-----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, Cd83tbOeRdObgLvfioLpVO3OI2VAkzcBVFWrM7563+oa0opwaSl8e13ggbffNmbo wdlZZkY6hxi+8TOWWKkL0w== 0000927356-96-000195.txt : 20040405 0000927356-96-000195.hdr.sgml : 20040405 19960424120700 ACCESSION NUMBER: 0000927356-96-000195 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 4 FILED AS OF DATE: 19960424 DATE AS OF CHANGE: 19970430 EFFECTIVENESS DATE: 19960501 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 485BPOS SEC ACT: 1933 Act SEC FILE NUMBER: 033-88148 FILM NUMBER: 96550042 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 485BPOS 1 PURSUANT TO RULE 485(B) As filed with the Securities and Exchange Commission on April 23, 1996 Registration No. 33-88148 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 _________________ FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Post-Effective Amendment No. 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 Depositors Principal Executive Offices) Copy to: EUGENE L. COPELAND, Esq. KURT W. BERNLOHR, Esq. Security Life of Denver Insurance Security Life of Denver Insurance Company Company 1290 Broadway 1290 Broadway Denver, Colorado 80203-5699 Denver, Colorado 80203-5699 (Name and Address of Agent for (303) 894-4923 Service) ---------- It is proposed that this filing will become effective: ___ on (date) pursuant to paragraph (a) of Rule 485 ___ 60 days after filing pursuant to paragraph (a) of Rule 485 X on May 1, 1996 pursuant to paragraph (b) of Rule 485 ___ immediately upon filing pursuant to paragraph (b) of Rule 485 ___ this post-effective amendment designates a new effective date for a previously filed post-effective amendment Title and amount of securities being registered: Interests under variable life insurance policies. Approximate Date of Proposed Public Offering: As soon as practical after the effective date. Registrant elects to be governed by Rule 6e-3(T)(b)(13)(i)(A) under the Investment Company Act of 1940 with respect to the policy described in the Prospectus. Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the Registrant has registered an indefinite amount of securities. Registrant filed its Form 24f-2 on February 28, 1996 for its most recent fiscal year ending December 31, 1995. SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-88148) 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 of AmountsYou Have in the Divisions of the Variable Account; Charges, Deductions and Refunds; Surrender; Partial Withdrawals; The Guaranteed Interest Division; Transfers of Account Values; Right to Exchange Policy; Lapse; Reinstatement; Premiums 10(f) Voting Privileges; Rights to Change Operations 10(g), (h) Right to Change Operations 10(i) Tax Considerations; Detailed Information about the Strategic Advantage Variable Universal Life Policy; Other General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges, Deductions and Refunds; Corporate Purchasers and Group or Sponsored Arrangements
(ii)
Form N-8B-2 Item No. Caption in Prospectus - --------------------------- --------------------------------------------- 14, 15 Policy Summary; Free Look; Other General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values for Each Division 17 Payment; Surrender; Partial Withdrawal 18 Policy Summary; Tax Considerations; Detailed Information about the Strategic Advantage Variable Universal Life Policy; Security Life Separate Account L1; Persistency Refund 19 Reports to Policy Owners; Notification and Claims Procedures; Performance Information 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the Strategic Advantage 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) Other General Policy Provisions; Distribution of the Policies; Security Life of Denver Insurance Company 41(b), 41(c), 42, 43 Inapplicable 44 Determining the Value You have in the Divisions of the Variable Account; How We Calculate Accumulation Unit Values for Each Division 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the Strategic Advantage Variable Universal Life Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the Strategic Advantage Variable Universal Life Policy 52 Determining the Value You Have in the Divisions of the Variable Account; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements
(iv) STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY ISSUED BY SECURITY LIFE OF DENVER INSURANCE COMPANY AND SECURITY LIFE SEPARATE ACCOUNT L1 This prospectus describes Strategic Advantage, an individual flexible premium variable universal life insurance policy (the "Policy" or collectively, "Policies") issued by Security Life of Denver Insurance Company ("Security Life"). The Policy provides insurance coverage with flexibility in death benefits and premium payments. The Policy is designed primarily for use on a multiple-life basis where the Insureds share a common employment or business relationship, and it may be owned individually or by a corporation, trust, association or similar entity. The Policy is funded by Security Life Separate Account L1 (the "Variable Account"). Nineteen Divisions of the Variable Account are available under the Policy. A Guaranteed Interest Division, which guarantees a minimum fixed rate of interest, is also available. Purchasers may utilize both the Divisions of the Variable Account and the Guaranteed Interest Division simultaneously. The Loan Division represents amounts we set aside as collateral for any Policy Loans taken. We will pay the Death Proceeds when the Insured dies if the Policy is still in force. The Death Proceeds will equal the death benefit, reduced by any outstanding Policy Loan, accrued loan interest, and any charges due during the grace period. The death benefit consists of two elements: the Base Death Benefit and any amount added by Rider. The Policy will remain in force as long as the Net Account Value remains positive. If at all times during the first three Policy years, the sum of premiums paid minus Partial Withdrawals taken and any Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed months this Policy has been in effect, the Policy will not lapse regardless of the amount of the Net Account Value. If the Guaranteed Minimum Death Benefit provision is purchased, the Stated Death Benefit portion of the Policy will remain in force for the Guarantee Period. To continue the Guarantee Period, the required premiums must be paid and the Net Account Value must remain diversified. The Policy permits the Owner to choose from three death benefit options which may increase the Base Death Benefit above the Stated Death Benefit: Option 1, a fixed benefit that equals the Stated Death Benefit; Option 2, a benefit that equals the Stated Death Benefit plus the Account Value; or Option 3, a benefit that equals the Stated Death Benefit plus the sum of premiums paid minus Partial Withdrawals taken to date. The Base Death Benefit in force as of any Valuation Date will not be less than the amount necessary to qualify the Policy as a life insurance contract under the Internal Revenue Code in existence at the time the Policy is issued. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. THIS PROSPECTUS SHOULD BE READ AND RETAINED FOR FUTURE REFERENCE. A PROSPECTUS FOR THE PORTFOLIO OR PORTFOLIOS BEING CONSIDERED MUST ACCOMPANY THIS PROSPECTUS AND SHOULD BE READ IN CONJUNCTION HEREWITH. DATE OF PROSPECTUS: MAY 1, 1996 When applying for the Policy, the Owner will irrevocably choose which of two tests for compliance with the FederalFederal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. If the Guideline Premium/Cash Value Corridor Test is chosen, premium amounts will be limited based on the death benefit of the Policy. See Life Insurance Definition, page 40. We will not allocate funds to the Policy until we receive at least one quarter of the Minimum Annual Premium, and we have approved the Policy for issue. Thereafter, the timing and amount of premium payments may vary, within specified limits. A higher premium level may be required to keep the Guaranteed Minimum Death Benefit in force. After certain deductions have been made, Net Premiums may be allocated to one or more of the Divisions of the Variable Account and to the Guaranteed Interest Division. A Policy may be returned according to the terms of the Right to Examine Policy Period (also called the Free-Look Period), during which time Net Premiums allocated to the Variable Account will be held in the Division investing in the Fidelity VIPInvestments Money Market Portfolio Division of the Variable Account. The assets of the Divisions of the Variable Account will be used to purchase, at net asset value, shares of designated Portfolios of various investment companies. The Policy Account Value is the sum of the amounts in the Divisions of the Variable Account plus the amount in the Guaranteed Interest Division and the amount in the Loan Division. The value of the amounts allocated to the Divisions of the Variable Account will vary with the investment experience of the corresponding Portfolios; there is no minimum guaranteed cash value for amounts allocated to the Divisions of the Variable Account. The value of amounts allocated to the Guaranteed Interest Division will depend on the interest rates we declare. The Account Value will also reflect deductions for the cost of insurance and expenses, as well as increases for additional Net Premiums. Replacing existing insurance coverage with the Policy described in this prospectus may not be advantageous.
