per divisional unit $17.32 $28.14 $16.36 $12.44 $27.97 ============ ============= ============= ============= =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 216 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
INVESCO ----------------------------------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL SMALL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH -------------- ------------- ------------ ------------- ------------- -------------- ASSETS Investments in mutual funds at market value (Note C) $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 -------------- ------------- ------------ ------------- ------------- -------------- Net assets $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============== ============= ============ ============= ============= ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 -------------- ------------- ------------ ------------- ------------- -------------- TOTAL POLICYHOLDER RESERVES $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============== ============= ============ ============= ============= ============== Number of division units outstanding (Note G) 587,846.822 564,281.758 498,536.417 166,522.972 158,826.877 ============= ============ ============= ============= ============== Value per divisional unit $17.15 $24.23 $16.97 $19.72 $14.25 ============= ============ ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 217 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999
VAN ECK ----------------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ---------- ------------- ------------- ------------- -------------- ASSETS Investments in mutual funds at market value (Note C) $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ---------- ------------- ------------- ------------- -------------- Net assets $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ========== ============= ============= ============= ============== POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ---------- ------------- ------------- ------------- -------------- TOTAL POLICYHOLDER RESERVES $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ========== ============= ============= ============= ============== Number of division units outstanding (Note G) 206,329.250 41,934.753 154,879.171 29,109.421 ============= ============= ============= ============== Value per divisional unit $9.47 $10.33 $8.69 $8.81 ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 218 Security Life Separate Account L1 Statement of Net Assets (continued) (Unaudited) September 30, 1999 AIM --------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES ----------- ---------------- ---------- ASSETS Investments in mutual funds at market value (Note C) $7,840,267 $3,053,235 $4,787,032 ------------ ------------- ------------ Net assets $7,840,267 $3,053,235 $4,787,032 ============ ============= ============ POLICYHOLDER RESERVES Reserves attributable to the policyholders (Note B) $7,840,267 $3,053,235 $4,787,032 ------------ ------------- ------------ TOTAL POLICYHOLDER RESERVES $7,840,267 $3,053,235 $4,787,032 ============ ============= ============ Number of division units outstanding (Note G) 252,333.471 462,515.169 ============= ============ Value per divisional unit $12.10 $10.35 ============= ============ See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 219 Security Life Separate Account L1 Statement of Operations (Unaudited) Nine months ended September 30, 1999
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM ------------ ------------ ----------- ----------- ----------- -------- ----------- INVESTMENT INCOME Dividends from mutual funds $16,941,715 $2,123,919 $7,325,481 $7,461,489 - $30,826 - Less valuation period deductions (Note B) 2,046,339 273,318 384,719 1,140,818 $196,400 18,383 $32,701 ------------ ------------ ----------- ----------- ----------- -------- ----------- Net investment income (loss) 14,895,376 1,850,601 6,940,762 6,320,671 (196,400) 12,443 (32,701) ------------ ------------ ----------- ----------- ----------- -------- ----------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 13,909,102 (135,889) 3,847,712 9,196,782 916,656 60,896 22,945 Net unrealized gains (losses) on investments (10,871,813) (2,235,009) (4,536,943) (4,797,945) 321,114 299,818 77,152 ------------ ------------ ----------- ----------- ----------- -------- ----------- Net realized and unrealized gains (losses) on investments 3,037,289 (2,370,898) (689,231) 4,398,837 1,237,770 360,714 100,097 ------------ ------------ ----------- ----------- ----------- -------- ----------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $17,932,665 ($520,297) $6,251,531 $10,719,508 $1,041,370 $373,157 $67,396 ============ ============ =========== =========== =========== ======== ===========
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 220 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS ------------- ------------- ------------- -------------- INVESTMENT INCOME Dividends from mutual funds $2,123,919 $911,596 $453,085 $759,238 Less valuation period deductions (Note B) 273,318 83,757 49,751 139,810 ------------- ------------- ------------- -------------- Net investment income (loss) 1,850,601 827,839 403,334 619,428 ------------- ------------- ------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments (135,889) (253,335) (271,898) 389,344 Net unrealized gains (losses) on investments (2,235,009) (517,057) (40,207) (1,677,745) ------------- ------------- ------------- -------------- Net realized and unrealized gains (losses) on investments (2,370,898) (770,392) (312,105) (1,288,401) ------------- ------------- ------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS ($520,297) $57,447 $91,229 ($668,973) ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 221 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ -------------- ------------- INVESTMENT INCOME Dividends from mutual funds $7,325,481 $2,200,048 $1,636,538 $2,764,203 $724,692 Less valuation period deductions (Note B) 384,719 97,314 61,293 165,157 60,955 ------------- -------------- ------------ -------------- ------------- Net investment income (loss) 6,940,762 2,102,734 1,575,245 2,599,046 663,737 ------------- -------------- ------------ -------------- ------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,847,712 (254,740) 155,044 1,688,880 2,258,528 Net unrealized gains (losses) on investments (4,536,943) (358,981) (1,323,462) (2,152,621) (701,879) ------------- -------------- ------------ -------------- ------------- Net realized and unrealized gains (losses) on investments (689,231) (613,721) (1,168,418) (463,741) 1,556,649 ------------- -------------- ------------ -------------- ------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,251,531 $1,489,013 $406,827 $2,135,305 $2,220,386 ============= ============== ============ ============== =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 222 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
FIDELITY ------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ----------- ----------- ------------ ----------- ----------- ------------ INVESTMENT INCOME Dividends from mutual funds $7,461,489 $798,528 $3,508,501 $820,014 $830,711 $1,503,735 Less valuation period deductions (Note B) 1,140,818 61,269 217,300 131,693 126,634 603,922 ----------- ----------- ------------ ----------- ----------- ------------ Net investment income (loss) 6,320,671 737,259 3,291,201 688,321 704,077 899,813 ----------- ----------- ------------ ----------- ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 9,196,782 114,141 6,110,588 276,971 - 2,695,082 Net unrealized gains (losses) on investments (4,797,945) (685,209) (5,671,895) 2,098,113 - (538,954) ----------- ----------- ------------ ----------- ----------- ------------ Net realized and unrealized gains (losses) on investments 4,398,837 (571,068) 438,693 2,375,084 - 2,156,128 ----------- ----------- ------------ ----------- ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $10,719,508 $166,191 $3,729,894 $3,063,405 $704,077 $3,055,941 =========== =========== ============ =========== =========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 223 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
INVESCO ----------------------------------------------------------------------------------- SMALL TOTAL TOTAL INDUSTRIAL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH ------------- ------------- ------------- ------------- --------- ------------ INVESTMENT INCOME Dividends from mutual funds - - - - - - Less valuation period deductions (Note B) $196,400 $52,259 $69,936 $48,767 $16,883 $8,555 ------------- ------------- ------------- ------------- --------- ------------ Net investment income (loss) (196,400) (52,259) (69,936) (48,767) (16,883) (8,555) ------------- ------------- ------------- ------------- --------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 916,656 282,794 423,686 (191,447) 298,134 103,489 Net unrealized gains (losses) on investments 321,114 (720,172) 195,085 636,457 (165,901) 375,645 ------------- ------------- ------------- ------------- --------- ------------ Net realized and unrealized gains (losses) on investments 1,237,770 (437,378) 618,771 445,010 132,233 479,134 ------------- ------------- ------------- ------------- --------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,041,370 ($489,637) $548,835 $396,243 $115,350 $470,579 ============= ============= ============= ============= ========= ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 224 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999
VAN ECK ----------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ----------- ----------- ------------ ----------- ------------ INVESTMENT INCOME Dividends from mutual funds $30,826 $16,585 $12,446 - $1,795 Less valuation period deductions (Note B) 18,383 8,697 1,849 $6,909 928 ----------- ----------- ------------ ----------- ------------ Net investment income (loss) 12,443 7,888 10,597 (6,909) 867 ----------- ----------- ------------ ----------- ------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 60,896 (325,719) (6,324) 391,099 1,840 Net unrealized gains (losses) on investments 299,818 531,534 (21,361) (205,448) (4,907) ----------- ----------- ------------ ----------- ------------ Net realized and unrealized gains (losses) on investments 360,714 205,815 (27,685) 185,651 (3,067) ----------- ----------- ------------ ----------- ------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $373,157 $213,703 ($17,088) $178,742 ($2,200) =========== =========== ============ =========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 225 Security Life Separate Account L1 Statement of Operations (continued) (Unaudited) Nine months ended September 30, 1999 AIM --------------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES -------------- -------------- -------------- INVESTMENT INCOME Dividends from mutual funds - - - Less valuation period deductions (Note B) $32,701 $11,381 $21,320 -------------- -------------- -------------- Net investment income (loss) (32,701) (11,381) (21,320) -------------- -------------- -------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 22,945 29,983 (7,038) Net unrealized gains (losses) on investments 77,152 99,305 (22,153) -------------- -------------- -------------- Net realized and unrealized gains (losses) on investments 100,097 129,288 (29,191) -------------- -------------- -------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $67,396 $117,907 ($50,511) ============== ============== ============== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 226 Security Life Separate Account L1 Statement of Changes in Net Assets (Unaudited) Nine months ended September 30, 1999
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS NB ALGER FIDELITY INVESCO VAN ECK AIM ------------ ------------ ----------- ------------ ------------ ---------- ------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $14,895,376 $1,850,601 $6,940,762 $6,320,671 ($196,400) $12,443 ($32,701) Net realized gains (losses) on investments 13,909,102 (135,889) 3,847,712 9,196,782 916,656 60,896 22,945 Net unrealized gains (losses) on investments (10,871,813) (2,235,009) (4,536,943) (4,797,945) 321,114 299,818 77,152 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Increase (decrease) in net assets from operations 17,932,665 (520,297) 6,251,531 10,719,508 1,041,370 373,157 67,396 ------------ ------------ ----------- ------------ ------------ ---------- ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 110,942,823 6,925,705 12,949,887 77,880,480 9,878,594 1,039,893 2,268,264 Cost of insurance and administrative charges (14,797,978) (1,647,897) (2,733,031) (8,219,106) (1,820,827) (122,396) (254,721) Benefit payments (519,243) - - (519,243) - - - Surrenders (12,100,319) (1,404,466) (2,698,139) (5,903,232) (1,465,154) (28,634) (600,694) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 1,848,227 (2,584,204) 8,363,932 (7,896,857) 519,983 891,599 2,553,774 Other 53,247 3,241 (25,849) 74,220 (23,320) 18,860 6,095 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Increase (decrease) from principal transactions 85,426,757 1,292,379 15,856,800 55,416,262 7,089,276 1,799,322 3,972,718 ------------ ------------ ----------- ------------ ------------ ---------- ------------ Total increase (decrease) in 103,359,422 772,082 22,108,331 66,135,770 8,130,646 2,172,479 4,040,114 net assets Net assets at beginning of 305,030,106 47,067,751 54,428,521 168,285,929 29,630,753 1,816,999 3,800,153 period ------------ ------------ ----------- ------------ ------------ ---------- ------------ Net assets at end of period $408,389,528 $47,839,833 $76,536,852 $234,421,699 $37,761,399 $3,989,478 $7,840,267 ============ ============ =========== ============ ============ ========== ============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 227 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