ISSUED BY: Security Life of Denver BROKER DEALER: ING America Equities, Inc. Insurance Company 1290 Broadway, Security Life Center Attn: Variable 1290 Broadway Denver, CO 80203-5699 Denver, CO 80203-5699 (303) 860-2000 (800) 525-9852 THROUGH ITS: Security Life Separate Account L1 ADMINISTERED AT: Customer Service Center P.O. Box 173763 Denver, CO 80217-3763 (800) 933-5858
PROSPECTUS DATED: May 1, 1996 ________________________________________________________________________________ Strategic Advantage 2 TABLE OF CONTENTS
DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS............................................................. 7 POLICY SUMMARY.................................................................................................. 10 General Information............................................................................................. 10 Death Benefits.................................................................................................. 10 Benefits at Maturity............................................................................................ 11 Additional Benefits............................................................................................. 11 Premiums........................................................................................................ 11 Allocation of Net Premiums...................................................................................... 12 Policy Values................................................................................................... 12 Determining the Value in the Divisions of the Variable Account.................................................. 12 How We Calculate Accumulation Unit Values for Each Division..................................................... 12 Transfers of Account Values..................................................................................... 12 Dollar Cost Averaging........................................................................................... 13 Automatic Rebalancing........................................................................................... 13 Loans........................................................................................................... 13 Partial Withdrawals............................................................................................. 13 Surrender....................................................................................................... 14 Right to Exchange Policy........................................................................................ 14 Lapse........................................................................................................... 14 Reinstatement................................................................................................... 14 Charges and Deductions.......................................................................................... 14 Persistency Refund.............................................................................................. 15 Refund of Sales Charges......................................................................................... 15 Tax Considerations.............................................................................................. 15 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION..................................................... 16 Security Life of Denver Insurance Company....................................................................... 16 Security Life Separate Account L1............................................................................... 16 Investment Objectives of the Portfolios......................................................................... 17 The Guaranteed Interest Division................................................................................ 20 DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY.................................................................................. 20 Applying for a Policy........................................................................................... 20 Premiums........................................................................................................ 21 Scheduled Premiums............................................................................................. 21 Unscheduled Premium Payments................................................................................... 21 Minimum Annual Premium......................................................................................... 21 Premium Payments Affect The Continuation of Coverage........................................................... 22 Choice of Definitional Tests................................................................................... 22 Choice of Guaranteed Minimum Death Benefit Provisions.......................................................... 22 Modified Endowment Contracts................................................................................... 22 Allocation of Net Premiums...................................................................................... 22 Death Benefits.................................................................................................. 23 Death Benefit Options.......................................................................................... 23 Changes In Death Benefit Option................................................................................ 23 Guaranteed Minimum Death Benefit Provision..................................................................... 24 Requirements to Maintain the Guarantee Period.................................................................. 25 - --------------------------------------------------------------------------------------------------------------------- Strategic Advantage 3
Changes In Death Benefit Amounts............................................................................ 25 Benefits at Maturity......................................................................................... 26 Additional Benefits.......................................................................................... 26 Accidental Death Benefit Rider.............................................................................. 26 Adjustable Term Insurance Rider............................................................................. 26 Additional Insured Rider.................................................................................... 27 Guaranteed Insurability Rider............................................................................... 27 Right to Exchange Rider..................................................................................... 27 Waiver of Cost of Insurance Rider........................................................................... 27 Waiver of Specified Premium Rider........................................................................... 27 Policy Values................................................................................................ 28 Account Value............................................................................................... 28 Cash Surrender Value........................................................................................ 28 Net Cash Surrender Value.................................................................................... 28 Net Account Value........................................................................................... 28 Determining the Value of Amounts in the Divisions of the Variable Account.................................... 28 How We Calculate Accumulation Unit Values for Each Division.................................................. 28 Transfers of Account Values.................................................................................. 29 Dollar Cost Averaging........................................................................................ 29 Automatic Rebalancing........................................................................................ 30 Policy Loans................................................................................................. 31 Partial Withdrawals.......................................................................................... 32 Surrender.................................................................................................... 33 Right to Exchange Policy..................................................................................... 33 Lapse........................................................................................................ 33 If Guaranteed Minimum Death Benefit Provision Is Not in Effect.............................................. 33 If the Guaranteed Minimum Death Benefit Provision Is in Effect.............................................. 33 Grace Period................................................................................................. 34 Reinstatement................................................................................................ 34 CHARGES, DEDUCTIONS AND REFUNDS.............................................................................. 34 Deductions from Premiums..................................................................................... 34 Tax Charges................................................................................................. 34 Sales Charges............................................................................................... 34 Daily Deductions from the Variable Account................................................................... 35 Mortality and Expense Risk Charge........................................................................... 35 Monthly Deductions from the Account Value.................................................................... 35 Initial Policy Charge....................................................................................... 35 Monthly Administrative Charge............................................................................... 35 Cost Of Insurance Charges................................................................................... 36 Charges For Additional Benefits............................................................................. 36 Guaranteed Minimum Death Benefit Charge..................................................................... 36 Changes In Monthly Charges.................................................................................. 36 Policy Transaction Fees...................................................................................... 37 Partial Withdrawal.......................................................................................... 37 Transfers................................................................................................... 37 Premium Allocation Charges.................................................................................. 37 Illustrations............................................................................................... 37 Persistency Refund........................................................................................... 37 Refund of Sales Charges...................................................................................... 38 Charges from Portfolios...................................................................................... 38 Group or Sponsored Arrangements.............................................................................. 40 Other Charges................................................................................................ 40 - ------------------------------------------------------------------------------------------------------------------ Strategic Advantage 4