NB ----------------------------------------------------------- TOTAL LIMITED NB MATURITY BOND GROWTH PARTNERS ------------- ------------- ------------- -------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $1,850,601 $827,839 $403,334 $619,428 Net realized gains (losses) on investments (135,889) (253,335) (271,898) 389,344 Net unrealized gains (losses) on investments (2,235,009) (517,057) (40,207) (1,677,745) ------------- ------------- ------------- -------------- Increase (decrease) in net assets from operations (520,297) 57,447 91,229 (668,973) ------------- ------------- ------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,925,705 1,882,305 1,428,513 3,614,887 Cost of insurance and administrative charges (1,647,897) (426,622) (276,240) (945,035) Benefit payments - - - - Surrenders (1,404,466) (1,000,100) (125,647) (278,719) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (2,584,204) (3,045,474) (516,834) 978,104 Other 3,241 22,152 (7,247) (11,664) ------------- ------------- ------------- -------------- Increase (decrease) from principal transactions 1,292,379 (2,567,739) 502,545 3,357,573 ------------- ------------- ------------- -------------- Total increase (decrease) in 772,082 (2,510,292) 593,774 2,688,600 net assets Net assets at beginning of period 47,067,751 15,578,349 9,026,160 22,463,242 ------------- ------------- ------------- -------------- Net assets at end of period $47,839,833 $13,068,057 $9,619,934 $25,151,842 ============= ============= ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 228 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
ALGER -------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------- -------------- ------------ ------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $6,940,762 $2,102,734 $1,575,245 $2,599,046 $663,737 Net realized gains (losses) on investments 3,847,712 (254,740) 155,044 1,688,880 2,258,528 Net unrealized gains (losses) on investments (4,536,943) (358,981) (1,323,462) (2,152,621) (701,879) ------------- -------------- ------------ ------------- -------------- Increase (decrease) in net assets from operations 6,251,531 1,489,013 406,827 2,135,305 2,220,386 ------------- -------------- ------------ ------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,949,887 3,095,456 2,456,242 5,358,862 2,039,327 Cost of insurance and administrative charges (2,733,031) (686,623) (472,644) (1,156,906) (416,858) Benefit payments - - - - - Surrenders (2,698,139) (916,830) (246,128) (985,915) (549,266) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,363,932 1,057,181 1,130,939 3,097,863 3,077,949 Other (25,849) (43,088) (22,908) (23,930) 64,077 ------------- -------------- ------------ ------------- -------------- Increase (decrease) from principal transactions 15,856,800 2,506,096 2,845,501 6,289,974 4,215,229 ------------- -------------- ------------ ------------- -------------- Total increase (decrease) in 22,108,331 3,995,109 3,252,328 8,425,279 6,435,615 net assets Net assets at beginning of period 54,428,521 15,503,371 9,220,207 22,903,614 6,801,329 ------------- -------------- ------------ ------------- -------------- Net assets at end of period $76,536,852 $19,498,480 $12,472,535 $31,328,893 $13,236,944 ============= ============== ============ ============= ==============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 229 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
FIDELITY --------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ------------ ----------- ----------- ------------ ------------ ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $6,320,671 $737,259 $3,291,201 $688,321 $704,077 $899,813 Net realized gains (losses) on investments 9,196,782 114,141 6,110,588 276,971 - 2,695,082 Net unrealized gains (losses) on investments (4,797,945) (685,209) (5,671,895) 2,098,113 - (538,954) ------------ ----------- ----------- ------------ ------------ ------------- Increase (decrease) in net assets from operations 10,719,508 166,191 3,729,894 3,063,405 704,077 3,055,941 ------------ ----------- ----------- ------------ ------------ ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 77,880,480 2,465,876 6,610,837 4,280,132 41,327,338 23,196,297 Cost of insurance and administrative charges (8,219,106) (451,606) (1,371,050) (775,628) (1,547,061) (4,073,761) Benefit payments (519,243) - - - (519,243) - Surrenders (5,903,232) (611,510) (665,962) (1,152,367) (1,149,832) (2,323,561) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (7,896,857) (1,322,166) 1,133,206 546,846 (22,310,341) 14,055,598 Other 74,220 (1,707) 25,166 20,753 (23,117) 53,125 ------------ ----------- ----------- ------------ ------------ ------------- Increase (decrease) from principal transactions 55,416,262 78,887 5,732,197 2,919,736 15,777,744 30,907,698 ------------ ----------- ----------- ------------ ------------ ------------- Total increase (decrease) in 66,135,770 245,078 9,462,091 5,983,141 16,481,821 33,963,639 net assets Net assets at beginning of 168,285,929 10,237,279 32,900,142 20,581,887 18,412,252 86,154,369 period ------------ ----------- ----------- ------------ ------------ ------------- Net assets at end of period $234,421,699 $10,482,357 $42,362,233 $26,565,028 $34,894,073 $120,118,008 ============ =========== =========== ============ ============ =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 230 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
INVESCO ------------------------------------------------------------------------------------- SMALL TOTAL TOTAL INDUSTRIAL COMPANY INVESCO RETURN INCOME HIGH YIELD UTILITIES GROWTH ------------- ------------- ------------- ------------- ----------- ------------ INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) ($196,400) ($52,259) ($69,936) ($48,767) ($16,883) ($8,555) Net realized gains (losses) on investments 916,656 282,794 423,686 (191,447) 298,134 103,489 Net unrealized gains (losses) on investments 321,114 (720,172) 195,085 636,457 (165,901) 375,645 ------------- ------------- ------------- ------------- ----------- ------------ Increase (decrease) in net assets from operations 1,041,370 (489,637) 548,835 396,243 115,350 470,579 ------------- ------------- ------------- ------------- ----------- ------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 9,878,594 3,952,616 3,467,604 1,336,363 782,410 339,601 Cost of insurance and administrative charges (1,820,827) (579,891) (678,755) (354,536) (141,851) (65,794) Benefit payments - - - - - - Surrenders (1,465,154) (205,183) (302,722) (119,092) (819,566) (18,591) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 519,983 (693,682) (187,353) (686,420) 1,304,087 783,351 Other (23,320) (7,978) (28,067) 4,823 2,443 5,459 ------------- ------------- ------------- ------------- ----------- ------------ Increase (decrease) from principal transactions 7,089,276 2,465,882 2,270,707 181,138 1,127,523 1,044,026 ------------- ------------- ------------- ------------- ----------- ------------ Total increase (decrease) in 8,130,646 1,976,245 2,819,542 577,381 1,242,873 1,514,605 net assets Net assets at beginning of 29,630,753 8,105,328 10,853,005 7,882,782 2,040,960 748,678 period ------------- ------------- ------------- ------------- ----------- ------------ Net assets at end of period $37,761,399 $10,081,573 $13,672,547 $8,460,163 $3,283,833 $2,263,283 ============= ============= ============= ============= =========== ============
See accompanying notes - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 231 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999
VAN ECK ------------------------------------------------------------------- WORLDWIDE WORLDWIDE WORLDWIDE TOTAL HARD WORLDWIDE EMERGING REAL VAN ECK ASSETS BOND MARKETS ESTATE ------------ ----------- ----------- ------------- ------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $12,443 $7,888 $10,597 ($6,909) $867 Net realized gains (losses) on investments 60,896 (325,719) (6,324) 391,099 1,840 Net unrealized gains (losses) on investments 299,818 531,534 (21,361) (205,448) (4,907) ------------ ----------- ----------- ------------- ------------- Increase (decrease) in net assets from operations 373,157 213,703 (17,088) 178,742 (2,200) ------------ ----------- ----------- ------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 1,039,893 373,568 213,261 292,969 160,095 Cost of insurance and administrative charges (122,396) (63,579) (12,138) (38,335) (8,344) Benefit payments - - - - - Surrenders (28,634) (23,333) - (839) (4,462) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 891,599 364,250 41,907 450,879 34,563 Other 18,860 15,574 1,437 1,328 521 ------------ ----------- ----------- ------------- ------------- Increase (decrease) from principal transactions 1,799,322 666,480 244,467 706,002 182,373 ------------ ----------- ----------- ------------- ------------- Total increase (decrease) in 2,172,479 880,183 227,379 884,744 180,173 net assets Net assets at beginning of 1,816,999 1,073,755 205,807 461,156 76,281 period ------------ ----------- ----------- ------------- ------------- Net assets at end of period $3,989,478 $1,953,938 $433,186 $1,345,900 $256,454 ============ =========== =========== ============= =============
See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 232 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) (Unaudited) Nine months ended September 30, 1999 AIM --------------------------------------------- TOTAL CAPITAL GOVERNMENT AIM APPRECIATION SECURITIES -------------- -------------- -------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) ($32,701) ($11,381) ($21,320) Net realized gains (losses) on investments 22,945 29,983 (7,038) Net unrealized gains (losses) on investments 77,152 99,305 (22,153) -------------- -------------- -------------- Increase (decrease) in net assets from operations 67,396 117,907 (50,511) -------------- -------------- -------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,268,264 1,133,728 1,134,536 Cost of insurance and administrative charges (254,721) (145,653) (109,068) Benefit payments - - - Surrenders (600,694) (17,852) (582,842) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,553,774 757,045 1,796,729 Other 6,095 3,624 2,471 -------------- -------------- -------------- Increase (decrease) from principal transactions 3,972,718 1,730,892 2,241,826 -------------- -------------- -------------- Total increase (decrease) in 4,040,114 1,848,799 2,191,315 net assets Net assets at beginning of 3,800,153 1,204,436 2,595,717 period -------------- -------------- -------------- Net assets at end of period $7,840,267 $3,053,235 $4,787,032 ============== ============== ============== See accompanying notes. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 233 Security Life Separate Account L1 Notes to Financial Statements (Unaudited) September 30, 1999 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine Variable Universal Life, Strategic Advantage Variable Universal Life and Variable Survivor Universal Life ("Variable Universal Life Policies") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be used to satisfy liabilities arising out of any other operations of the Company. As of September 30, 1999, the Separate Account offered twenty-three investment divisions available to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds are as follows: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger Berman Management Incorporated (NB) Neuberger Berman Limited Maturity Bond Portfolio Neuberger Berman Growth Portfolio Neuberger Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 234 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE A. ORGANIZATION (CONTINUED) INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio INVESCO VIF Small Company Growth Portfolio Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Hard Assets Portfolio Van Eck Worldwide Real Estate Portfolio Van Eck Worldwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI - Capital Appreciation Portfolio AIM VI - Government Securities Portfolio The Variable Universal Life Policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The Variable Universal Life Policies also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 235 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in, first-out ("FIFO") method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 236 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) A daily deduction, at an annual rate of .75% of the daily asset value of the Separate Account divisions, is charged to the Separate Account for mortality and expense risks assumed by the Company. Total mortality and expense charged for the nine months ended September 30, 1999 was $2,046,339. POLICYHOLDER RESERVES--Policyholder reserves are recorded in the Separate Account at the aggregate account values of the policyholders invested in the Separate Account divisions. To the extent that benefits to be paid to the policyholders exceed their account values, the Company will contribute additional funds to the benefit proceeds. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 237 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE C. INVESTMENTS Fund shares are purchased at net asset value with net premiums (premium payments, less sales and tax loads charged by the Company) and divisional transfers from other divisions. Fund shares are redeemed for the payment of benefits, for surrenders, for transfers to other divisions, and for charges by the Company for certain cost of insurance and administrative charges. The cost of insurance and administrative charges for the nine months ended September 30, 1999 was $14,797,978. Dividends made by the Funds are reinvested in the Funds. The following is a summary of Fund shares owned as of September 30, 1999:
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - -------------------------------------------- ---------------- --------- -------------- ----------------- Neuberger Berman Management Inc.: Limited Maturity Bond 990,754.879 $13.19 $13,068,057 $13,341,360 Growth 383,569.926 $25.08 9,619,934 9,144,677 Partners 1,393,453.900 $18.05 25,151,842 26,937,142 Fred Alger Management, Inc.: American Small Capitalization 463,366.913 $42.08 19,498,480 19,206,039 American MidCap Growth 486,069.128 $25.66 12,472,535 12,434,368 American Growth 592,004.793 $52.92 31,328,893 29,186,588 American Leveraged AllCap 320,042.146 $41.36 13,236,944 12,430,665 Fidelity Management & Research Co.: Asset Manager 610,859.913 $17.16 10,482,357 10,431,780 Growth 952,602.490 $44.47 42,362,233 41,979,868 Overseas 1,208,050.382 $21.99 26,565,028 23,798,192 Money Market 34,894,073.120 $1.00 34,894,073 34,894,073 Index 500 823,628.676 $145.84 120,118,008 104,570,094 INVESCO Funds Group, Inc.: Total Return 634,061.153 $15.90 10,081,573 10,511,407 Industrial Income 690,881.639 $19.79 13,672,547 12,787,764 High Yield 709,150.330 $11.93 8,460,163 8,693,689 Utilities 172,198.950 $19.07 3,283,833 3,136,203 Small Company Growth 152,102.322 $14.88 2,263,283 1,813,540 Van Eck Associates Corporation: Worldwide Hard Assets 183,640.729 $10.64 1,953,938 1,866,458 Worldwide Bond 39,669.059 $10.92 433,186 450,594 Worldwide Emerging Markets 148,063.782 $9.09 1,345,900 1,504,209 Worldwide Real Estate 26,966.790 $9.51 256,454 261,390 AIM Advisors, Inc.: Capital Appreciation 113,756.899 $26.84 3,053,235 2,834,706 Government Securities 434,001.049 $11.03 4,787,032 4,774,323 ------------ ------------- Total $408,389,528 $386,989,129 ============ =============
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 238 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE C. INVESTMENTS (CONTINUED) For the nine months ended September 30, 1999, the cost of purchases (plus reinvested dividends) and sales of investments are as follows:
BEGINNING END FUND OF YEAR PURCHASES SALES OF YEAR - ------------------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond $15,334,595 $4,863,022 ($6,856,257) $13,341,360 Growth 8,510,696 2,921,295 (2,287,314) 9,144,677 Partners 22,570,797 6,832,674 (2,466,329) 26,937,142 Fred Alger Management, Inc.: American Small Capitalization 14,851,950 9,680,757 (5,326,668) 19,206,039 American MidCap Growth 7,858,579 5,128,822 (553,033) 12,434,368 American Growth 18,608,688 14,479,402 (3,901,502) 29,186,588 American Leveraged AllCap 5,293,171 11,199,357 (4,061,863) 12,430,665 Fidelity Management & Research Co.: Asset Manager 9,501,494 5,409,681 (4,479,395) 10,431,780 Growth 26,845,882 49,460,163 (34,326,177) 41,979,868 Overseas 19,913,166 12,428,649 (8,543,623) 23,798,192 Money Market 18,412,252 83,637,874 (67,156,053) 34,894,073 Index 500 70,067,500 38,943,047 (4,440,453) 104,570,094 INVESCO Funds Group, Inc.: Total Return 7,814,990 4,595,765 (1,899,348) 10,511,407 Industrial Income 10,163,306 4,303,132 (1,678,674) 12,787,764 High Yield 8,752,765 2,641,428 (2,700,504) 8,693,689 Utilities 1,727,429 2,282,360 (873,586) 3,136,203 Small Company Growth 674,581 1,581,087 (442,128) 1,813,540 Van Eck Associates Corporation: Worldwide Hard Assets 1,517,809 1,870,712 (1,522,063) 1,866,458 Worldwide Bond 201,853 327,317 (78,576) 450,594 Worldwide Emerging Markets 414,017 4,479,244 (3,389,052) 1,504,209 Worldwide Real Estate 76,310 280,045 (94,965) 261,390 AIM Advisors, Inc. Capital Appreciation 1,085,211 2,087,719 (338,224) 2,834,706 Government Securities 2,560,855 4,762,021 (2,548,553) 4,774,323 ------------- ------------ --------------- ------------- Total $272,757,896 $274,195,573 ($159,964,340) $386,989,129 ============= ============ =============== =============
Aggregate proceeds from sales of investments for the nine months ended September 30, 1999 were $173,873,442. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 239 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE D. OTHER POLICY DEDUCTIONS The Variable Universal Life Policies provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The Variable Universal Life Policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time of borrowing against the policies, an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division in the Company's General Account to secure the loan. As payments are made on the policy loan, amounts are transferred back from the Loan Division to the Separate Account divisions. Interest is credited to the balance in the Loan Division at a fixed rate. The Loan Division is not variable in nature and is not included in these Separate Account statements. NOTE F. FEDERAL INCOME TAXES The Separate Account is not taxed separately because the operations of the Separate Account are part of the total operations of the Company. The Company is taxed as a life insurance company under the Internal Revenue Code. The Separate Account is not taxed as a "Regulated Investment Company" under subchapter "M" of the Internal Revenue Code. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 240 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the nine months ended September 30, 1999:
(DECREASE) FOR OUTSTANDING INCREASE WITHDRAWALS OUTSTANDING AT BEGINNING FOR PAYMENTS AND OTHER AT END DIVISION OF YEAR RECEIVED DEDUCTIONS OF YEAR - ---------------------------------------------------------------------------------------------------------- Neuberger Berman Management Inc.: Limited Maturity Bond 1,245,559.121 319,332.671 (525,269.118) 1,039,622.674 Growth 447,486.376 125,919.627 (99,517.630) 473,888.373 Partners 986,298.018 257,003.976 (117,939.937) 1,125,362.057 Fred Alger Management, Inc.: American Small Capitalization 838,692.418 394,407.340 (263,508.506) 969,591.252 American MidCap Growth 402,532.472 148,230.643 (29,117.984) 521,645.131 American Growth 923,696.066 438,134.681 (206,209.462) 1,155,621.285 American Leveraged AllCap 221,642.446 292,852.027 (173,072.134) 341,422.339 Fidelity Management & Research Co.: Asset Manager 600,255.213 267,313.961 (262,352.258) 605,216.916 Growth 1,293,480.338 1,654,759.376 (1,442,829.875) 1,505,409.839 Overseas 1,429,659.907 765,975.800 (571,856.489) 1,623,779.218 Money Market 1,526,404.399 6,748,481.247 (5,469,895.852) 2,804,989.794 Index 500 3,215,990.519 1,324,678.050 (246,138.425) 4,294,530.144 INVESCO Funds Group, Inc.: Total Return 450,557.216 253,716.704 (116,427.098) 587,846.822 Industrial Income 473,616.752 178,044.695 (87,379.689) 564,281.758 High Yield 486,858.648 158,273.720 (146,595.951) 498,536.417 Utilities 110,379.616 115,690.556 (59,547.200) 166,522.972 Small Company Growth 67,506.441 136,205.871 (44,885.435) 158,826.877 Van Eck Associates Corporation: Worldwide Hard Assets 132,513.824 205,152.684 (131,337.258) 206,329.250 Worldwide Bond 18,656.317 30,172.136 (6,893.700) 41,934.753 Worldwide Emerging Markets 67,354.295 498,961.101 (411,436.225) 154,879.171 Worldwide Real Estate 8,765.232 31,025.290 (10,681.101) 29,109.421 AIM Advisors, Inc. Capital Appreciation 105,457.867 177,801.435 (30,925.831) 252,333.471 Government Securities 246,150.062 461,371.899 (245,006.792) 462,515.169
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 241 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at September 30, 1999 consisted of the following:
ACCUMULATED NET ACCUMULATED NET REALIZED UNREALIZED INVESTMENT GAINS GAINS PRINCIPAL INCOME (LOSSES) ON (LOSSES) ON DIVISION TRANSACTIONS (LOSS) INVESTMENTS INVESTMENTS NET ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ Neuberger Berman Management Inc.: Limited Maturity Bond $12,562,603 $1,060,309 ($281,553) ($273,302) $13,068,057 Growth 8,793,027 627,076 (275,425) 475,256 9,619,934 Partners 25,178,621 851,608 906,913 (1,785,300) 25,151,842 Fred Alger Management, Inc.: American Small Capitalization 17,061,250 2,257,234 (112,445) 292,441 19,498,480 American MidCap Growth 10,432,084 1,605,541 396,745 38,165 12,472,535 American Growth 24,617,360 2,618,200 1,951,027 2,142,306 31,328,893 American Leveraged AllCap 9,195,995 648,266 2,586,404 806,279 13,236,944 Fidelity Management & Research Co.: Asset Manager 9,355,520 920,583 155,678 50,576 10,482,357 Growth 31,627,570 3,555,730 6,796,617 382,316 42,362,233 Overseas 22,063,364 1,088,395 646,434 2,766,835 26,565,028 Money Market 33,253,155 1,640,918 - - 34,894,073 Index 500 100,251,140 1,273,803 3,045,152 15,547,913 120,118,008 INVESCO Funds Group, Inc.: Total Return 10,115,714 36,014 359,679 (429,834) 10,081,573 Industrial Income 11,796,930 418,112 572,722 884,783 13,672,547 High Yield 7,933,708 597,561 162,419 (233,525) 8,460,163 Utilities 2,735,480 10,273 390,449 147,631 3,283,833 Small Company Growth 1,718,607 (8,555) 103,489 449,742 2,263,283 Van Eck Associates Corporation: Worldwide Hard Assets 2,149,636 16,934 (300,111) 87,479 1,953,938 Worldwide Bond 446,321 10,597 (6,324) (17,408) 433,186 Worldwide Emerging Markets 1,120,018 (6,909) 391,099 (158,308) 1,345,900 Worldwide Real Estate 258,684 866 1,840 (4,936) 256,454 AIM Advisors, Inc.: Capital Appreciation 2,816,104 (11,381) 29,983 218,529 3,053,235 Government Securities 4,802,681 (21,320) (7,038) 12,709 4,787,032 ============= ============= ============== ============ ============= Total $350,285,572 $19,189,855 $17,513,754 $21,400,347 $408,389,528 ============= ============= ============== ============ =============
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 242 Security Life Separate Account L1 (Unaudited) Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) Security Life of Denver Insurance Company is aware of the computer problems that may exist surrounding the Year 2000. Our senior management is committed to ensuring that information processing and delivery systems will be Year 2000 compliant before December 31, 1999. Our project team continues to implement the Year 2000 project plan which includes the analysis, remediation and testing of our in-house source code. The project plan covers Security Life, ING America Equities, Inc., Midwestern United Life Insurance Company and First ING Life Insurance Company of New York. We will follow our normal project management methodology, including communication with senior management on a monthly and as-needed basis. Funds have been allocated for these efforts, and we are confident we have sufficient resources to ensure Year 2000 processing capabilities. The analysis, remediation and system testing phases of the plan were completed by June 28, 1999. We will continue to do precautionary testing throughout 1999. However, there is no assurance Security Life will be successful, or that interaction with other service providers will not impact our services. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 243 APPENDIX A FACTORS FOR THE CASH VALUE ACCUMULATION TEST FOR A LIFE INSURANCE POLICY
Male | Male | Male Attained or Unisex Unisex | Attained or Unisex Unisex | Attained or Unisex Unisex Age 100/0 Female 80/20 | Age 100/0 Female 80/20 | Age 100/0 Female 80/20 --- ----- ------ ----- | --- ----- ------ ----- | --- ----- ------ ----- 0 11.727 14.234 12.149 | | 1 11.785 14.209 12.194 | 34 4.188 4.902 4.314 | 67 1.617 1.815 1.657 2 11.458 13.815 11.857 | 35 4.052 4.742 4.173 | 68 1.583 1.769 1.620 3 11.128 13.417 11.515 | 36 3.920 4.586 4.037 | 69 1.550 1.724 1.585 4 10.803 13.023 11.178 | 37 3.793 4.437 3.906 | 70 1.518 1.681 1.552 5 10.481 12.635 10.845 | 38 3.670 4.293 3.780 | 71 1.488 1.639 1.520 6 10.161 12.253 10.514 | 39 3.553 4.154 3.658 | 72 1.459 1.599 1.489 7 9.844 11.875 10.187 | 40 3.439 4.021 3.541 | 73 1.432 1.560 1.460 8 9.530 11.505 9.863 | 41 3.330 3.894 3.429 | 74 1.406 1.524 1.433 9 9.221 11.141 9.545 | 42 3.226 3.771 3.322 | 75 1.382 1.490 1.407 10 8.918 10.784 9.233 | 43 3.125 3.654 3.218 | 76 1.359 1.457 1.383 11 8.623 10.436 8.928 | 44 3.028 3.541 3.119 | 77 1.338 1.427 1.360 12 8.338 10.098 8.634 | 45 2.936 3.432 3.023 | 78 1.318 1.398 1.338 13 8.066 9.771 8.353 | 46 2.846 3.328 2.931 | 79 1.299 1.371 1.318 14 7.808 9.455 8.085 | 47 2.761 3.227 2.843 | 80 1.281 1.345 1.298 15 7.564 9.150 7.831 | 48 2.678 3.129 2.758 | 81 1.264 1.321 1.280 16 7.335 8.857 7.592 | 49 2.599 3.035 2.676 | 82 1.248 1.298 1.262 17 7.118 8.575 7.364 | 50 2.522 2.945 2.597 | 83 1.233 1.277 1.245 18 6.911 8.302 7.148 | 51 2.449 2.858 2.522 | 84 1.218 1.257 1.230 19 6.713 8.038 6.939 | 52 2.378 2.774 2.449 | 85 1.205 1.238 1.215 20 6.521 7.782 6.737 | 53 2.311 2.693 2.379 | 86 1.193 1.221 1.202 21 6.334 7.534 6.540 | 54 2.246 2.615 2.312 | 87 1.181 1.205 1.189 22 6.150 7.293 6.347 | 55 2.184 2.540 2.248 | 88 1.171 1.190 1.177 23 5.969 7.059 6.158 | 56 2.125 2.468 2.187 | 89 1.160 1.176 1.166 24 5.791 6.831 5.971 | 57 2.068 2.398 2.128 | 90 1.151 1.163 1.155 25 5.615 6.611 5.788 | 58 2.014 2.330 2.071 | 91 1.141 1.150 1.144 26 5.441 6.396 5.608 | 59 1.962 2.265 2.017 | 92 1.131 1.137 1.133 27 5.271 6.188 5.431 | 60 1.912 2.201 1.965 | 93 1.120 1.125 1.122 28 5.104 5.986 5.258 | 61 1.864 2.139 1.915 | 94 1.109 1.112 1.110 29 4.940 5.791 5.089 | 62 1.818 2.079 1.867 | 95 1.097 1.098 1.097 30 4.781 5.601 4.925 | 63 1.774 2.022 1.821 | 96 1.083 1.084 1.084 31 4.626 5.418 4.765 | 64 1.732 1.967 1.777 | 97 1.069 1.069 1.069 32 4.476 5.241 4.610 | 65 1.692 1.914 1.735 | 98 1.054 1.054 1.054 33 4.330 5.069 4.459 | 66 1.654 1.863 1.695 | 99 1.040 1.040 1.040 | | 100 1.000 1.000 1.000
- -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 244 APPENDIX B PERFORMANCE INFORMATION POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each variable investment option 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 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. The illustrations are based on the payment of a $5,750 annual premium, paid at the beginning of each year, for a hypothetical policy with a $300,000 face amount death benefit Option 1, issued on a nonsmoker male, Age 45. It is assumed that all premiums are allocated to the investment option illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of premium payments and the use of other policy features, such as policy loans, would affect individual policy benefits. The amounts shown for the cash surrender values, account values and death benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the Variable Account for mortality and expense risks, and each portfolio's charges and expenses. See Charges, page 42. This prospectus also contains illustrations based on assumed rates of return. See Illustrations of Death Benefits, Account Values, Surrender Values and Accumulated Premiums, page 51. - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 245 HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 - -------------------------------------------------------------------------------- AIM VI Capital Appreciation Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 2.50% 5,131 5,131 300,000 1995 35.69% 13,809 13,809 300,000 1996 17.58% 21,973 21,973 300,000 1997 13.51% 30,308 30,308 300,000 1998 19.30% 41,638 41,638 300,000 AIM VI Government Securities Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 -3.73% 4,808 4,808 300,000 1995 15.56% 11,360 11,360 300,000 1996 2.29% 16,588 16,588 300,000 1997 8.16% 23,050 23,050 300,000 1998 7.66% 29,742 29,742 300,000 Alger American Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 4.14% 5,216 5,216 300,000 1991 40.39% 14,413 14,413 300,000 1992 12.38% 21,671 21,671 300,000 1993 22.47% 32,348 32,348 300,000 1994 1.45% 37,441 37,441 300,000 1995 36.37% 57,266 57,266 300,000 1996 13.35% 69,935 69,935 300,000 1997 25.75% 93,461 93,461 300,000 1998 48.07% 145,016 145,016 335,131 Alger American MidCap Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1994 -1.54% 4,921 4,921 300,000 1995 44.45% 14,410 14,410 300,000 1996 11.90% 21,575 21,575 300,000 1997 15.01% 30,254 30,254 300,000 1998 30.30% 45,429 45,429 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 246 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 Alger American Small Capitalization Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 64.48% 8,354 8,354 300,000 1990 8.71% 14,528 14,528 300,000 1991 57.54% 30,643 30,643 300,000 1992 3.55% 36,602 36,602 300,000 1993 13.28% 46,650 46,650 300,000 1994 -4.38% 48,877 48,877 300,000 1995 44.31% 77,017 77,017 300,000 1996 4.18% 84,752 84,752 300,000 1997 11.39% 99,306 99,306 300,000 1998 15.53% 119,862 119,862 300,000 Fidelity VIP Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 31.51% 6,637 6,637 300,000 1990 -11.73% 10,251 10,251 300,000 1991 45.51% 22,069 22,069 300,000 1992 9.32% 29,287 29,287 300,000 1993 19.37% 40,444 40,444 300,000 1994 -0.02% 44,915 44,915 300,000 1995 35.36% 66,859 66,859 300,000 1996 14.71% 81,698 81,698 300,000 1997 23.48% 106,351 106,351 300,000 1998 39.49% 154,612 154,612 347,259 Fidelity VIP Overseas Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1989 26.28% 6,365 6,365 300,000 1990 -1.67% 11,171 11,171 300,000 1991 8.00% 17,320 17,320 300,000 1992 -10.72% 19,644 19,644 300,000 1993 37.35% 33,336 33,336 300,000 1994 1.72% 38,474 38,474 300,000 1995 9.74% 47,081 47,081 300,000 1996 13.15% 58,205 58,205 300,000 1997 11.56% 69,836 69,836 300,000 1998 12.81% 83,772 83,772 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 247 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 Fidelity VIP II Index 500 Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1993 9.74% 5,506 5,506 300,000 1994 1.04% 10,616 10,616 300,000 1995 37.19% 21,296 21,296 300,000 1996 22.82% 31,981 31,981 300,000 1997 32.82% 48,605 48,605 300,000 1998 28.31% 68,184 68,184 300,000 GCG Trust Equity Income Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1990 4.74% 5,247 5,247 300,000 1991 20.02% 12,332 12,332 300,000 1992 1.88% 17,510 17,510 300,000 1993 11.13% 24,712 24,712 300,000 1994 -1.18% 28,923 28,923 300,000 1995 18.93% 39,781 39,781 300,000 1996 8.77% 48,084 48,084 300,000 1997 17.44% 61,601 61,601 300,000 1998 8.26% 71,438 71,438 300,000 GCG Trust Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1997 15.69% 5,815 5,815 300,000 1998 45.36% 15,800 15,800 300,000 GCG Trust Hard Assets Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1990 -13.84% 4,284 4,284 300,000 1991 4.70% 9,729 9,729 300,000 1992 -9.81% 13,134 13,134 300,000 1993 49.93% 26,864 26,864 300,000 1994 2.53% 32,221 32,221 300,000 1995 10.69% 40,656 40,656 300,000 1996 33.17% 60,102 60,102 300,000 1997 6.22% 68,451 68,451 300,000 1998 -29.58% 51,183 51,183 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 248 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 GCG Trust Limited Maturity Bond Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 7.87% 5,409 5,409 300,000 1991 11.27% 11,601 11,601 300,000 1992 4.84% 17,258 17,258 300,000 1993 6.20% 23,339 23,339 300,000 1994 -1.19% 27,564 27,564 300,000 1995 11.72% 35,835 35,835 300,000 1996 4.32% 41,990 41,990 300,000 1997 6.67% 49,423 49,423 300,000 1998 6.86% 57,494 57,494 300,000 GCG Trust Liquid Asset Money Market Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 7.75% 5,403 5,403 300,000 1991 5.66% 11,000 11,000 300,000 1992 3.13% 16,355 16,355 300,000 1993 2.64% 21,624 21,624 300,000 1994 3.89% 27,211 27,211 300,000 1995 5.51% 33,457 33,457 300,000 1996 5.01% 39,773 39,773 300,000 1997 5.07% 46,348 46,348 300,000 1998 5.13% 53,324 53,324 300,000 GCG Trust Mid-Cap Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 29.23% 6,519 6,519 300,000 1996 20.68% 13,934 13,934 300,000 1997 19.67% 22,517 22,517 300,000 1998 42.61% 38,912 38,912 300,000 GCG Trust Research Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 36.58% 6,901 6,901 300,000 1996 23.37% 14,720 14,720 300,000 1997 20.12% 23,546 23,546 300,000 1998 40.94% 39,902 39,902 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 249 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 GCG Trust Total Return Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 24.51% 6,273 6,273 300,000 1996 13.70% 12,839 12,839 300,000 1997 20.89% 21,426 21,426 300,000 1998 19.29% 31,211 31,211 300,000 INVESCO VIF Equity Income Fund Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1995 29.25% 6,520 6,520 300,000 1996 22.28% 14,123 14,123 300,000 1997 28.17% 24,372 24,372 300,000 1998 15.30% 33,554 33,554 300,000 INVESCO VIF High Yield Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 19.76% 6,027 6,027 300,000 1996 16.59% 12,883 12,883 300,000 1997 17.33% 20,840 20,840 300,000 1998 1.42% 25,909 25,909 300,000 INVESCO VIF Small Company Growth Fund Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 1998 16.38% 5,851 5,851 300,000 Neuberger Berman AMT Partners Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1995 36.47% 6,895 6,895 300,000 1996 29.57% 15,461 15,461 300,000 1997 31.25% 26,719 26,719 300,000 1998 4.21% 32,749 32,749 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 250 HYPOTHETICAL ILLUSTRATIONS (continued) Nonsmoker Male Age 45 Preferred Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $5,750 Van Eck Worldwide Bond Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1990 11.25% 5,585 5,585 300,000 1991 18.39% 12,562 12,562 300,000 1992 -5.25% 16,489 16,489 300,000 1993 7.79% 22,863 22,863 300,000 1994 -1.32% 27,058 27,058 300,000 1995 17.30% 37,045 37,045 300,000 1996 2.53% 42,505 42,505 300,000 1997 2.38% 47,950 47,950 300,000 1998 12.75% 59,020 59,020 300,000 Van Eck Worldwide Emerging Markets Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1996 26.82% 6,393 6,393 300,000 1997 -11.61% 10,050 10,050 300,000 1998 -34.15% 9,755 9,755 300,000 Van Eck Worldwide Real Estate Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 1998 -11.35% 4,413 4,413 300,000 - -------------------------------------------------------------------------------- Corporate Benefits Variable Universal Life 251 PART II UNDERTAKING TO FILE REPORTS Subject to the terms and conditions of Section 15(d) of the Securities Exchange Act of 1934, the undersigned Registrant hereby undertakes to file with the Securities and Exchange Commission such supplementary and periodic information, documents, and reports as may be prescribed by any rule or regulation of the Commission heretofore or hereafter duly adopted pursuant to authority conferred in that section. UNDERTAKING REGARDING INDEMNIFICATION Please refer to the Articles of Incorporation listed as Exhibits 1.A(6)(a) and 1.A(6)(b-g) and the By-Laws listed as Exhibits 1.A(6)(h) and 1.A(6)(h)(i). Security Life of Denver's (the "corporation") Certificate of Incorporation and bylaws provide that the corporation shall have every power and duty of indemnification of directors, officers, employees and agents, without limitation, provided by the laws of the state of Colorado. Under Colorado law, the corporation has the power to indemnify such persons against expenses, judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed action, suit or proceeding, if such person acted in good faith and in a manner which that person reasonably believed to be in or not opposed to the best interest of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. In the case of actions by or in the right of the corporation, such indemnification cannot be made where such person is adjudged liable to the corporation, except pursuant to a court order. The corporation is required to indemnify directors, officers, employees and agents against expense actually and reasonably incurred in connection with actions where such persons have been successful on the merits or otherwise in defense of such actions. Insofar as indemnification for liability arising under the Securities Act of 1933 (the "Act") may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling preceding, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Act and will be governed by the final adjudication of such issue. UNDERTAKING REQUIRED BY SECTION 26(E)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table. - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 1 The prospectus. The undertaking to file reports. The undertaking regarding indemnification. The undertaking required by Section 26(e)2(A) of the Investment Company Act of 1940, as amended. The signatures. Written consents of the following persons: James L. Livingston, Jr. (See Exhibit 6B). Ernst & Young, L.L.P. (See Exhibit 7A). Sutherland Asbill & Brennan LLP (See Exhibit 7B). The following exhibits: 1.A (1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant. /1/ (2) Not Applicable. (3) (a) Security Life of Denver Distribution Agreement. /1/ (i) Amendment to Security Life of Denver Insurance Company Distribution Agreement (b) Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule. (c) Commission Schedule for Policies. (4) Not Applicable. (5) (a) Specimen Corporate Variable Universal Life Insurance Policy (Form No. 2505(VUL)- 3/00). /5/ (b) Adjustable Term Insurance Rider (Form No. R2006-3/00). /5/ (c) Certificate of Insurance. /5/ (6) (a) Security Life of Denver's Restated Articles of Incorporation. 1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987. /1/ (h) Security Life of Denver's By-Laws. /1/ (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments throug September 30, 1997). /2/ (7) Not Applicable. (8) (a) Participation Agreements (i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Life Insurance Company, on Behalf of Itself and its Separate Accounts and Name of Underwriter of Variable Contracts and Policies. /3/ (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company. /1/ (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company. /1/ (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /1/ - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 2 (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /1/ (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company. /1/ (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company. /1/ (b) (i) Third Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. /4/ (ii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /4/ (iii) Fourth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. /4/ (iv) Amendment No. 2 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc. /4/ (v) Fourth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. (vi) Amendment No. 3 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc. (vii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (viii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (9) Not Applicable. (10) Specimen Guaranteed Issue Variable Life Insurance Application with Guaranteed Issue Binding Limited Life Insurance Coverage Form (Form Nos. Q2009-11/97 and Q-1112 B-6/98). /5/ 2. Included as Exhibit 1.A(5) above. 3.A Opinion and consent of Gary W. Waggoner as to securities being registered. /5/ 4. Not Applicable. 5. Not Applicable. 6.A Opinion and consent of James L. Livingston, Jr. 7.A Consent of Ernst & Young L.L.P. B Consent of Sutherland Asbill & Brennan LLP. 8. Not Applicable. 11. Issuance, Transfer and Redemption Procedures Memorandum. - --------------- - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 3 /1/ Incorporated herein by reference to Post-Effective Amendment No. 7 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 27, 1998 (File No. 33-74190). /2/ Incorporated herein by reference to Post-Effective Amendment No. 5 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 29, 1998 (File No. 33-74190). /3/ Incorporated herein by reference to Post-Effective Amendment No. 6 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). /4/ Incorporated herein by reference to the Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 10, 1999 (File No. 333-72753). /5/ Incorporated herein by reference to the Initial Registration to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on November 8, 1999 (File No. 333-90577). - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Security Life of Denver Insurance Company and the Registrant, Security Life Separate Account L1, have duly caused this Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 3rd day of December, 1999. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher -------------------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner - ---------------------------------- Gary W. Waggoner SECURITY LIFE SEPARATE ACCOUNT L1 (Registrant) BY: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher ---------------------------------------- Stephen M. Christopher President (Seal) ATTEST: /s/ Gary W. Waggoner Gary W. Waggoner - ------------------------------------------------------------------------------- Corporate Variable Universal Life II - 5 Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/ Stephen M. Christopher ---------------------------- Stephen M. Christopher President, Chief Executive Officer and Director /s/ James L .Livingston, Jr. ---------------------------- James L. Livingston, Jr. Executive Vice President and Chief Actuary PRINCIPAL ACCOUNTING OFFICER: /s/ Shari A. Enger ---------------------------- Shari A. Enger Vice President and Controller DIRECTORS: /s/ Thomas F. Conroy ---------------------------- Thomas F. Conroy /s/ Michael W. Cunningham ---------------------------- Michael W. Cunningham /s/ P. Randall Lowery ---------------------------- P. Randall Lowery - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 6 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(3)(a)(i) Amendment to Security Life of Denver Insurance Company Distribution Agreement 1.A(3)(b) Amendment to Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule. 1.A(3)(c) Commission Schedule for Policies. 