TAX CONSIDERATIONS........................................................................................... 40 Life Insurance Definition.................................................................................... 40 Diversification Requirements................................................................................. 41 Modified Endowment Contracts................................................................................. 41 Tax Treatment of Premiums.................................................................................... 42 Loans, Surrenders and Withdrawals............................................................................ 42 If the Policy is Not a Modified Endowment Contract.......................................................... 42 If the Policy is a Modified Endowment Contract.............................................................. 42 Alternative Minimum Tax...................................................................................... 43 Tax-exempt Policy Owners..................................................................................... 43 Changes to Comply with Law................................................................................... 43 Other........................................................................................................ 43 ADDITIONAL INFORMATION ABOUT THE POLICY...................................................................... 44 Voting Privileges............................................................................................ 44 Right to Change Operations................................................................................... 45 Reports to Owners............................................................................................ 45 OTHER GENERAL POLICY PROVISIONS.............................................................................. 45 Free Look Period............................................................................................. 45 The Policy................................................................................................... 46 Age.......................................................................................................... 46 Ownership.................................................................................................... 46 Beneficiary.................................................................................................. 46 Collateral Assignment........................................................................................ 46 Incontestability............................................................................................. 46 Misstatements of Age or Sex.................................................................................. 46 Suicide...................................................................................................... 46 Payment...................................................................................................... 47 Notification and Claims Procedures........................................................................... 47 Telephone Privileges......................................................................................... 47 Non-Participating............................................................................................ 48 Distribution of the Policies................................................................................. 48 Settlement Provisions........................................................................................ 48 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS......................................................................................... 50 ADDITIONAL INFORMATION....................................................................................... 58 Directors and Officers....................................................................................... 58 State Regulation............................................................................................. 61 Legal Matters................................................................................................ 61 Legal Proceedings............................................................................................ 61 Experts...................................................................................................... 61 Registration Statement....................................................................................... 62 FINANCIAL STATEMENTS......................................................................................... 62 APPENDIX A................................................................................................... 120 APPENDIX B................................................................................................... 128 APPENDIX C................................................................................................... 129 Performance Information...................................................................................... 129 - ------------------------------------------------------------------------------------------------------------------ Strategic Advantage 5
IN THIS PROSPECTUS "WE," "US" AND "OUR" REFER TO SECURITY LIFE OF DENVER INSURANCE COMPANY. THIS POLICY IS NOT AVAILABLE IN ALL JURISDICTIONS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT BE LAWFULLY MADE. NO PERSON IS AUTHORIZED TO MAKE ANY REPRESENTATION REGARDING THE OFFERING DESCRIBED IN THIS PROSPECTUS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS OR ANY ATTACHED SUPPLEMENT HERETO. - ------------------------------------------------------------------------------- Strategic Advantage 6 DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS AS USED IN THIS PROSPECTUS, THE FOLLOWING TERMS HAVE THE INDICATED MEANINGS. THERE ARE OTHER CAPITALIZED TERMS WHICH ARE EXPLAINED OR DEFINED IN OTHER PARTS OF THIS PROSPECTUS. ACCOUNT VALUE -- THE SUM OF THE AMOUNTS ALLOCATED TO THE DIVISIONS OF THE VARIABLE ACCOUNT AND TO THE GUARANTEED INTEREST DIVISION, AS WELL AS ANY AMOUNT SET ASIDE IN THE LOAN DIVISION TO SECURE A POLICY LOAN. ACCUMULATION UNIT -- A UNIT OF MEASUREMENT WHICH WE USE TO CALCULATE THE ACCOUNT VALUE IN EACH DIVISION OF THE VARIABLE ACCOUNT. ACCUMULATION UNIT VALUE -- THE VALUE OF THE ACCUMULATION UNITS OF EACH DIVISION OF THE VARIABLE ACCOUNT. THE ACCUMULATION UNIT VALUE IS DETERMINED AS OF EACH VALUATION DATE. ADJUSTABLE TERM INSURANCE RIDER -- THE ADJUSTABLE TERM INSURANCE RIDER IS AVAILABLE TO ADD DEATH BENEFIT COVERAGE TO THE POLICY. THE ADJUSTABLE TERM INSURANCE RIDER ALLOWS THE OWNER TO SCHEDULE THE PATTERN OF DEATH BENEFITS APPROPRIATE FOR FUTURE NEEDS. THE ADJUSTABLE TERM INSURANCE RIDER IS NOT GUARANTEED UNDER THE GUARANTEED MINIMUM DEATH BENEFIT PROVISION. AGE -- THE INSUREDS AGE AT ANY TIME IS HIS OR HER AGE ON THE BIRTHDAY NEAREST THE POLICY DATE INCREASED BY THE NUMBER OF FULL POLICY YEARS ELAPSED SINCE THE POLICY DATE. BASE DEATH BENEFIT -- THE BASE DEATH BENEFIT WILL VARY ACCORDING TO WHICH DEATH BENEFIT OPTION IS CHOSEN: UNDER OPTION 1, THE BASE DEATH BENEFIT EQUALS THE STATED DEATH BENEFIT OF THE POLICY. UNDER OPTION 2, THE BASE DEATH BENEFIT EQUALS THE STATED DEATH BENEFIT OF THE POLICY PLUS THE ACCOUNT VALUE. UNDER OPTION 2, THE BASE DEATH BENEFIT FLUCTUATES WITH THE AMOUNT OF THE ACCOUNT VALUE, BUT WILL NEVER BE LESS THAN THE STATED DEATH BENEF IT. UNDER OPTION 3, THE BASE DEATH BENEFIT EQUALS THE STATED DEATH BENEFIT OF THE POLICY PLUS THE SUM OF ALL PREMIUMS PAID MINUS PARTIAL WITHDRAWALS TAKEN UNDER THE POLICY. UNDER OPTION 3, THE BASE DEATH BENEFIT GENERALLY WILL INCREASE AS PREMIUMS ARE PAID AND DECREASE AS PARTIAL WITHDRAWALS ARE TAKEN. IN NO EVENT WILL THE BASE DEATH BENEFIT BE LESS THAN THE STATED DEATH BENEFIT. THE BASE DEATH BENEFIT MAY BE INCREASED FROM THE AMOUNT DESCRIBED TO COMPLY WITH THE FEDERAL INCOME TAX LAW DEFINITION OF LIFE INSURANCE, REGARDLESS OF DEATH BENEFIT OPTION SELECTED. BENEFICIARY(IES) -- THE PERSON OR PERSONS DESIGNATED TO RECEIVE THE DEATH PROCEEDS IN THE CASE OF THE DEATH OF THE INSURED. CASH SURRENDER VALUE -- THE AMOUNT OF THE ACCOUNT VALUE PLUS ANY REFUND OF SALES CHARGES DUE. CUSTOMER SERVICE CENTER -- OUR ADMINISTRATIVE OFFICE AT P.O. BOX 173763, DENVER, CO 80217-3763. DEATH PROCEEDS -- THE AMOUNT PAYABLE ON THE DEATH OF THE INSURED. IT EQUALS THE BASE DEATH BENEFIT PLUS THE ADJUSTABLE TERM INSURANCE RIDER, IF APPLICABLEANY, REDUCED BY ANY OUTSTANDING POLICY LOAN AND ACCRUED LOAN INTEREST. IF DEATH OCCURS AFTER THE POLICY HAS ENTERED THE GRACE PERIOD, DEATH PROCEEDS WILL BE FURTHER REDUCED BY ANY POLICY CHARGES INCURRED BUT NOT YET DEDUCTED. DIVISION(S) -- THE INVESTMENT OPTIONS AVAILABLE: THE DIVISIONS OF THE VARIABLE ACCOUNT, EACH OF WHICH INVESTS IN SHARES OF ONE OF THE PORTFOLIOS; THE GUARANTEED INTEREST DIVISION; AND THE LOAN DIVISION. FREE LOOK PERIOD -- THE PERIOD OF TIME WITHIN WHICH THE OWNER MAY EXAMINE THE POLICY AND RETURN IT FOR A REFUND. THIS IS ALSO CALLED THE RIGHT TO EXAMINE POLICY PERIOD. GENERAL ACCOUNT -- THE ACCOUNT WHICH CONTAINS ALL OF OUR ASSETS OTHER THAN THOSE HELD IN THE VARIABLE ACCOUNT OR OUR OTHER SEPARATE ACCOUNTS. GUARANTEED INTEREST DIVISION -- PART OF OUR GENERAL ACCOUNT TO WHICH A PORTION OF THE ACCOUNT VALUE MAY BE ALLOCATED AND WHICH PROVIDES GUARANTEES OF PRINCIPAL AND INTEREST. SEE THE GUARANTEED INTEREST DIVISION, PAGE 20. GUARANTEED MINIMUM DEATH BENEFIT -- THE PROVISION IN THE POLICY WHICH GUARANTEES THAT THE STATED DEATH BENEFIT WILL REMAIN IN FORCE FOR THE GUARANTEE PERIOD REGARDLESS OF THE AMOUNT OF THE NET ACCOUNT VALUE, PROVIDED CERTAIN CONDITIONS ARE MET. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 24. GUARANTEE PERIOD -- THE PERIOD DURING WHICH THE STATED DEATH BENEFIT IS GUARANTEED UNDER THE GUARANTEED - ------------------------------------------------------------------------------- Strategic Advantage 7 MINIMUM DEATH BENEFIT PROVISION. THE TWO AVAILABLE GUARANTEE PERIODS ARE (I) TO THE INSUREDS AGE 65 OR 10 YEARS FROM THE POLICY DATE, WHICHEVER IS LATER, OR (II) THE LIFETIME OF THE INSURED. THE GUARANTEE PERIOD WILL END PRIOR TO THE SELECTED DATE ANY TIME THE REQUIRED PREMIUMS HAVE NOT BEEN PAID OR ON ANY MONTHLY PROCESSING DATE THAT THE NET ACCOUNT VALUE IS NOT DIVERSIFIED ACCORDING TO OUR REQUIREMENTS. SEE GUARANTEED MINIMUM DEATH BENEFIT, PAGE 24. INSURED -- THE PERSON ON WHOSE LIFE THIS POLICY IS ISSUED AND UPON WHOSE DEATH THE DEATH PROCEEDS ARE PAYABLE. INVESTMENT DATE -- THE DATE ON WHICH THE INITIAL NET PREMIUM WE RECEIVE WILL BE ALLOCATED TO THE POLICY. WE WILL NOT ALLOCATE FUNDS TO THE POLICY UNTIL WE RECEIVE AT LEAST ONE QUARTER OF THE MINIMUM ANNUAL PREMIUM AS SHOWN IN THE SCHEDULE ATTACHED TO THE POLICY AND WE HAVE APPROVED THE POLICY FOR ISSUE. LOAN DIVISION -- PART OF OUR GENERAL ACCOUNT IN WHICH FUNDS ARE SET ASIDE TO SECURE ANY OUTSTANDING POLICY LOAN AND ACCRUED LOAN INTEREST WHEN DUE. MATURITY DATE -- THE DATE THE POLICY MATURES. THIS IS THE POLICY ANNIVERSARY ON WHICH THE INSURED'S AGE IS NEAREST 100. MINIMUM ANNUAL PREMIUM -- TWENTY-FIVE PERCENT OF THIS PREMIUM MUST BE PAID BEFORE WE WILL ISSUE THE POLICY. IF ON EACH MONTHLY PROCESSING DATE DURING THE FIRST THREE POLICY YEARS, THE SUM OF PREMIUMS PAID, LESS THE SUM OF PARTIAL WITHDRAWALS AND POLICY LOAN TAKEN AND ACCRUED LOAN INTEREST, IS GREATER THAN OR EQUAL TO ONE TWELFTH OF THE MINIMUM ANNUAL PREMIUM TIMES THE NUMBER OF COMPLETED POLICY MONTHS, THE POLICY IS GUARANTEED NOT TO LAPSE, REGARDLESS OF ITS NET ACCOUNT VALUE. SEE MINIMUM ANNUAL PREMIUM, PAGE 21. MONTHLY PROCESSING DATE -- THE DATE EACH MONTH ON WHICH THE MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE ARE DUE. THE FIRST MONTHLY PROCESSING DATE WILL BE THE POLICY DATE OR THE INVESTMENT DATE, IF LATER. SUBSEQUENT MONTHLY PROCESSING DATES WILL BE THE SAME DATE AS THE POLICY DATE EACH MONTH THEREAFTER UNLESS THIS IS NOT A VALUATION DATE, IN WHICH CASE THE MONTHLY PROCESSING DATE OCCURS ON THE NEXT VALUATION DATE. NASD -- THE NATIONAL ASSOCIATION OF SECURITIES DEALERS, INC. NET ACCOUNT VALUE -- THE AMOUNT OF THE ACCOUNT VALUE MINUS ANY POLICY LOAN AND ACCRUED LOAN INTEREST. NET AMOUNT AT RISK -- THE DIFFERENCE BETWEEN THE CURRENT BASE DEATH BENEFIT AND THE AMOUNT OF THE ACCOUNT VALUE. NET CASH SURRENDER VALUE -- THE AMOUNT AVAILABLE IF THE POLICY IS SURRENDERED, WHICH IS EQUAL TO THE CASH SURRENDER VALUE MINUS ANY POLICY LOAN AND ACCRUED LOAN INTEREST. NET PREMIUM -- PREMIUM AMOUNTS PAID LESS THE SALES AND TAX CHARGES. THESE CHARGES ARE DEDUCTED FROM THE PREMIUMS BEFORE THE PREMIUM IS APPLIED TO THE ACCOUNT VALUE. OWNER -- THE INDIVIDUAL, ENTITY, PARTNERSHIP, REPRESENTATIVE OR PARTY WHO CAN EXERCISE ALL RIGHTS OVER AND RECEIVE THE BENEFITS OF THE POLICY DURING THE INSURED'S LIFETIME. PARTIAL WITHDRAWAL -- THE WITHDRAWAL OF A PORTION OF THE NET CASH SURRENDER VALUE FROM THE POLICY. THE PARTIAL WITHDRAWAL MAY REDUCE THE AMOUNT OF BASE DEATH BENEFIT AND TARGET DEATH BENEFIT IN FORCE. SEE PARTIAL WITHDRAWALS, PAGE 32. POLICY -- THE POLICY CONSISTING OF THE BASIC POLICY, ANY APPLICATIONS AND ANY RIDERS OR ENDORSEMENTS. POLICY LOAN -- THE SUM OF AMOUNTS BORROWED FROM THE POLICY, INCREASED BY ANY POLICY LOAN INTEREST CAPITALIZED WHEN DUE, AND REDUCED BY ANY POLICY LOAN REPAYMENTS. POLICY DATE -- THE DATE UPON WHICH THE POLICY BECOMES EFFECTIVE. THE POLICY DATE IS USED TO DETERMINE THE MONTHLY PROCESSING DATE, POLICY MONTHS, POLICY YEARS, AND POLICY MONTHLY, QUARTERLY, SEMI-ANNUAL AND ANNUAL ANNIVERSARIES. UNLESS OTHERWISE INDICATED, THE TERM "POLICY ANNIVERSARY" REFERS TO THE ANNUAL ANNIVERSARY OF THE POLICY. PORTFOLIOS -- THE INVESTMENT OPTIONS AVAILABLE TO THE DIVISIONS OF THE VARIABLE ACCOUNT. EACH PORTFOLIO HAS A DEFINED INVESTMENT OBJECTIVE. PREMIUM CLASS -- THE UNDERWRITING CLASS INTO WHICH THE INSURED IS CATEGORIZED. THIS INCLUDES