1.A(8)(b)(v) Fourth Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. 1.A(8)(b)(vi) Amendment No. 3 to Participation Agreement among AIM Variable Insurance Funds, Inc., Security Life of Denver Insurance Company and ING America Equities, Inc. 1.A(8)(b)(vii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(b)(vii) Fifth Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 6.B Opinion and consent of James L. Livingston, Jr. 7.A Consent of Ernst & Young, L.L.P. B Consent of Sutherland Asbill & Brennan LLP. 11. Issuance, Transfer and Redemption Procedures Memorandum. - -------------------------------------------------------------------------------- Corporate Variable Universal Life II - 7 EX-1 2 1.A(3)(A)(I) AMDMT TO DIST AGRMT EXHIBIT 1.A(3)(a)(i) AMENDMENT TO SECURITY LIFE OF DENVER INSURANCE COMPANY DISTRIBUTION AGREEMENT WHEREAS, Security Life and ING America Equities, Inc. (formerly known as SLD Equities Inc.) entered into a Distribution Agreement dated September 22, 1994; WHEREAS, the parties now desire to modify the list of products issued by Security Life and distributed by ING America Equities, Inc.; NOW THEREFORE, in consideration of mutual promises and covenants, the parties agree as follows: 1. Schedule "A", Compensation Schedule is hereby deleted and replaced with the new Schedule "A" attached hereto. Effective this 2nd day of December, 1999. By: /s/ Gary W. Waggoner By: /s/ James L. Livingston, Jr. Gary W. Waggoner, Secretary James L. Livingston, Jr., President SECURITY LIFE OF DENVER ING AMERICA EQUITIES, INC. INSURANCE COMPANY SCHEDULE "A" COMPENSATION SCHEDULE This Schedule "A" to the Distribution Agreement between Security Life of Denver Insurance Company ("Security Life") and ING America Equities, Inc. ("INGAE") dated September 22, 1994, sets forth the compensation to be paid to INGAE for its services as underwriter and distributor of the following products. 1. EXCHEQUER ANNUITY (no longer being sold or issued) A Flexible Premium Deferred Combination Fixed & Variable Annuity Contract Total Gross Dealer Concessions earned in the first year by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE (pursuant to the Selling Broker-Dealer's election, this will be either 5% or 6% of funds actually received and accepted by Security Life during the first year of the contract), plus an additional 1% of funds actually received and accepted by Security Life during the first year of the contract. After the first year, all Trail Commissions calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. 2. FIRSTLINE A Flexible Premium Variable Universal Life Policy Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. Additional payments as are due for override payments, expense allowances, bonuses, wholesale fees and other expenses. 3. FIRSTLINE II A Flexible Premium Variable Universal Life Policy Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. Additional payments as are due for override payments, expense allowances, bonuses, wholesale fees and other expenses. 4. STRATEGIC ADVANTAGE (no longer being sold or issued) All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. 5. STRATEGIC ADVANTAGE II A Flexible Premium Variable Universal Life Policy Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. Additional payments as are due for override payments, expense allowances, bonuses, wholesale fees and other expenses. 6. VARIABLE SURVIVORSHIP UNIVERSAL LIFE A Flexible Premium Variable Universal Life Policy Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. Additional payments as are due for override payments, expense allowances, bonuses, wholesale fees and other expenses. 7. CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE A Flexible Premium Variable Universal Life Policy Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security Life and INGAE. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. All commissions shall be paid only on an earned basis, as calculated in the next commission cycle. EX-2 3 1.A(3)(B) AMDMT EXHIBIT 1.a(3)(b) AMENDMENT TO THE BROKER-DEALER SUPERVISORY AND SELLING AGREEMENT FOR VARIABLE CONTRACTS This Amendment is made by and among ING Security Life of Denver Insurance Company ("ING Security Life"), ING America Equities, Inc. ("INGAE") and Selling Broker-Dealer and Agency, collectively known as the Parties. WHEREAS, the Parties have executed a Broker-Dealer Supervisory and Selling Agreement for Variable Contracts ("the Agreement") which provides that Selling Broker-Dealer and Agency will enable and supervise its registered representatives to solicit and sell the Contracts issued by ING Security Life and distributed by INGAE. WHEREAS, the Agreement also provides for certain compensation to be paid to Selling Broker-Dealer or Agency for the sales of such Contracts, the Agreement is modified as follows: 1. The Schedule I, "Compensation Schedule to Selling Agreement for ING Security Life Corporate Benefits Variable Universal Life" is hereby added. This Amendment is effective ________________, and shall be deemed to be accepted by Broker-Dealer and Agency by ING Security Life and INGAE by submission of an application for the Corporate Benefits Variable Universal Life product by Selling Broker-Dealer or Agency on or after that date. SCHEDULE I COMPENSATION SCHEDULE TO SELLING AGREEMENT FOR SECURITY LIFE CORPORATE BENEFITS VARIABLE UNIVERSAL LIFE This Schedule is an attachment to the ING America Equities, Inc. ("ING America Equities") Selling Agreement by and among the parties pursuant to paragraph 17 of that Selling Agreement, effective as of ________, 2000, or the date that Selling Broker-Dealer submits an application for this product, whichever is later. The provisions of this Schedule shall apply only to ING Security Life Corporate Benefits Variable Universal Life policies solicited and issued while this Schedule is in effect. All compensation payable under this Schedule shall be subject to the terms and conditions contained herein at the time of issue of the policy by ING Security Life of Denver Insurance Company ("ING Security Life"). 1. Commission Structure: Commissions are payable on premiums paid up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment will be commissionable up to that segment's target premium. The commission rates as a percent of premium are given in a table below. POLICY YEAR OF COVERAGE COMMISSION RATE SEGMENT 1 12% 2 - 4 10% 5 - 10 2% 11+ 0 Any premiums paid within 15 days prior to policy anniversary will result in the agent receiving commissions at the same rate as if the premium was paid on the anniversary date. 2. Trail Commissions as a percent of the net account value are paid. The trail commission is calculated monthly based on the net account value at the end of the prior month. It is paid at the end of the policy year, provided the policy remains in force at that time and is not subject to the grace period provisions. The trail commissions will continue when the insured lives past age 100 and the continuation of coverage feature is in force. The annual trail commission rates are given below. Annual trail commission rates as a percent of the net account value: POLICY YEAR TRAIL COMMISSION RATE 1 - 20 0.20% 21+ 0.10% 3. Riders: The Adjustable Term Insurance Rider has no target premium associated with it. 4. Commission Calculation: Commissions shall be calculated only on premium actually received and accepted by ING Security Life. Commissions shall be paid only on an earned basis. Outstanding loan amounts carried over are not considered commissionable premium. 5. Premium Allocation: If the Stated Death Benefit has been increased since the policy date, premiums received are allocated to the coverage segments in the same proportion that the commission target premium for each segment bears to the total commission target premium of the policy. 6. Compensation Payments: Compensation on initial premium shall be due to the Selling Broker-Dealer at the time of the issuance of the policy and for all other premium payments at the time of the receipt and acceptance of premium by ING Security Life, except that the amount, if any, and the time of payment of compensation on replacements, reissues, changes, conversions, exchanges, term renewals, term conversions, premiums paid in advance, policies issued on a "guaranteed issue" basis, policies requiring facultative reinsurance arrangements, and other special cases and programs shall be governed by ING Security Life's underwriting and administrative rules then in effect. The Compensation shall be payable to the Selling Broker-Dealer in accordance with the Schedule I in effect at the time of issue of the policy. 7. Commission Chargeback: In the event that a policy for which a commission has been paid is lapsed or surrendered by the Policy Owner or has a reduction of stated death benefit during the first three policy years, or is returned to ING Security Life for refund of premium during the Free Look Period as described in the policy, ING Security Life and ING America Equities shall require reimbursement from Selling Broker-Dealer as shown below. POLICY YEAR COMMISSION CHARGEBACK 1 100% of first year commission 2 50% of first year commission 3 25% of first year commission 4+ 0% If a premium payment for which a commission has been paid is refunded by ING Security Life, a reimbursement of the commission paid on the amount refunded will be due from the Selling Broker-Dealer. The reimbursement may be deducted by ING America Equities from the next, or any subsequent, commission payment to Selling Broker-Dealer. If the amount to be reimbursed exceeds compensation otherwise due, Selling Broker-Dealer shall promptly reimburse ING America Equities before the next commission cycle. 8. Internal Exchanges: Commissions on the exchange of any ING Security Life policy for Corporate Benefits Variable Universal Life, if any, will be paid in accordance with the exchange procedures in effect at ING Security Life on the date the exchange is completed. The commission rates and/or target premiums may be adjusted in accordance with the rules in effect at the time of the exchange. If the Representative responsible for the exchange is not the producer of the original policy, and the original producer is still active with ING Security Life, no commission will be payable to the Representative or the Selling Broker-Dealer. EX-3 4 1.A(3)(C) COMMISSION SCHEDULE EXHIBIT 1.a(3)(c) Commission Schedule: Commissions are payable on premiums paid up to the target premium only. No commissions are paid on premium in excess of the target premium. Any time a new coverage segment is created, premiums allocated to that segment will be commissionable up to that segment's target premium. The commission rates as a percent of premium are given in a table below. POLICY YEAR OF COVERAGE COMMISSION RATE SEGMENT 1 12% 2 - 4 10% 5 - 10 2% 11+ 0 Annual trail commission rates as a percent of the net account value: POLICY YEAR TRAIL COMMISSION RATE 1 - 20 0.20% 21+ 0.10% EX-4 5 1.A(8)(B)(VI) Exhibit 1.A(8)(b)(vi) AMENDMENT NO. 3 PARTICIPATION AGREEMENT The Participation Agreement (the "Agreement"), dated December 3, 1997, by and among AIM Variable Insurance Funds, Inc., a Maryland corporation, Security Life of Denver Insurance Company, a Colorado life Insurance company and ING America Equities, Inc., a Colorado corporation, is hereby amended as follows: Schedule A of the Agreement is hereby deleted in its entirety and replaced with the following: SCHEDULE A
FUNDS AVAILABLE UNDER THE SEPARATE ACCOUNTS CONTRACTS FUNDED BY THE SEPARATE POLICIES UTILIZING THE FUNDS ACCOUNTS AIM V.I. Government Securities Fund | Separate Account Al | o THE EXCHEQUER VARIABLE ANNUITY - ---------------------------------------- ------------------- ------------------------------------- AIM V.I. Capital Appreciation Fund | Separate Account Ll | o FIRSTLINE VARIABLE UNIVERSAL LIFE AIM V.I. Government Securities Fund | | o FIRSTLINE II VARIABLE UNIVERSAL LIFE | | o STRATEGIC ADVANTAGE VARIABLE | | UNIVERSAL LIFE | | o STRATEGIC ADVANTAGE II VARIABLE | | UNIVERSAL LIFE | | o VARIABLE SURVIVORSHIP UNIVERSAL | | LIFE | | o CORPORATE BENEFITS VARIABLE | | UNIVERSAL LIFE - ---------------------------------------- ------------------- -------------------------------------
All other terms and provisions of the Agreement not amended herein shall remain in full force and effect. Effective Date: November 1, 1999 AIM VARIABLE INSURANCE FUNDS, INC. Attest: /s/ P. Michelle Grace By: /s/ Robert H. Graham Name: P. Michelle Grace Name: Robert H. Graham Title: Assistant Secretary Title: President (SEAL) 1 of 2 SECURITY LIFE OF DENVER INSURANCE COMPANY Attest: /s/ Eric G. Banta By: /s/ Gary W. Waggoner Name: Eric G. Banta Name: Gary W. Waggoner Title: Assistant Secretary Title: Vice President (SEAL) ING AMERICA EQUITIES, INC. Attest: /s/ Eric G. Banta By: /s/ James L. Livingston, Jr. Name: Eric G. Banta Name: James L. Livingston, Jr. Title: Assistant Secretary Title: President (SEAL) 2 of 2 EX-5 6 1.A(8)(B)(V) Exhibit 1.A(8)(b)(v) FOURTH AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado ("Insurance Company"), INVESCO Variable Investment Funds, Inc., a Maryland corporation (the "Company"), and INVESCO Funds Group, Inc., a Delaware corporation ("INVESCO") (collectively, the "Parties). WHEREAS, the Parties executed a participation agreement dated August 26, 1994 (the "Participation Agreement"), governing how shares of the Company's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by the Insurance Company through certain separate accounts (the "Separate Accounts"); WHEREAS, the various Contracts for which shares are purchased are listed in Schedule B of the Participation Agreement; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract funded by the Separate Accounts; NOW THEREFORE, in consideration of their mutual promises, the Insurance Company, the Company and INVESCO agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule B an amended Schedule B in the form attached hereto which adds the Corporate Benefits Variable Universal Life Policy to the list of Contracts funded by the Separate Accounts. Executed this 3rd day of November, 1999. ATTEST: INVESCO Variable Investment Funds, Inc. BY: /s/ Ronald L. Grooms Ronald L. Grooms Senior Vice President ATTEST: Security Life of Denver Insurance Company BY: /s/ Gary W. Waggoner ATTEST: INVESCO Funds Group, Inc. BY: /s/ Ronald L. Grooms Ronald L. Grooms Senior Vice President -1- SCHEDULE B Contracts 1. The Exchequer Variable Annuity (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) 2. FirstLine (Flexible Premium Variable Life Insurance Policy) 3. Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) 4. FirstLine II Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) 5. Strategic Advantage II Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) 6. Variable Survivorship Universal Life (Flexible Premium Variable Universal Life Insurance Policy) 7. Corporate Benefits Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy)
-2- EX-6 7 1.A(8)(B)(VII) FIFTH AMDMT TO FIDELITY EXHIBIT 1.A(8)(B)(VII) FIFTH AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado (the "Insurance Company"), Variable Insurance Products Fund, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation (the "Underwriter") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 10, 1994 (the "Participation Agreement"), governing how shares of the Fund's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by the Insurance Company through certain separate accounts (the "Separate Accounts"); WHEREAS, the various Contracts for which shares are purchased are listed in Schedule A of the Participation Agreement; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract funded by the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, the Insurance Company, the Fund and the Underwriter agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule A an amended Schedule A in the form attached hereto which adds the Corporate Benefits Variable Universal Life policy to the list of Contracts funded by the Separate Accounts. Executed this 1st day of December, 1999. Security Life of Denver Insurance Company Variable Insurance Products Fund BY: /s/ Gary W. Waggoner BY: /s/ Robert C. Pozen ------------------------------------- ------------------------------ Gary W. Waggoner Robert C. Pozen Vice President, General Counsel Senior Vice President and Corporate Secretary Fidelity Distributors Corporation BY: /s/ Kevin J. Kelly Kevin J. Kelly Vice President -1- Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account - -------------------------------------- ------------------- Security Life Separate Account Al o The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) Security Life Separate Account Ll o First Line (Flexible Premium (November 3, 1993) Variable Life Insurance Policy) o Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) o FirstLine II Variable Universal Life (Flexible Premium Variable Life Insurance Policy) o Strategic Advantage II Variable Universal Life (Flexible Premium Variable Life Insurance) o Variable Survivorship Universal Life (Flexible Premium Variable Life Insurance) o Corporate Benefits Variable Universal Life (Flexible Premium Variable Life Insurance) -2- EX-7 8 1.A(8)(B)(VIII) FUND II EXHIBIT 1.A(8)(B)(VIII) FIFTH AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado ("Insurance Company"), Variable Insurance Products Fund II, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation (the "Underwriter") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 10, 1994 (the "Participation Agreement"), governing how shares of Fund's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by Insurance Company through certain separate accounts (the "Separate Accounts"). WHEREAS, the various Contracts for which shares are purchased are listed in Schedule A of the Participation Agreement; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract funded by the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, Insurance Company, Fund, and Underwriter agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule A an amended Schedule A in the form attached hereto which adds the Corporate Benefits Variable Universal Life policy to the list of Contracts funded by the Separate Accounts. Executed this 1st day of December, 1999. Security Life of Denver Insurance Company Variable Insurance Products Fund II BY: /s/ Gary W. Waggoner BY: /s/ Robert C. Pozen ------------------------------------ -------------------------------- Gary W. Waggoner Robert C. Pozen Vice President, General Counsel Senior Vice President and Corporate Secretary Fidelity Distributors Corporation BY: /s/ Kevin J. Kelly ------------------------------- Kevin J. Kelly Vice President -1- Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account - -------------------------------------- ------------------- Security Life Separate Account Al o The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) Security Life Separate Account Ll o First Line (Flexible Premium (November 3, 1993) Variable Life Insurance Policy) o Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) o FirstLine II Variable Universal Life (Flexible Premium Variable Life Insurance Policy) o Strategic Advantage II Variable Universal Life (Flexible Premium Variable Life Insurance) o Variable Survivorship Universal Life (Flexible Premium Variable Life Insurance) o Corporate Benefits Variable Universal Life (Flexible Premium Variable Life Insurance) -2- EX-8 9 6.B LIVINGSTON CONSENT EXHIBIT 6.B [letterhead of Security Life here] December 3, 1999 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Pre-Effective Amendment No. 1; SEC File No. 333-90577 Gentlemen: In my capacity as Executive Vice President and Chief Actuary of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: The preparation of Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 (File No. 333- 90577) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the corporate benefits variable universal life insurance policies; and The preparation of the policy forms for the corporate benefits variable universal life insurance policies described in Pre-Effective Amendment No. 1 (the "Policies"). It is my professional opinion that 1. The aggregate fees and charges under the Policies are reasonable in relation to the services rendered the expenses expected to be incurred and the risks assumed by Security Life. 2. The illustrations of death benefits, account value, cash surrender value, and total premiums paid plus interest at 5 percent shown in the Prospectus, based on the assumptions stated in the illustration are consistent with the provisions of the Policies. The rate structures of the Policies have not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations included, appear to be correspondingly more favorable to prospective buyers than other illustrations which could have been provided at other combinations of ages, sex of the insured, death benefit option and amount, definition of life insurance test, premium class, and premium amounts. Insureds of other premium classes may have higher costs of insurance charges. 3. All other numerical examples shown in the Prospectus are consistent with the Policies and our other practices, and have not been designed to appear more favorable to prospective buyers than other examples which could have been provided. I hereby consent to the filing of this opinion as an Exhibit to Pre-Effective Amendment No. 1 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/ James L. Livingston, Jr. James L. Livingston, Jr., F.S.A., M.A.A.A. JLL:tls EX-9 10 7.A E&Y CONSENT Exhibit 7.A Consent of Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Financial Statements" and to the use of our reports dated April 5, 1999 (with respect to the financial statements of Security Life Separate Account L1 and the consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries), in Pre-Effective Amendment No. 1 to the Registration Statement (Form S-6 No. 333-90577) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 as filed with the Securities and Exchange Commission on December 3, 1999. /s/ ERNST & YOUNG LLP Denver, Colorado December 3, 1999 EX-10 11 7.B SA&B CONSENT Exhibit 7.B [Sutherland Asbill & Brennan LLP] CONSENT OF SUTHERLAND ASBILL & BRENNAN LLP We consent to the reference to our firm in the prospectus included in Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6 for Security Life Separate Account L1 (File No. 333-90577). In giving this consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933. SUTHERLAND ASBILL & BRENNAN LLP By: /s/ Kimberly J. Smith --------------------------- Kimberly J. Smith Washington, D.C. December 3, 1999 EX-11 12 11. ITR PROCEDURES MEMO EXHIBIT 11 DESCRIPTION OF ISSUANCE, TRANSFER, AND REDEMPTION PROCEDURES FOR POLICIES PURSUANT TO RULE 6E-3(T)(B)(12)(III) This document sets forth the administrative procedures that will be followed by Security Life of Denver ("Security Life") in connection with the issuance of certain of its Corporate Benefits flexible premium variable universal life insurance policies (the "policies") issued through Security Life Separate Account L1 (the "Separate Account"), the transfer of assets held under the policies, and the redemption of interests in policies for use on multi-life basis when the insured people share a common employment or business relationship. I. PROCEDURES RELATING TO ISSUANCE AND PURCHASE OF THE POLICIES A. Offering of the Policy The policy is offered only to corporate entities or qualifying groups of individual owners ("owners") who satisfy certain suitability standards. The policy may be purchased to acquire insurance on the life of a person (an "insured") in whom the owner has an insurable interest. Security Life requires satisfactory evidence of the insured's insurability, which may include a medical examination of the insured. The available issue ages are 15 through 85. Age is determined on the insured's age as of the birthday nearest the policy date. This policy is available only to groups of ten or more insured people. Generally, we require a minimum total group first year premium of at least $250,000. However, depending on underwriting circumstances, we may reduce the minimum total group first year premium. We generally require a minimum target death benefit of $50,000 per policy. We may reduce the minimum target death benefit if the average target death benefit at policy issuance for the group is at least $50,000. Acceptance of an application depends on Security Life's underwriting rules, and Security Life reserves the right to reject an application for any reason. If a policy has more than one owner (joint owners), then any transaction under the policy except for telephone transfers of account value will require the authorization of all owners. B. Cost of Insurance Charges Structure, Payments and Underwriting Standards Security Life places the insured in a premium class when the policy is issued, based on Security Life's underwriting of the application. This original premium class applies to the initial stated death benefit. 1 The current cost of insurance charge rate for a policy is based on the age at issue, sex, and premium class of the insured, and on the policy year, and therefore varies from time to time. Security Life currently places insureds in the following premium classes, based on underwriting: Standard Tobacco (ages 0-85); and Standard Non-tobacco (ages 20-85). Insureds may also be placed in a substandard rate class, which involves a higher mortality risk that the standard tobacco or standard non-tobacco classes. Security Life guarantees that the cost of insurance rates used to calculate the monthly cost of insurance charge will not exceed the maximum cost of insurance premiums set forth in the policies. The guaranteed cost of insurance rate for standard classes are based on the 1980 Commissioners' Standard ordinary mortality Tables, Male or Female, Smoker or Nonsmoker Mortality Premiums (1980 CSO Tables). The guaranteed cost of insurance rates for substandard classes are based on multiples of or additives to the 1980 CSO Tables. Security Life's current cost of insurance may be less than the guaranteed cost of insurance that is set forth in the policy. Current cost of insurance rates will be determined based on Security Life's expectations as to future mortality, investment earnings, expenses, taxes, and persistency experience. These rates may change from time to time. Cost of insurance rates (whether guaranteed or current) for an insured in a standard non-tobacco class are equal to or lower than guaranteed cost of insurance for an insured of the same age and sex in a standard tobacco class. Cost of insurance rates (whether guaranteed or current) for an insured in a standard non-tobacco or tobacco class are generally lower than guaranteed cost of insurance for an insured of the same age and sex and tobacco status in a substandard class. The cost of insurance for the policy will not be the same for all owners. Insurance is based on the principle of pooling and distribution of mortality risks which assumes that each owner is charged a cost of insurance commensurate with the insured's mortality risk as actually determined, reflecting factors such as age, sex, health, and underwriting method. A uniform cost of insurance charge for all insureds would discriminate unfairly in favor of those insureds representing higher risks. Although there will be no uniform cost of insurance charges for all insureds for a given stated death benefit there will be a uniform cost of insurance charge for all insureds of the same issue age, sex, policy duration and underwriting classification. If the insured's age or sex has been misstated in the application for the policy or in any application for supplemental and/or rider benefits, and if the misstatement becomes known during the lifetime of the insured, then policy values will be adjusted to those based on the correct monthly deductions (reflecting the correct age or sex) since the policy date. If the policy's values are insufficient to cover the monthly deduction on the prior monthly date, the grace period will be deemed to have begun on such date, and notification will be sent to the owner at least 61 days prior to the end of the grace period. See "Policy Termination and Grace Period," below. 