FACTORS SUCH AS THE SMOKING STATUS OF THE INSURED, THE APPROACH TO MEDICAL EXAMINATIONS WE MAY USE IN ISSUING THE POLICY, AS WELL AS ANY SUBSTANDARD RATINGS WHICH MAY APPLY. THE PREMIUM CLASS FOR THE POLICY IS LISTED IN THE SCHEDULE. RIDER -- A RIDER ADDS BENEFITS TO THE POLICY. SCHEDULE -- THE PAGES CONTAINED IN ATTACHED TO THE POLICY WHICH INCLUDE THE INFORMATION SPECIFIC TO THE POLICY, SUCH AS THE INSUREDS AGE, THE POLICY DATE, ETC. - -------------------------------------------------------------------------------- Strategic Advantage 8 SCHEDULED PREMIUM -- THE PREMIUM AMOUNT SPECIFIED BY THE OWNER ON THE APPLICATION AS THE AMOUNT WHICH IS INTENDED TO BE PAID AT FIXED INTERVALS OVER A SPECIFIED PERIOD OF TIME. WE WILL SEND PREMIUM REMINDER NOTICES FOR THE AMOUNT OF THE SCHEDULED PREMIUM ON A QUARTERLY, SEMIANNUAL, OR ANNUAL BASIS, AS SPECIFIED; THE SCHEDULED PREMIUM NEED NOT BE PAID, AND IT MAY BE CHANGED AT ANY TIME. ALSO, WITHIN LIMITS, THE OWNER MAY PAY LESS OR MORE THAN THE SCHEDULED PREMIUM. SEE SCHEDULED PREMIUMS, PAGE 21. SEC -- THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. STATED DEATH BENEFIT -- THE INITIAL AMOUNT OF BASE DEATH BENEFIT UNDER THE POLICY. THE STATED DEATH BENEFIT AMOUNT WILL NOT VARY UNLESS THE OWNER CHANGES IT. TARGET DEATH BENEFIT -- WHEN ADJUSTABLE TERM INSURANCE RIDER IS ADDED TO THE POLICY, THE OWNER SPECIFIES THE TARGET DEATH BENEFIT AND STATED DEATH BENEFIT IN THE APPLICATION FOR THE POLICY; THE ADJUSTABLE TERM INSURANCE RIDER DEATH BENEFIT IS THE DIFFERENCE BETWEEN THE TARGET DEATH BENEFIT AND THE BASE DEATH BENEFIT PROVIDED BY THE POLICY. IN NO EVENT WILL THE ADJUSTABLE TERM INSURANCE RIDER DEATH BENEFIT BE LESS THAN ZERO. THE ADJUSTABLE TERM INSURANCE RIDER AUTOMATICALLY ADJUSTS OVER TIME FOR CHANGES IN THE BASE DEATH BENEFIT DUE TO THE FEDERAL INCOME TAX LAW DEFINITION OF LIFE INSURANCE TO KEEP THE TARGET DEATH BENEFIT AT THE DESIRED AMOUNT. THE TARGET DEATH BENEFIT FOR EACH YEAR WILL BE SHOWN IN THE SCHEDULE WHEN AN ADJUSTABLE TERM INSURANCE RIDER EXISTS ON THE POLICY. TARGET PREMIUM -- THE PREMIUM ON WHICH THE SALES CHARGE IS CALCULATED. SEE SALES CHARGES, PAGE 34. TRANSACTION DATE -- THE DATE WE RECEIVE A PREMIUM OR AN ACCEPTABLE WRITTEN OR TELEPHONE REQUEST AT OUR CUSTOMER SERVICE CENTER. IF A PREMIUM OR REQUEST REACHES OUR CUSTOMER SERVICE CENTER ON A DAY WHICH IS NOT A VALUATION DATE, OR AFTER THE CLOSE OF BUSINESS ON A VALUATION DATE (THAT IS, AFTER 4:00 P.M. EASTERN TIME), THE TRANSACTION DATE WILL BE THE NEXT SUCCEEDING VALUATION DATE. VALUATION DATE -- EACH DATE AS OF WHICH THE NET ASSET VALUE OF THE SHARES OF THE PORTFOLIOS AND UNIT VALUES OF THE DIVISIONS ARE DETERMINED. VALUATION DATES CURRENTLY OCCUR ON EACH DAY ON WHICH THE NEW YORK STOCK EXCHANGE AND SECURITY LIFE'S CUSTOMER SERVICE CENTER ARE OPEN FOR BUSINESS, EXCEPT FOR DAYS THAT A DIVISION'S CORRESPONDING PORTFOLIO DOES NOT VALUE ITS SHARES. VALUATION PERIOD -- THE PERIOD WHICH BEGINS AT 4:00 P.M. EASTERN TIME ON A VALUATION DATE AND ENDS AT 4:00 P.M. EASTERN TIME ON THE NEXT SUCCEEDING VALUATION DATE. VARIABLE ACCOUNT -- SECURITY LIFE SEPARATE ACCOUNT L1 ESTABLISHED BY SECURITY LIFE TO SEGREGATE THE ASSETS FUNDING THE POLICY FROM THE ASSETS IN OUR GENERAL ACCOUNT. THE VARIABLE ACCOUNT IS DIVIDED INTO DIVISIONS, EACH OF WHICH INVESTS IN SHARES OF ONE OF THE PORTFOLIOS. - -------------------------------------------------------------------------------- Strategic Advantage 9 POLICY SUMMARY THE PURPOSE OF THIS POLICY SUMMARY IS TO PROVIDE A BRIEF OVERVIEW OF THE POLICY. FURTHER DETAIL IS PROVIDED IN THE POLICY AND IN THE DETAILED INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS. THE DISCUSSION IN THIS PROSPECTUS ASSUMES THAT ANY STATE VARIATION WILL BE COVERED IN A SPECIAL PROSPECTUS SUPPLEMENT OR IN THE FORM OF POLICY APPROVED IN THAT STATE, AS APPROPRIATE. THE TERMS UNDER WHICH THE POLICIES ARE ISSUED MAY ALSO VARY FROM THOSE DESCRIBED IN THIS PROSPECTUS BASED ON PARTICULAR CIRCUMSTANCES. THE DESCRIPTION OF THE POLICIES IN THIS PROSPECTUS IS SUBJECT TO THE TERMS OF THE POLICY PURCHASED BY AN OWNER OR ANY RIDER TO IT. AN APPLICANT MAY REVIEW A COPY OF THE POLICY AND ANY RIDER TO IT ON REQUEST. GENERAL INFORMATION The Policy provides life insurance protection on the life of the Insured. So long as the Policy remains in force, we will pay a death benefit when the Insured dies. We will pay a maturity benefit in lieu of a death benefit when the Policy reaches the Maturity Date during the lifetime of the Insured. Strategic Advantage is designed primarily for use on a multi-life basis where the Insureds share a common employment or business relationship. The Policy may be owned individually or by a corporation, trust, association or similar entity. The Policy may be used for such purposes as informally funding non-qualified executive deferred compensation or salary continuation plans, retiree medical benefits, or other purposes. DEATH BENEFITS We will pay the Death Proceeds to the Beneficiary upon the death of the Insured while the Policy remains in force. The Death Proceeds will be equal to the Base Death Benefit plus any amounts payable from any additional benefits provided by Rider, reduced by the amount of any outstanding Policy Loan and any accrued loan interest. See Death Benefits, page 23. If the Policy is in the grace period, the Death Proceeds will be paid but will be further reduced by any Policy charges incurred but not deducted. The Death Proceeds may be paid in one sum or under a variety of settlement options. See Settlement Provisions, page 48. When we issue the Policy, the death benefit is equal to the Base Stated Death Benefit applied for plus any amount added by Adjustable Term Insurance Rider. The minimum Stated Death Benefit for which we will issue a Policy is $50,000; however, we may lower the minimum Stated Death Benefit for certain group or sponsored arrangements. The Base Death Benefit may vary from the Stated Death Benefit as a result of choice operation of a death benefit option, increases to keep the Base Death Benefit in compliance with the FederalFederal income tax law definition of life insurance, changes in the death benefit option, or increases and decreases requested by the Owner. The Owner may choose from three death benefit options, which may affect the amount of the Base Death Benefit. See Death Benefit Options, page 23. The total Stated Death Benefit is the sum of the Stated Death Benefits for all coverage segments. The three death benefit options are: Option 1: The Base Death Benefit equals the total Stated Death Benefit. Option 2: The Base Death Benefit equals the total Stated Death Benefit plus the Account Value. Under this option, the Base Death Benefit fluctuates daily with the amount of the Account Value, but will never be less than the Stated Death Benefit. Option 3: The Base Death Benefit equals the total Stated Death Benefit plus the sum of premiums paid minus Partial Withdrawals taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. The Owner may request a change to the death benefit option on any Policy anniversary. We may require evidence of insurability according to our normal rules of underwriting for this type of Policy for a change in death benefit option. See Changes In Death Benefit Option, page 23. The Adjustable Term Insurance Rider is available to provide term insurance coverage which adjusts automatically over time to fill the difference between the Target Death Benefit chosen and the Base Death Benefit (which may change as often as daily). The Adjustable Term Insurance Rider has no externally defined premium; instead, a cost of insurance charge is deducted monthly from the Account Value for the Adjustable Term - ------------------------------------------------------------------------------- Strategic Advantage 10 Insurance Rider amount in effect. See Adjustable Term Insurance Rider, page 26. Generally, the Policy will remain in force only as long as the Net Account Value is sufficient to pay all the monthly deductions. However, if the Guarantee Period is in effect or the premiums paid meet the Minimum Annual Premium requirement during the first three Policy years, the Stated Death Benefit of the Policy will remain in force even if the Net Account Value is not sufficient to pay the monthly deductions. The Adjustable Term Insurance Rider, any other Riders, and any amount by which the Base Death Benefit exceeds the Stated Death Benefit is not guaranteed to remain in force during the Guarantee Period. See Guaranteed Minimum Death Benefit, page 24. At least 30 days prior to a Policy anniversary, the Owner may request that the insurance coverage be increased or decreased. Increases in the death benefit are not allowed after the Insureds Age 85. The death benefit may be changed only once each Policy year on the Policy anniversary. The change in coverage may not be for an amount less than $1,000. We may require evidence of insurability according to our normal rules of underwriting for this type of Policy for an increase to the Stated or Target Death Benefit. The Stated Death Benefit may be decreased if the effective date of the decrease will occur after the later of two years from the Policy Date or two years after the prior increase is made. Decreases in the death benefit may not decrease the Stated Death Benefit below the minimum we require to issue this Policy. Unless otherwise indicated, any request for an increase to the Target Death Benefit will be assumed to also be a request for an increase to the Stated Death Benefit so that the amount of the Adjustable Term Insurance Rider at the time of the increase will not change. In some cases, we may not approve a change if it would disqualify the Policy as life insurance under applicable Federal income tax law. See Life Insurance Definition, page 40, and Changes In Death Benefit Option, page 23. BENEFITS AT MATURITY If the Insured is still living on the Maturity Date, we will pay the Net Account Value. The Policy will then end. See Benefits at Maturity, page 26. ADDITIONAL BENEFITS Additional benefits may be included with the Policy, and are attached to the Policy by Rider. The charge for these additional benefits is deducted monthly from the Account Value. We offer a variety of additional benefits. See Additional Benefits, page 26. PREMIUMS The Policy is a flexible premium Policy, so the amount and frequency of premium payments may vary, within limits. Other than the Minimum Annual Premium, 25% of which must be paid in order for coverage to begin, and any payments required to keep the Policy in force, there are no required premium payments. The Scheduled Premium is selected by the Owner, within our limits, when application for the Policy is made. It is the amount for which premium reminder notices will be sent. The Scheduled Premium may not necessarily be sufficient to maintain the Guarantee Period for one of the Guaranteed Minimum Death Benefit provisions or keep the Policy in force. Premium reminder notices for the Scheduled Premiums will be sent on an annual, semi-annual, or quarterly basis. Monthly payments may be made by Electronic Funds Transferautomatic withdrawal from a checking account. The financial institution making the Electronic Funds Transfers may impose a charge for this service. See Premiums, page 21. When applying for the Policy, the Owner will irrevocably choose which of two tests for compliance with the Federal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. These tests may limit the amount of premiums that may be paid. See Choice of Definitional Tests, page 22, and Life Insurance Definition, page 40. The Owner may also choose to purchase one of two Guaranteed Minimum Death Benefit provisions. These provide a guarantee that the Stated Death Benefit will remain in force for the Guarantee Period regardless of the amount of the Policys Net Account Value. The provision allows a choice of the Guarantee Period: a) ten-year or to the Insureds Age 65, whichever is later, or b) lifetime. Premium levels higher than the Minimum Annual Premium will be required if one of the Guaranteed Minimum Death Benefit provisions is chosen. An extra charge will be deducted from the Account Value each month the Guaranteed Minimum Death Benefit is in effect. In addition on all Monthly Processing Dates during the Guarantee Period, the Net Account Value must remain diversified according to our requirements. See Changes In Death Benefit Option, page 23. We will notify the Policy Owner if the Scheduled Premium would cause the Policy to immediately be a Modified Endowment Contract under Federal income tax law. See Modified Endowment Contracts, page 22. - ------------------------------------------------------------------------------- Strategic Advantage 11 Generally, unscheduled premium payments may be made at any time so long as each payment is at least $100. We reserve the right to limit unscheduled premiums if the payment would result in an increase in the amount of Base Death Benefit required by the Federal income tax law definition of life insurance. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment received before the Maturity Date is considered a loan repayment, unless otherwise indicated. See Unscheduled Premium Payments, page 21. Since this is a flexible premium life insurance Policy, the amount of premiums paid will affect the length of time the Policy will stay in force. See Premium Payments Affect The Continuation of Coverage, page 22. ALLOCATION OF NET PREMIUMS After certain premium-based charges are deducted from each premium, the balance, called the Net Premium, is added to the Account Value based on the premium allocation instructions. Net Premiums may be allocated to one or more of the Divisions of the Variable Account, or to the Guaranteed Interest Division, or both. Amounts allocated to the Divisions of the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio until the end of the Free Look Period. At the end of the Free Look Period, this portion of the Account Value will be reallocated according to the most recent premium allocation instructions. Net Premiums received after the Free-Look Period will be allocated upon receipt according to the most recent written premium allocation instructions. Allocation percentages must be in whole numbers, with the sum equaling 100%. See Allocation of Net Premiums, page 22. POLICY VALUES The Policy Account Value is equal to the sum of the amounts in the Guaranteed Interest Division and in the Divisions of the Variable Account. It also includes any amount we set aside in the Loan Division as collateral for any outstanding Policy Loan. The Account Value reflects Net Premiums paid, as well as deductions for charges. It will also reflect the investment experience of amounts allocated to the Divisions of the Variable Account, and interest earned on amounts allocated to the Guaranteed Interest Division and the Loan Division. Any Partial Withdrawal, and any service fee, will be deducted from the Account Value. The Cash Surrender Value of the Policy is equal to the Account Value plus any refund of sales charges due. The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of any outstanding Policy Loan and accrued loan interest. The Net Account Value of the Policy is equal to the Account Value less the amount of any outstanding Policy Loan and accrued loan interest. DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT The amounts included in the Divisions of the Variable Account are measured in terms of Accumulation Units and Accumulation Unit Values. On any given day, the value of the amount in a Division of the Variable Account is equal to the Accumulation Unit Value times the number of Accumulation Units credited in that Division. The Accumulation Units of each Division of the Variable Account will have different Accumulation Unit Values. See Determining the Value of Amounts in the Divisions of the Variable Account, page 28. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine Accumulation Unit Values for each Division of the Variable Account as of each Valuation Date. All Policy transactions are effective as of a Valuation Date. The Accumulation Unit Value of each Division reflects the investment experience of the underlying Portfolio for the Valuation Period as well as asset based charges deducted in connection with the Policy and the expenses of the Portfolio. See How We Calculate Accumulation Unit Values for Each Division. page 28. TRANSFERS OF ACCOUNT VALUES After the Free-Look Period, up to 12 transfers among Divisions of the Variable Account or to the Guaranteed Interest Division may be made in each Policy year without charge. There will be a $25 charge for each transfer over 12 in a Policy year. Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging are not included in determining the limit on transfers without a charge. The minimum amount we will transfer is $100. Once during the first 30 days of each Policy year, transfers may be made from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the - ------------------------------------------------------------------------------- Strategic Advantage 12 Policy anniversary or within the following 30 days will be processed. Transfer requests received at any other time will not be processed. Transfers of the Account Value to the Guaranteed Interest Division are not limited to this 30-day period. Transfer amounts from the Guaranteed Interest Division to the Divisions of the Variable Account are limited to the greatest of (i) 25% of the balance in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year, (ii) the sum of any amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year, or, (iii) $100. See Transfers of Account Values, page 29. DOLLAR COST AVERAGING Dollar Cost Averaging is available by electing this feature on the application, by completing the appropriate form or by telephone, if the proper telephone authorization form is on file with us. We offer Dollar Cost Averaging to Owners who have at least $10,000 either in the Division investing in the Fidelity VIP Investments Money Market Portfolio Division or the Division investing in the Neuberger & Berman AMT Limited Maturity Bond Portfolio Division of the Variable Account. With Dollar Cost Averaging, a designated dollar amount of Account Value in the selected Division will be transferred automatically as of each Monthly Processing Date to one or more other Divisions of the Variable Account. The monthly transfer under Dollar Cost Averaging may be no less than $100 per month. Dollar Cost Averaging may also be used to meet the diversification requirements of the Guaranteed Minimum Death Benefit provisions. There is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will occur first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. See Dollar Cost Averaging, page 29. AUTOMATIC REBALANCING Automatic Rebalancing is available by electing this feature on the application, by completing the appropriate form or by telephoning us, if the proper telephone authorization form is on file with us. Automatic Rebalancing allows the Owner to match Account Value allocations over time to the premium allocation percentages. As of the first Valuation Date of each calendar quarter, we will automatically rebalance the amounts in the Divisions to match the current premium allocation percentages according to the most recent instructions. This will rebalance the Account Values that may be out of line with those allocation percentages, which may result, for example, from Divisions which underperform other Divisions in certain quarters. With Automatic Rebalancing, Account Values may be reallocated among any number of Divisions, and those allocations may, within certain limits, be changed at any time. Automatic Rebalancing may also be used to simplify the process of meeting the diversification requirements of the Guaranteed Minimum Death Benefit provisions. Any transfers as a result of the operation of the Automatic Rebalancing feature are not counted toward the limit of 12 transfers than can be made each Policy year without a transfer charge. However, we will charge a fee of $25 each time premium allocation is changed more often than five times per Policy year; otherwise, there is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will occur first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. See Automatic Rebalancing, page 30. LOANS Loans may be taken against the Policys Account Value as of the Valuation Date the loan request is processed. The loan must be at least $100. Loan interest accrues at an annualized rate of 3.75%. An amount equal to the Policy Loan is withdrawn from the Divisions of the Variable Account and from the Guaranteed Interest Division and is placed in our General Account as collateral for the loan. We call this segregated amount the Loan Division. The Loan Division earns a guaranteed rate of interest equal to 3% on an annualized basis. Unless otherwise indicated, we will assume that any payments, other than Scheduled Premiums, constitute Policy Loan repayments and not premiums. See Policy Loans, page 31. PARTIAL WITHDRAWALS A Partial Withdrawal of a portion of the Net Account Value may be requested any time after the first Policy year, within limits. One Partial Withdrawal is allowed each Policy year. The minimum Partial Withdrawal is $100; the maximum Partial Withdrawal is the amount which will leave $500 - ------------------------------------------------------------------------------- Strategic Advantage 13 as the Net Account Value. We will process only the amount of the Partial Withdrawal request which will leave $500 as the Net Account Value. If more than this maximum is requested, we will require a full surrender of the Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the Account Value. Depending on the amount of the withdrawal, the Death Proceeds payable under the Policy may also be reduced. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after the Partial Withdrawal would be less than the minimum we require to issue this Policy at the time of the reduction. See Partial Withdrawals, page 32. SURRENDER The Policy may be surrendered for its Net Cash Surrender Value at any time while the Insured is living. The Net Cash Surrender Value of the Policy equals the Cash Surrender Value minus any Policy Loan and accrued loan interest. We will compute the Net Cash Surrender Value as of the Valuation Date we receive the request for surrender and the Policy at our Customer Service Center, and all insurance coverage will end on that date. See Surrender, page 33. RIGHT TO EXCHANGE POLICY At any time during the first 24 months following the Policy Date or a requested increase to the Stated Death Benefit, the Owner may exercise the right to exchange the Policy from one in which the Account Value is not guaranteed into a guaranteed Policy. This is accomplished by the transfer of the entire amount in the Divisions of the Variable Account to the Guaranteed Interest Division, the allocation of all future premium payments to the Guaranteed Interest Division and the removal of the right to allocate future amounts to the Variable Account. See Right to Exchange Policy, page 33. LAPSE The Policy will generally remain in force only as long as the Net Account Value is sufficient to pay all the deductions which are taken from the Account Value each month. However, during the first three Policy years, if on each Monthly Processing Date the sum of premiums paid, less the sum of Partial Withdrawals, any outstanding Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, then the Policy and all attached Riders are guaranteed not to lapse, regardless of the Net Account Value. Also, if the Guaranteed Minimum Death Benefit provision has been elected and the Guarantee Period has not ended, the Stated Death Benefit will remain in effect regardless of the amount of the Net Account Value. Any Policy charges during the Guarantee Period which would reduce the Net Account Value below zero will be waived. The Guarantee Period will end if the Policy does not meet the monthly premium test or if on any Monthly Processing Date the Net Account Value is not diversified according to our requirements as explained under Guaranteed Minimum Death Benefit Provision, page 24. See Lapse, page 33. REINSTATEMENT A lapsed Policy and its Riders may be reinstated within five years of its lapse if it has not been surrendered for its Net Cash Surrender Value. This will require new evidence of insurability and payment of certain reinstatement premiums. We will also reinstate any Policy Loan which existed when coverage ended, with accrued loan interest to the date of lapse. See Reinstatement, page 34. CHARGES AND DEDUCTIONS Deductions From Premiums: The following charges are deducted from each premium before it is applied to the Account Value: (i) Tax Charges--A charge currently equal to 2.5% of premiums is deducted for state and local premium taxes. A charge currently equal to 1.5% of each premium is deducted to cover our estimated cost of the Federal income tax treatment of deferred acquisition costs. We reserve the right to increase or decrease the premium expense charges for taxes due to any change in tax law. We further reserve the right to increase or decrease the premium expense charge for the Federal deferred acquisition cost due to any change in the cost to us. (ii) Sales Charge--A charge equal to a percentage of each premium based on the amount of premium paid and the number of years since the Policy Date or the date of an increase in coverage is deducted to cover a portion of our expenses in issuing this Policy. For each of the first five Policy years, this charge is equal