2 The policy provides coverage on an insured named under the policy and a Death Benefit payable upon the death of the insured. The policy will remain in force as long as the policy's cash surrender value is sufficient to cover the charges due. On or after one year from the policy date, the owner may request a reduction in the stated death benefit, by notice to Security Life, subject to the following rules. If a change in the stated death benefit would result in total premiums paid exceeding the premium limitations prescribed under current tax law to qualify the policy as a life insurance contract, Security Life will refund promptly to the owner the amount of such excess above the premium limitations. The minimum amount of any decrease in stated death benefit is $1,000, and any decrease in stated death benefit will become effective on the monthly date next following the date that notice requesting the decrease is received and approved by Security Life. Security Life reserves the right to decline a requested decrease in the stated death benefit if compliance with the guideline premium limitations under current tax law resulting from this decrease would result in immediate termination of the policy, or if to effect the requested decrease, payments to the owner would have to be made from the accumulated value for compliance with the guideline premium limitations, and the amount of such payments would exceed the cash surrender value under the policy. At any time after issue the owner may request an increase in the stated death benefit; any increase in the stated death benefit must be at least $1,000 (unless the increase is effected pursuant to a rider providing for automatic increases in stated death benefit), and an application must be submitted. Any increase that is not guaranteed by rider will require satisfactory evidence of insurability and must meet Security Life's underwriting rules. The increase in stated death benefit will become effective on the monthly date next following the date the request for the increase is received and approved, and the account value will be adjusted to the extent necessary to reflect a monthly deduction as of the effective date based on the increase in stated death benefit. Security Life will determine a cost of insurance rate for each increase in coverage based on the age of the insured at the time of the increase. The following rules will apply for purposes of determining the risk amount for each rate. When an increase in stated death benefit is requested, Security Life conducts underwriting before approving the increase (except as noted below) to determine whether a different premium class will apply to the increase. If the premium class for the increase has lower cost of insurance rates than the original premium class, then the premium class for the increase will also be applied to the initial stated death benefit. If the premium class for the increase has higher cost of insurance rates than the original premium class, the premium class for the increase will apply only to the increase in stated death benefit, and the original premium class will continue to apply to the initial stated death benefit. For the purposes of determining the risk amount associated with a stated death benefit, Security Life will attribute the total net amount at risk for the total stated death benefit. If there is a 3 decrease in stated death benefit after an increase, the decrease is applied to each stated death benefit in the same proportion that it bears to the total stated death benefit, unless state law requires otherwise. The policy will be offered and sold pursuant to an established mortality structure and underwriting standards in accordance with state insurance laws. Where state insurance laws prohibit the use of actuarial tables that distinguish between men and women in determining premiums and policy benefits for their insured resident, Security Life will comply. C. Application and Payment Processing To purchase a policy, an application must be completed and submitted through an authorized Security Life agent. An owner's policy coverage will become effective on the policy date which may be specified on the application. The issue date is the date that Security Life has completed the review of the application and underwriting and has printed the policy for mailing and delivery to the Registered Representative to deliver to the Policyowner. The initial premium does not have to be received for issuance to occur. The Policy Date is the date used to determine the monthly processing date, coverage effective date and policy anniversaries. This date may be the same as the issue and investment date but can also be a date requested by the Policyowner. The Policy Date is not generally determined by the receipt of the initial premium. The Investment Date is the date that Security Life applies funds to the Policy. It is determined by the next valuation date following the date that we have received the initial premium, approved the policy for issue and have received all issue requirements. It is generally the same date as the policy and issue date. As provided for under state insurance law, the owner, to preserve insurance age, may be permitted to backdate the policy. In no case may the policy date be more than six months prior to the date the application was completed. Charges for the monthly deduction for the backdated period are deducted on the issue date. Temporary life insurance coverage may be provided prior to the policy date under the terms of a temporary insurance agreement. In accordance with Security Life's underwriting rules, temporary life insurance coverage may not exceed $3,000,000 and will not remain in effect for more than ninety (90) days. The initial net premium will be credited to the policy on the issue date if all outstanding delivery requirements are satisfied. For backdated policies, the initial net premium will be credited on the issue date. Planned periodic premiums and unscheduled premiums that are not underwritten will be credited to the policy and the net premiums will be invested to the requested divisions on the valuation date they are received by the home office. If an additional premium payment is rejected, Security Life will return the premium payment promptly, without any adjustment for investment experience. 4 The policy date is the date from which policy months, years, and anniversaries are measured. A policy month is each one-month period beginning with a monthly date and ending with the day immediately preceding the next following monthly date. The monthly date is the same day as the policy date for each succeeding month. The monthly deduction is deducted on each monthly date. A policy year is each period of twelve months commencing with the policy date and ending immediately preceding the first annual date, or any following year commencing with an annual date and ending immediately preceding the next annual date. The annual date is the same day in each policy year as the policy date. The issue date, if the same as the policy date, is the date from which the suicide and contestable periods start. It is shown in the policy, and is the date that the policy is issued. D. Allocation of Net Premiums On the investment date, the account value is equal to the initial net premium credited (initial premium payment less the premium expense charge), less any monthly deductions made as the policy date up to six months for backdated policies. On each investment date thereafter, the account value is the sum of the variable account, the guaranteed interest division, and the loan account. The account value will vary to reflect the performance of the subdivisions to which amounts have been allocated, interest credited on amounts allocated to the guaranteed interest division, interest credited on amounts in the loan account, charges, transfers, partial cash surrenders, loans and loan repayments. The net account value is cash value minus any outstanding policy debt. When applying for a policy, the owner selects a plan for paying level premium payments at specified intervals, e.g., quarterly, semi-annually or annually, until the maturity date. If the owner elects, Security Life will also arrange for payment of planned period premiums on a monthly basis under a pre-authorized payment arrangement. The owner is not required to pay premium payments in accordance with these plans; rather, the owner can pay more or less than planned or skip a planned periodic premium entirely. Currently, there is no minimum amount for each premium. Security Life may establish a minimum amount 90 days after Security Life sends the owner a written notice of such increase. Subject to certain limits (described below), the owner can change the amount and frequency of planned periodic premiums whenever the owner wishes by sending notice to the home office. However, Security Life reserves the right to limit the amount of a premium payment or the total premium payments paid. In the application, the owner specifies the percentage of net premium to be allocated to each investment option including the guaranteed interest division (G.I.D.). Net premiums will generally be allocated to the investment options on the valuation date that Security Life receives them in accordance with the allocations specified in the application or subsequent notice. State guidelines regarding the allocation of the net initial premium varies as does the length of time for free look. Some states mandate that if an owner exercises his/her free look right he/she 5 is entitled to a full premium refund (Premium refund states). In these instances Security Life allocates the funds to the money market investment option. Other states mandate that should the owner exercise his/her free look option he/she is entitled to receive the value of the fund allocations plus the policy charges deducted (valuation states). In these instances Security Life allocates the net initial premium to the divisions elected on the application during the free look period but after the 5 day deemed delivery date. The net premium allocation percentages specified in the application will apply to subsequent premium payments until the owner changes the percentages. The minimum allocation percentage that an owner may specify for an investment option or the guaranteed account is 1%, and allocation percentages must be whole numbers. The sum of allocations must equal 100%. Security Life reserves the right to limit the number of investment options (18) to which account value may be allocated. An owner can change the allocation percentages at any time, subject to the rules below, by sending notice to the home office or if telephone privileges are in effect, the request can be received by phone. The change will apply to all premium payments received with or after receipt of the owner's notice. E. Exchange Program Security Life may offer an exchange program for designated inforce policies to be exchanged to a Corporate Benefits Variable Universal Life policy. Evidence of insurability will not be required if there is not a request for a death benefit increase. Policies eligible for this exchange will be limited to Strategic Advantage II policies issued after December 1, 1999 through April 30, 2000, to policyowners who otherwise qualify to purchase the Corporate Benefits Variable Universal Life policy. F. Additional Payment Additional unscheduled premium payments can be made at any time while the policy is in force. Premium payments after the initial premium payment must be made to the home office. Security Life has the right to limit the number and amount of such premium payments. Total premium payments paid in a policy year may not exceed guideline premium payment limitations for life insurance set forth in the Internal Revenue Code. Security Life will promptly refund any portion of any premium payment that is determined to be in excess of the premium payment limit established by law to qualify a policy as a contract for life insurance. Security Life reserves the right to reject any requested increase in planned periodic premiums, or any unscheduled premium. Security Life also reserves the right to require satisfactory evidence of insurability prior to accepting any premium which increases the risk amount of the policy. No premium payment will be accepted after the maturity date. The owner may specify that a specific unscheduled premium payment is to be applied as a repayment of a policy loan, if any. 6 The payment of premiums may cause a policy to be a modified endowment contract under the Internal Revenue Code. If acceptance of a premium paid would, in Security Life's view, cause the policy to become a Modified Endowment Contract, then to the extent feasible Security Life will not accept that portion of the premium that would cause the policy to become a Modified Endowment Contract unless the owner confirms in writing the owner's intent to convert the policy to a Modified Endowment Contract. Security Life may return that portion of the payment pending receipt of instructions from the owner. G. Policy Termination and Grace Period The policy terminates at the earliest of the end of the grace period, the surrender of the policy by the owner or the fulfillment of Security Life's obligations under the policy (i.e., payment of the death benefit proceeds). If the cash surrender value on a monthly date is less than the amount of the monthly deduction to be deducted on that date the policy will be in default. In addition, if on a monthly date the cash value less any policy loan exceeds the amount of the monthly deduction due for the following policy month, the policy will be in default. An owner, and any assignee of record, will be sent notice of the default. If a policy goes into default, the owner will be allowed a 61-day grace period to pay a premium payment sufficient to cover the monthly deductions due during the grace period and