to 8% of premiums paid up to the Target Premium and 3% of premiums paid in excess of the Target Premium. In the sixth Policy year and thereafter, - ------------------------------------------------------------------------------- Strategic Advantage 14 the sales charge is equal to 3% of all premiums paid. See Deductions from Premiums, page 34 Deductions From The Variable Account: A mortality and expense risk charge is assessed against the Divisions of the Variable Account in the amount of 0.75% per annum (0.002055% per day). We assess the mortality and expense risk charge to compensate us for assuming mortality and expense risks under the Policies. See Daily Deductions from the Variable Account, page 35. Monthly Deductions From The Account Value: The following charges are deducted from the Account Value at the beginning of each Policy month: (i) Initial Policy Charge--$10 per month for the first five Policy years. (ii) Monthly Administrative Charge--$5 per month plus $0.0125 per thousand of Stated Death Benefit or Target Death Benefit if greater. This charge is limited to $20 per month. (iii) Cost of Insurance Charge--A monthly charge based on the Net Amount at Risk on the life of the Insured. The amount of this charge differs for Base Death Benefit and Adjustable Term Insurance Rider, if any, as well as for multiple base coverage segments. (iv) Charges for Additional Benefits--The cost of any additional benefits added by Rider, other than the Adjustable Term Insurance Rider. (v) Guaranteed Minimum Death Benefit Charge--currently $0.005 per thousand of the Stated Death Benefit during the Guarantee Period. This charge is guaranteed to never be greater than $.01 per thousand of the Stated Death Benefit. See Monthly Deductions from the Account Value, page 35. Policy Transaction Fees: Policy Transaction Fees are deducted from the Divisions of the Variable Account and Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the Net Account Value immediately before the transaction for which the charge is made. See Policy Transaction Fees, page 37. Charges From Portfolios: Shares of the Portfolios are purchased at net asset value, which reflects investment management and other direct expenses that have already been deducted from the assets of the Portfolio. See Charges from Portfolios, page 38. PERSISTENCY REFUND The Account Value will be credited with a Persistency Refund each Monthly Processing Date after the 10th Policy anniversary. The refund is equivalent to 0.5% of the Account Value per year, adjusted for any coverage segment in force for fewer than 10 years. See Persistency Refund, page 37. REFUND OF SALES CHARGES If the Policy has not lapsed, we will, upon full surrender of the Policy within the first 2 Policy years, return a portion of the sales charges previously deducted from premiums paid. See Refund of Sales Charges, page 38. TAX CONSIDERATIONS Under current Federal income tax law, death benefits of life insurance policies are not subject to income tax. In order for this treatment of the death benefit to apply, the Policy must qualify as a life insurance contract. The tax code provides for two tests to qualify a Policy as a life insurance contract. The Owner irrevocably selects which of these tests we will apply to the Policy in the application. After the Policy Date, the Policy will reflect the test chosen. See Life Insurance Definition, page 40. Generally, under current Federal income tax law, Account Value earnings are not subject to income tax as long as they remain within the Policy. Loans, Partial Withdrawals, surrender, lapse or an exchange of Insured may result in recognition of ordinary income for tax purposes and may result in penalties if the Policy is considered a Modified Endowment Contract as explained in Modified Endowment Contracts, page 41. - ------------------------------------------------------------------------------- Strategic Advantage 15 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION SECURITY LIFE OF DENVER INSURANCE COMPANY Security Life of Denver Insurance Company ("Security Life") is a stock life insurance company organized under the laws of the State of Colorado in 1929. Our headquarters are located at 1290 Broadway, Denver, Colorado 80203-5699. We are admitted to do business in the District of Columbia and all states except New York. As of the end of 1995, Security Life and its consolidated subsidiaries had over $109 billion of life insurance in force. Our total assets exceeded $6 billion and our shareholders equity exceeded $746 million, on a generally accepted accounting principles basis as of December 31, 1995. We offer a complete line of life insurance and retirement products, including annuities, individual and group life, and pension products, and market life reinsurance. Security Life actively manages its General Account investment portfolio to meet both long-term and short-term contractual obligations. The General Account portfolio invests primarily in investment-grade bonds and low-risk policy loans. Security Life is a wholly-owned indirect subsidiary of ING Groep, N.V. ("ING"), one of the worlds three largest diversified financial services organizations. ING is headquartered in Amsterdam, Netherlands, and has consolidated assets exceeding $247 billion on a Dutch (modified U.S.) generally accepted accounting principles basis as of December 31, 1995. The principal underwriter and distributor for the Policies is ING America Equities, Inc. ("ING America Equities"), a wholly owned subsidiary of Security Life. ING America Equities, Inc., is registered as a broker-dealer with the SEC and is a member of the NASD. The current address for ING America Equities is 1290 Broadway, Denver, Colorado, 80203-5699. SECURITY LIFE SEPARATE ACCOUNT L1 Security Life Separate Account L1 (the "Variable Account"), established on November 3, 1993, under the Insurance Law of the State of Colorado, is a unit investment trust registered with the SEC under the Investment Company Act of 1940. Such registration does not involve any supervision by the SEC of the management of the Variable Account or Security Life. The Variable Account is a separate investment account of Security Life used to support our variable life insurance policies and for other purposes as permitted by applicable laws and regulations. The assets of the Variable Account are kept separate from our General Account and any other separate accounts we may have. We may offer other variable life insurance contracts that will invest in the Variable Account which are not discussed in this prospectus. The Variable Account may also invest in other securities which are not available to the Policy described in this prospectus. We own all the assets in the Variable Account. Income and realized and unrealized gains or losses from assets in the Variable Account are credited to or charged against the Variable Account without regard to other income, gains or losses in our other investment accounts. That portion of the assets of the Variable Account which is equal to the reserves and other Policy liabilities with respect to the Variable Account is not chargeable with liabilities arising out of any other business we conduct. The Variable Account may, however, be subject to liabilities arising from Divisions of the Variable Account whose assets are attributable to other variable life policies offered by the Variable Account. If the assets exceed the required reserves and other policy liabilities, we may transfer the excess to our General Account. Before making any such transfer, Security Life will consider any possible adverse effect the transfer might have on the Variable Account. The Variable Account has several Divisions, each of which invests in shares of a corresponding Portfolio of a mutual fund. Therefore, the investment experience of a Policy depends on the experience of the Portfolios designated. For example, the Neuberger and Berman Limited Maturity Bond Division invests solely in shares of the Neuberger and Berman Advisers Management Trust Limited Maturity Bond Portfolio. These Portfolios are available only to serve as the underlying investment for variable annuity and variable life insurance contracts issued through separate accounts of Security Life as well as other life insurance companies and may be available to certain pension accounts. They are not available directly to individual investors. - ------------------------------------------------------------------------------- Strategic Advantage 16 Each of the Portfolios is a separate series of an open-end management investment company which receives investment advice from a registered investment adviser not otherwise affiliated with Security Life. The Neuberger & Berman Advisers Management Trust has organized its Portfolio to a master feeder structure. See the prospectus for the Neuberger & Berman Advisers Management Trust for more details. The Portfolios as well as their investment objectives are described below. Shares of these Portfolios are sold to separate accounts of insurance companies, which may or may not be affiliated with Security Life or each other, a practice known as "shared funding." They may also sell shares to separate accounts to serve as the underlying investment for both variable annuity contracts and variable life insurance policies, known as "mixed funding." As a result, there is a possibility that a material conflict may arise between the interests of Owners of Policies in which Account Values are allocated to the Variable Account and of owners of policies in which account values are allocated to one or more other separate accounts investing in any one of the Portfolios. Shares of these Portfolios may also be sold to certain qualified pension and retirement plans qualifying under Section 401 of the Code that include cash or deferred arrangements under Section 401(k) of the Code. As a result, there is a possibility that a material conflict may arise between the interests of owners generally, or certain classes of owners, and such retirement plans or participants in such retirement plans. In the event of a material conflict, Security Life will consider what action may be appropriate, including removing the Portfolio from the Variable Account. There are certain risks associated with mixed and shared funding and with the sale of shares to qualified pension and retirement plans, as disclosed in each Portfolios prospectus. INVESTMENT OBJECTIVES OF THE PORTFOLIOS Each Portfolio has a different investment objective that it tries to achieve by following its investment strategy. The objectives and policies of each Portfolio will affect its return and its risks. A summary of the investment objectives is contained in the description of each Portfolio below. More detailed information may be found in the current prospectus for each Portfolio. A prospectus for the Portfolios being considered must accompany this prospectus and should be read in conjunction with this prospectus. NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST The Neuberger & Berman Advisers Management Trust (the "Trust") is a registered, open-end management investment company organized as a Delaware business trust pursuant to a Trust Instrument dated May 23, 1994. The Trust is comprised of separate Portfolios, each of which invests all of its net investable assets in a corresponding series of Advisers Managers Trust ("Managers Trust"), a diversified, open-end management investment company organized as of May 24, 1994 as a New York common law trust. This master feeder structure is different from that of many other investment companies which directly acquire and manage their own portfolios of securities. Neuberger & Berman Management Incorporated acts as investment manager to Managers Trust and Neuberger & Berman, L.P. as sub-adviser. Limited Maturity Bond Portfolio--seeks the highest level of current income consistent with low risk to principal and liquidity. As a secondary objective, it also seeks to enhance its total return. The Limited Maturity Bond Portfolio pursues its investment objectives primarily by investing in a diversified portfolio of short-to-intermediate term U.S. Government and Agency securities and debt securities issued by financial institutions, corporations and others, primarily of investment grade. The Limited Maturity Bond Portfolio may invest up to 10% of its net assets, measured at the time of investment, in debt securities rated below investment grade or in comparable unrated securities. The Limited Maturity Bond Portfolio's dollar weighted average portfolio duration may range up to five years. Government Income Portfolio--seeks a high level of current income and total return, consistent with safety of principal. The Portfolio invests at least 65% of its total assets in U.S. Government and Agency securities with an emphasis on