for a period of two additional months or a sufficient amount to avoid termination of the policy due to excessive loans. Security Life will send notice of the amount required to be paid during the grace period ("grace period premium payment") to the owner's last known address and the address of any assignee of record. The grace period will begin when the notice is sent. An owner's policy will remain in effect during the grace period. If the insured should die during the grace period and before the grace period premium payment is paid, the death benefit proceeds will still be payable to the beneficiary, although the amount paid will reflect a reduction for the monthly deductions due on or before the date of the insured's death (and for any policy debt). If the grace period premium payment has not been paid before the grace period ends, the policy will lapse. It will have no value and no benefits will be payable. The maturity date is the date when insurance coverage under the policy terminates and maturity benefit is paid. It is generally the insured's 100th birthday, and is shown in the policy. The maturity benefit is equal to the cash surrender value on the maturity date. H. Reinstatement of a Policy Terminated for Insufficient Values The policy may be reinstated within five years after lapse and before the maturity date, subject to compliance with certain conditions, including the payment of a necessary premium payment and submission of satisfactory evidence of insurability. I. Repayment of a Loan 7 An owner may repay all or part of a policy loan at any time while the insured is living and the policy is in force. Loan repayments must be sent to the home office and will be credited as of the date received. The owner may instruct Security Life that a specific unscheduled premium payment is to be applied as a loan repayment. When a loan repayment is made, account value in the loan account in an amount equivalent to the repayment is transferred from the loan account to the investments options according to the owner's current net premium allocation instructions. J. Policy Riders Rider benefits may be available and may be added to the policy. Monthly charges for the rider will be deducted from the account value as part of the monthly deductions. The rider benefits available provide fixed benefits that do not vary with the investment experience of the separate account. The only rider available is the Adjustable Term Insurance Rider. Additional rules and limits apply to these rider benefits and are set forth in the rider. II. TRANSFERS AMONG INVESTMENT OPTIONS Several investment options of the Separate Account are available for allocation of net premiums paid under the policy, subject to certain limitations set forth in the policy. Each invests its assets in shares or units of an underlying portfolio. Currently available investment options invest in portfolios of AIM Variable Insurance Funds, Inc., The Alger American Fund, Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II, the GCG Trust, INVESCO Variable Investment Funds, Inc., Neuberger Berman Advisors Management Trust, Van Eck Worldwide Insurance Trust. All Funds are registered under the Investment Company Act of 1940 as an open-end management investment company. Additional funds may be made available in the future. After the free-look period and prior to the maturity date, the owner may transfer all or part of the account value (except loan amounts) from the investment options to other investment options or to the guaranteed interest division; or transfer a part of an amount in the guaranteed interest to the investment options, subject to the following restrictions. The minimum transfer amount is the lesser of $100 or the entire amount in that investment option or the guaranteed interest. A transfer request that would reduce the amount in an investment option or the guaranteed interest division below $100 will be treated as a transfer request for the entire amount in that investment option or the guaranteed interest division. With the exception of the Right to Exchange (described below), Security Life reserves the right to limit the number or frequency of transfers permitted in the future. Security Life will make the transfer as of the end of the valuation period during which such transfer is requested and received by Security Life. Currently, there is a 12 free transfer limit on the number of transfers that can be made between investment options or to the guaranteed interest division. Currently, Security Life assesses a transfer charge of $10 for each transfer during a policy year in excess of the first twelve transfers. The transfer charge will be deducted from the investment option from which the requested transfer is being made, on a pro-rata basis. 8 Telephone transfers will be based upon instructions given by telephone, provided the appropriate authorization has been provided to Security Life. Security Life reserves the right to suspend telephone transfer privileges at any time, for any reason, if Security Life deems such suspension to be in the best interests of owners. During the first twenty-four policy months following the issue date, and within sixty days of the later of notification of a change in the investment policy of the separate account or the effective date of such change, the owner may exercise a one-time Right to Exchange by requesting that all or a portion of the variable account be transferred to the guaranteed interest division. Exercise of the Right to Exchange is not subject to the transfer charge. Following the exercise of the Right to Exchange, net premiums may not be allocated to the subdivisions of the variable account, and transfers of account value to the subdivisions will not be permitted. The other terms and conditions of the policy will continue to apply. Transfers may also be effected pursuant to the dollar cost averaging or auto rebalancing feature as may be elected by the owner from time to time and as described in the current prospectus. III. REDEMPTION PROCEDURES, SURRENDER AND RELATED TRANSACTIONS A. Surrender for Cash Surrender Value An owner may surrender the policy at any time for its cash surrender value by submitting notice to the home office. Security Life may require return of the policy. A surrender charge may apply. A surrender request will be processed as of the valuation date the surrender notice and all required documents are received. Payment will be made within seven calendar days. An owner's policy will terminate and cease to be in force if it is surrendered. It cannot later be reinstated. B. Death Claims The death benefit proceeds are equal to the sum of the base death benefit for each coverage segment under the death benefit option selected, calculated on the date of the insured's death, plus any rider benefits, minus any outstanding policy loan including accrued but unpaid interest, minus any unpaid monthly deductions incurred prior to the date of death. If the insured's age or sex has been misstated in the application for the policy or in any application for supplemental and/or rider benefits, and if the misstatement becomes known after the death of the insured, then the death benefit under the policy or such supplemental and/or rider benefits will be that which the cost of insurance charge which was deducted from the account value on the last monthly processing date prior to the death of the insured would have purchased for the correct sex and age. Security Life will pay interest at the rate declared by us or at a higher rate required by law. 9 Security Life will usually pay the death benefit proceeds to the beneficiary within seven days after receipt at its Home Office of due proof of death of the insured and all other requirements necessary to make payment. If the payment of the death benefit of a policy is contested, payment of proceeds may be delayed. The Death Benefit payable depends on the death benefit option in effect on the date of death. Subject to certain conditions, owners may change the death benefit option. Under Option 1, the death benefit is the greater of the specified amount, which includes the account value or the Applicable Percentage of account value on the date of the insured's death. Under Option 2, the death benefit is the greater of the specified amount plus the account value on the date of death, or the Applicable Percentage of the account value on the date of the insured's death. Under Option 3, the death benefit is the greater of the stated death benefit plus the sum of all premiums paid minus partial withdrawals or the account value multiplied by the appropriate factor. The "Applicable Percentage" which is the AV on the date of death multiplied by the appropriate factor from the Definition of Life Insurance factors shown in the policy's appendix A or B. A table showing the Applicable Percentages for Attained Ages 0 to 95 is set forth in the policy. On or after one year from the policy date, the owner may change the death benefit option on the policy, by notice to Security Life, subject to the following rules. A change in the Death Benefit Option may be requested at least 30 days prior to a policy anniversary. After any changes, the specified amount must be at least $50,000. The effective date of the change will be the monthly date next following the day that Security life receives and accepts notice of the request for change. Security Life may require satisfactory evidence of insurability. When a change from Option 1 to Option 2 is made, the specified amount after the change is effected will be equal to the specified amount before the change less the account value on the effective date of the change. When a change from Option 2 to Option 1 is made, the specified amount after the change will be equal to the specified amount before the change is effected and the death benefit will be increased by the account value on the effective date of the change. When a change from Option 3 to Option 1 is made, the specified amount will be the stated death benefit plus the sum of the premiums paid minus partial withdrawals. C. Policy Loan After the first policy year and while the insured is living, provided the policy is not in the grace period, the owner may borrow against the policy at any time by submitting notice to the home office. The minimum amount of any loan request is $100. The maximum loan amount is the net cash surrender value less monthly deductions to the next policy anniversary. Maximum loan amounts may be different if required by state law. Outstanding loans reduce the amount available for new loans. Loans will be processed as of the date the loan notice is received and approved. Loan proceeds generally will be sent to the owner within seven calendar days. 10 Loan interest charges on a Policy Loan accrue daily at a compound annual interest rate of 3.25%. Interest is due in arrears on each policy anniversary. Outstanding loan amounts (including unpaid interest added to the loan) plus accrued interest not yet due equals the total policy loan. When a policy loan is made, an amount sufficient to secure the loan is transferred out of the variable account and the guaranteed account and into the policy's loan account. Thus, a loan will have no immediate effect on the account value, but other policy values, such as the cash surrender value and the death benefit proceeds, will be reduced immediately by the amount transferred to the loan account. This transfer is made against the account value in each subdivision and the guaranteed account in proportion to the account value in each on the effective date of the loan, unless the owner specifies that transfers be made form specific subdivisions. an amount of account value equal to any due and unpaid loan interest which exceeds interest credited to the loan account will also be transferred to the loan account on each annual date. Such interest will be transferred from each investment option in the same proportion that account value in each bears to the total unloaned account value. The loan account will be credited with interest at an effective annual rate of not less than the annual loan interest rate of 3%. D. Partial Withdrawals An owner may make partial cash surrenders under the policy at any time after the first policy anniversary subject to the conditions below. An owner must submit notice to the home office. Each partial cash surrender must be at least $100. The maximum partial withdrawal is the amount which will leave $500 as the net cash surrender value. When a partial withdrawal is taken, the amount of the withdrawal plus a service fee of $25 is deducted from the account value. As of the date Security Life receives notice of a partial cash surrender request, the cash value will be reduced by the partial cash surrender amount. Unless the owner requests that a partial cash surrender be deducted from specified investment options, the partial cash surrender amount will be deducted from account value on a pro-rata basis in proportion to the account value in each investment option. If death benefit Option 1 is in effect, Security life may reduce the specified amount. Security Life may reject a partial cash surrender request if the partial cash surrender would reduce the specified amount below $50,000, or if the partial cash surrender would cause the policy to fail to qualify as a life insurance contract under applicable tax laws, as interpreted by Security Life. Partial cash surrender requests will be processed as of the valuation date notice is received by Security Life, and generally will be paid within seven calendar days. E. Monthly Charges 11 On each monthly date, Security Life will deduct from the account value the monthly deductions due, commencing as of the policy date. An owner's policy date is the date used to determine the applicable monthly date. The monthly deduction consists of (1) cost of insurance charges ("cost of insurance charge"), (2) the monthly administrative charge (the "administrative charge"), (3) mortality and expense charge, and (4) charges for any rider benefit. The monthly deduction is deducted on pro rata basis from the account value in each investment option. 12 -----END PRIVACY-ENHANCED MESSAGE-----