U.S. Government mortgage-backed securities. In addition, the Portfolio invests at least 25% of its total assets in mortgage-backed securities (including U.S. Government mortgage-backed securities) and asset-backed securities. The investment manager follows a flexible investment strategy depending on market conditions and interest rate trends. Growth Portfolio--seeks capital appreciation without regard to income. Invests in securities believed to have maximum potential for long-term capital appreciation. To maximize this potential, securities convertible into common stocks and warrants and options to purchase stocks may be utilized. This investment program involves greater risks and share price volatility than - ------------------------------------------------------------------------------- Strategic Advantage 17 programs that invest in more conservative securities. Partners Portfolio--seeks capital growth through a conservative investment approach that is designed to increase capital with reasonable risk. Its investment program seeks securities believed to be undervalued based on strong fundamentals such as low price-to-earnings ratio, consistent cash flow, and support from asset values. Up to 15% of the series net assets, measured at the time of investment, may be invested in corporate debt securities rated below investment grade. THE ALGER AMERICAN FUND The Alger American Fund is a registered investment company organized on April 6, 1988, as a multi-series Massachusetts business trust. The Fund's investment manager is Fred Alger Management, Inc., which has been in the business of providing investment advisory services since 1964. Alger American Small Capitalization Portfolio--seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies that, at the time of purchase of the securities, have "total market capitalization" - present market value per share multiplied by the number of shares outstanding - within the range of companies included in the Russell 2000 Growth Index, updated quarterly. The Russell 2000 Growth Index is designed to track the performance of small capitalization companies. As of December 31, 1995, the range of market capitalization of these companies was $20 million to $2.2 billion. Alger American MidCap Growth Portfolio--seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies that, at the time of purchase of the securities, have total market capitalization within the range of companies included in the S&P MidCap 400 Index, updated quarterly. The S&P MidCap 400 Index is designed to track the performance of medium capitalization companies. As of December 31, 1995, the range of market capitalization of these companies was $118 million to $7.5 billion. Alger American Growth Portfolio--seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities, primarily of companies with a total market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio--seeks long-term capital appreciation by investing in a diversified, actively managed portfolio of equity securities. The Portfolio may engage in leveraging (up to 33 1/3% of its assets) and options and futures transactions, which are deemed to be speculative and which may cause the Portfolios net asset value to be more volatile than the net asset value of a fund that does not engage in these activities. FIDELITY VARIABLE INSURANCE PRODUCTS FUND AND VARIABLE INSURANCE PRODUCTS FUND II Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II are open-end, diversified, management investment companies organized as Massachusetts business trusts on November 13, 1981 and March 21, 1988, respectively. The funds are managed by Fidelity Management & Research Company ("FMR") which handles the Fund's business affairs. FMR is the management arm of Fidelity Investments, which was established in 1946 and is now America's largest mutual fund manager. VIP Growth Portfolio--seeks capital appreciation by investing in common stocks, although the Portfolio is not limited to any one type of security. VIP Overseas Portfolio--seeks long term growth of capital primarily through investments in foreign securities. The Overseas Portfolio provides a means for investors to diversify their own portfolios by participating in companies and economies outside of the United States. VIP Money Market Portfolio--seeks as high a level of current income as is consistent with preserving capital and providing liquidity. The Portfolio will invest only in high quality U.S. dollar-denominated money market securities of domestic and foreign issuers. VIP II Asset Manager Portfolio--seeks high total return with reduced risk over the long-term by allocating its assets among domestic and foreign stocks, bonds, and short-term fixed-income instruments. VIP II Index 500 Portfolio--seeks to provide investment results that correspond to the total return (i.e., the combination of capital changes and income) of common stocks publicly traded in the United States. In seeking this objective, the Portfolio attempts to duplicate the composition and total return of the Standard & Poors Composite - ------------------------------------------------------------------------------- Strategic Advantage 18 Index of 500 Stocks while keeping transaction costs and other expenses low. The Portfolio is designed as a long-term investment option. INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO Variable Investment Funds, Inc. is a registered, open-end management investment company that was organized as a Maryland corporation on August 19, 1993, and is currently comprised of four diversified investment Portfolios, described below. INVESCO Funds Group, Inc., the Fund's investment adviser, is primarily responsible for providing the Portfolios with various administrative services and supervising the Funds daily business affairs. Portfolio management is provided to each Portfolio by its sub-adviser. INVESCO Trust Company serves as sub-adviser to the Industrial Income, High Yield and Utilities Portfolios. INVESCO Capital Management, Inc. serves as sub-adviser to the Total Return Portfolio. INVESCO VIF Total Return Portfolio--seeks a high total return on investment through capital appreciation and current income. The Total Return Portfolio seeks to achieve its investment objective by investing in a combination of equity securities (consisting of common stocks and, to a lesser degree, securities convertible into common stock) and fixed income securities. INVESCO VIF Industrial Income Portfolio--seeks the best possible current income while following sound investment practices. Capital growth potential is an additional, but secondary, consideration in the selection of portfolio securities. The Industrial Income Portfolio seeks to achieve its investment objective by investing in securities which will provide a relatively high yield and stable return and which, over a period of years, also may provide capital appreciation. INVESCO VIF High Yield Portfolio--seeks a high level of current income by investing substantially all of its assets in lower rated bonds and other debt securities and in preferred stock. Under normal circumstances, at least 65% of the Portfolios total assets will be invested in debt securities having maturities at the time of issuance of at least three years. Potential capital appreciation is a factor in the selection of investments, but is secondary to the Portfolio's primary objective. This Portfolio may not be appropriate for all Owners due to the higher risk of lower rated bonds commonly known as "junk bonds." See the prospectus for the INVESCO VIF High Yield Portfolio for more information concerning these risks. INVESCO VIF Utilities Portfolio--seeks capital appreciation and income through investments primarily in equity securities of companies principally engaged in the public utilities business. VAN ECK WORLDWIDE INSURANCE TRUST Van Eck Worldwide Insurance Trust is a open-end management investment company organized as a "business trust" under the laws of the Commonwealth of Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as investment adviser and manager to the Gold and Natural Resources Fund and Fiduciary International Inc. serves as a sub-investment adviser to the World wide Balanced Fund. Van Eck Worldwide Balanced Fund--seeks long-term capital appreciation together with current income by investing in stocks, bonds and money market instruments worldwide. Van Eck Gold and Natural Resources Fund--seeks a long-term capital appreciation by investing in equity and debt securities of companies engaged in the exploration, development, production and distribution of gold and other natural resources, such as strategic and other metals, minerals, forest products, oil, natural gas and coal. Current income is not an investment objective. - ------------------------------------------------------------------------------- Strategic Advantage 19 THE GUARANTEED INTEREST DIVISION All or a portion of Net Premiums and transfers of Net Account Value may be made to the Guaranteed Interest Division, which is part of our General Account and which pays interest at a declared rate. The General Account supports our non- variable insurance and annuity obligations. Because of exemptive and exclusionary provisions, interests in the Guaranteed Interest Division have not been registered under the Securities Act of 1933, and neither the Guaranteed Interest Division nor the General Account has been registered as an investment company under the Investment Company Act of 1940. Accordingly, neither the General Account, the Guaranteed Interest Division nor any interests therein are generally subject to regulation under these Acts. As a result, the staff of the SEC has not reviewed the disclosures included in this prospectus which relate to the General Account and the Guaranteed Interest Division. These disclosures, however, may be subject to certain provisions of the Federal securities law relating to the accuracy and completeness of statements made in this prospectus. For more details regarding the General Account, see the Policy. The amount in the Guaranteed Interest Division at any time is the sum of all Net Premiums allocated to that Division, all transfers to the Guaranteed Interest Division and earned interest. This amount is reduced by amounts transferred out of or withdrawn from the Guaranteed Interest Division and deductions from your Account Value allocated to the Guaranteed Interest Division. Amounts may be accumulated in the Guaranteed Interest Division by (i) allocating Net Premiums, (ii) transferring amounts from the Divisions of the Variable Account, (iii) earning interest on amounts already in the Guaranteed Interest Division, and (iv) repaying a Policy Loan to release amounts from the Loan Division. We pay a declared interest rate on all amounts in the Guaranteed Interest Division. From time to time, we declare the rates that will apply to amounts in the Guaranteed Interest Division. These annual interest rates will never be less than the minimum guaranteed interest rate of 3% and will be in effect for at least 12 months. The interest is credited as of each Valuation Date to the amount in the Guaranteed Interest Division. This interest will be paid regardless of the actual investment experience of the General Account; we bear the full amount of the investment risk for the amount allocated to the Guaranteed Interest Division. DETAILED INFORMATION ABOUT THE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard Strategic Advantage Variable Universal Life Policy. There may be differences in the Policy because of the requirements of the state where the Policy is issued; any such changes will be defined in the Policy. The illustrations beginning on page 50 are intended to provide an idea of how the key financial elements of Strategic Advantage work. The illustrations show Premiums, Account Values, Cash Surrender Values and Death Benefits. APPLYING FOR A POLICY A Strategic Advantage Policy may be purchased by submitting an application to us. On the Policy Date, the Insured must be no more than Age 85. Before issuing any Policy or applying Net Premium to the Variable Account or the Guaranteed Interest Division, we require satisfactory evidence of insurability, which may include a medical examination, and completion of all underwriting requirements. The Investment Date is the date we have approved the Policy for issue, and we receive and apply the first premium payment, in an amount not less than 25% of the Minimum Annual Premium. The Policy is generally available with a minimum Stated Death Benefit of $50,000; however, we may reduce this amount for certain group or sponsored arrangements if the average Stated Death Benefit at issuance for the single group or sponsored arrangement is at least $50,000. The maximum Stated Death Benefit will be limited by our underwriting and reinsurance procedures in effect at the time of application. The Policy Date is the date upon which the Policy becomes effective. The Policy Date is the date used to determine Policy years and Policy months regardless of when the Policy is delivered. In the case of certain payroll deduction plans or other automatic investment plans, the Policy Date may be different from the date the first premium payment is received. If the Policy Date is prior to the Investment Date, we will charge monthly deductions you for insurance protection from the Policy Date. If a premium payment in an amount not less than one-twelfth of the Minimum Annual Premium is received with the application and there has been no material - ------------------------------------------------------------------------------- Strategic Advantage 20 misrepresentation in the application, temporary insurance equal to the face amount applied for up to a maximum amount as described in the binding limited life insurance coverage form will be in force. Coverage will begin when the binding limited life insurance coverage form has been completed and signed, a premium has been accepted by us and Part I of the application has been completed. Binding limited life insurance coverage will end on the earliest of the date: (i) premiums are returned five days after notice of termination is mailed to the Owner's address on the application; (ii) coverage starts under the Policy resulting from the application; (iii) a policy resulting from the application is refused by us; or (iv) 90 days after the date the binding limited life insurance coverage form is signed. In no event will a death benefit be provided under the temporary insurance agreement if there was a material misrepresentation in the answers to the questions in the binding limited life insurance coverage form or any question or statement in the application, a proposed Insured dies by suicide or intentional self-inflected injury, or the premium check or authorized withdrawal is not honored. PREMIUMS The amount and frequency of premium payments are flexible, within the limits described below. SCHEDULED PREMIUMS Even though premium amounts are flexible, the Schedule pages of the Policy will show a "Scheduled Premium." The Scheduled Premium may be chosen by the Owner, within our limits, when application for the Policy is made. The Scheduled Premium is the amount which is to be paid over a specified period of time and may not necessarily be sufficient to keep the Policy in force. The Owner will receive premium reminder notices for the Scheduled Premium on a quarterly, semiannual, or annual basis. Alternatively, the premiums, other than the first, may be paid via Electronic Fund Transfer each month. The financial institution making the Electronic Funds Transfer may impose a charge for this service. The Owner is not required to pay the Scheduled Premium, and it may be changed at any time subject to the maximum and minimum limits we may set. If one of the Guaranteed Minimum Death Benefit provisions described below has been chosen, the Scheduled Premium should not be less than the amount required to maintain the guarantee. UNSCHEDULED PREMIUM PAYMENTS Generally, unscheduled premium payments may be made at any time as long as each payment is at least $100. We may change this minimum if we give 90 days written notice of the change. We reserve the right to limit the amount of unscheduled premiums if the payment would result in an increase in the amount of the Base Death Benefit required by the Federal income tax law definition of life insurance, or to require suitable evidence of the insurability of the Insured at the time of the unscheduled premium payment. Premiums may also be limited if the Guideline Premium/Cash Value Corridor Test is chosen to comply with the Federal income tax law definition of life insurance. We will return premium payments if we determine the payment would cause the Policy to immediately become a Modified Endowment Contract. After the Owner has signed a form acknowledging that the Owner understands the Policy will be a Modified Endowment Contract, we will apply future premium payments. See Modified Endowment Contracts, page 41 and Changes to Comply with Law, page 43. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment received before the Maturity Date is considered a loan repayment, unless otherwise indicated. Applicable tax and sales charges are not deducted from a loan repayment but are deducted from any payment which constitutes a premium. MINIMUM ANNUAL PREMIUM At least 25% of the Minimum Annual Premium must be paid and received by our Customer Service Center before the insurance will go into effect. We determine the applicable Minimum Annual Premium based on the Age, sex and Premium Class of the Insured, the Stated Death Benefit of the Policy and any additional benefits selected. We may reduce the Minimum Annual Premium for certain group or sponsored arrangements. The Minimum Annual Premium for the Policy is shown in the Schedule pages of the Policy. If on each Monthly Processing Date during the first three Policy years, the sum of premiums paid, less the sum of Partial Withdrawals and Policy Loans taken including accrued loan interest, is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, the Policy is guaranteed not to lapse, regardless of its Net Account Value. See Lapse, page 33. - ------------------------------------------------------------------------------- Strategic Advantage 21 PREMIUM PAYMENTS AFFECT THE CONTINUATION OF COVERAGE If premium payments are discontinued, either temporarily or permanently, the Policy will continue in effect until the Net Account Value can no longer cover the monthly deductions for the benefits selected and the Policy will lapse. See Lapse, page 33. If the Minimum Annual Premium requirements are satisfied, the Policy is guaranteed not to lapse during the first three Policy years, regardless of its Net Account Value. If one of the Guaranteed Minimum Death Benefit provisions has been purchased, the Stated Death Benefit portion of the Policy will remain in effect until the end of the Guarantee Period so long as the conditions of the guarantee are met. See Guaranteed Minimum Death Benefit, page 24. CHOICE OF DEFINITIONAL TESTS When application for the Policy is made, the Owner will irrevocably choose which of the two tests for compliance with the Federal income tax law definition of life insurance we will apply to the Policy. These tests are the Cash Value Accumulation Test and the Guideline Premium/Cash Value Corridor Test. See Life Insurance Definition, page 40. If the Guideline Premium/Cash Value Corridor Test is chosen, the premium payments that may be made relative to the death benefit of the Policy will be limited. CHOICE OF GUARANTEED MINIMUM DEATH BENEFIT PROVISIONS When applying for the Policy, the Owner will also have the opportunity to choose from one of two Guaranteed Minimum Death Benefit provisions, which may extend the period that the Stated Death Benefit of the Policy will remain in effect if the Divisions of the Variable Account suffer adverse investment experience. These provisions require premium payment levels which are higher than the Minimum Annual Premium and an extra charge will be deducted from the Account Value each month during the Guarantee Period. In addition, the Net Account Value of the Policy must remain diversified according to our requirements. See Guaranteed Minimum Death Benefit, page 24. The required premium levels depend on which of the two Guarantee Periods is chosen, as well as the Stated Death Benefit of the Policy, the Insureds Age, sex, and Premium Class, the death benefit option chosen, and Rider coverage. For Policies with no Rider coverage, the required premium level for the Lifetime Guarantee Period will be equal to the guideline annual premium determined in accordance with the Federal income tax law definition of life insurance; the required premium level for the Ten Year/Age 65 Guarantee Period will be less than the guideline annual premium. Adding additional benefits to the Policy will increase the required premium levels above those indicated above. Policy Owners should consider the Guaranteed Minimum Death Benefit provision when setting the Scheduled Premium. MODIFIED ENDOWMENT CONTRACTS Regardless of which test for compliance with the Federal income tax law definition of life insurance is chosen, Federal income tax law provides special rules for the income taxation of distributions from life insurance policies which are defined as "Modified Endowment Contracts." These rules apply to distributions such as Policy Loans, surrenders and Partial Withdrawals. The application of these rules depends upon whether premiums have been paid which exceed a defined "seven-pay" limit. See Modified Endowment Contracts, page 41. The seven-pay limit will always be greater than the Minimum Annual Premium and the premiums required for the Guaranteed Minimum Death Benefit provisions, but may be less than the Scheduled Premium selected. If we determine that the Scheduled Premium will cause the Policy to be a Modified Endowment Contract on the Policy Date, we will issue the Policy based on the Scheduled Premium selected, but we will require the Owner to sign a form acknowledging that the Policy is a Modified Endowment Contract. Alternatively, the Scheduled Premium may be reduced to a level which will not cause the Policy to become a Modified Endowment Contract, and we will issue the Policy based on the revised Scheduled Premium. ALLOCATION OF NET PREMIUMS After certain premium-based charges are deducted from each premium, the balance, called the Net Premium, is added to the Account Value based on the Owner's instructions. Net Premium amounts allocated to the Guaranteed Interest Division will be allocated to that Division upon receipt. During the Free-Look Period, Net Premiums allocated to the Divisions of the Variable Account will be allocated to the Division investing in Fidelity VIP Money Market Portfolio of the Variable Account. At the end of the Free-Look Period, this portion of the Account Value will be automatically allocated according to the most recent premium allocation instructions. See Free Look Period, page 45. Net Premiums received after the Free Look Period will be allocated upon receipt according to the allocation instructions stated in the application for the Policy or the most recent instructions. Allocation percentages must be - ------------------------------------------------------------------------------- Strategic Advantage 22 in whole numbers, with the sum for all Divisions equaling 100%. Premium allocation instructions may be changed up to five times per Policy year without charge. Premium allocation changes exceeding five in a Policy year will be subject to a $25 charge for each additional change. DEATH BENEFITS Strategic Advantage offers the flexibility to determine the amount of insurance coverage needed, both now and in the future. It does this by combining the long- term advantages of permanent life insurance coverage with the flexibility and short-term advantages of term life insurance. Both permanent and term life insurance are available in this single Policy, Strategic Advantage. When a Policy is issued, an initial amount of insurance coverage is determined according to the instructions included in the application. The death benefit initially consists of a Stated Death Benefit and, if desired, an additional amount of insurance coverage which is added by Adjustable Term Insurance Rider. The Stated Death Benefit is the long-term element of the Policy; the Adjustable Term Insurance Rider is the term insurance element of the Policy. As described below, the Base Death Benefit may vary from the Stated Death Benefit. This may result from choice operation of a death benefit option, increases to comply with the Federal income tax law definition of life insurance, changes in the death benefit option, or requested increases and decreases. The Adjustable Term Insurance Rider provides term insurance coverage which adjusts automatically to fill the difference between the Target Death Benefit chosen and the Base Death Benefit. The Adjustable Term Insurance Rider does not have an externally defined premium; the cost is included in the monthly cost of insurance charges discussed below. See Adjustable Term Insurance Rider, page 26. So long as the Policy remains in force, we will pay an amount equal to the Death Proceeds to the Beneficiary of this Policy when the Insured dies. The Death Proceeds will consist of the Base Death Benefit, reduced by any outstanding Policy Loan and accrued loan interest (and, if in the grace periodfollowing a lapse, further reduced by any overdue charges). The Death Proceeds will also include any amount provided by Rider on the primary Insured. DEATH BENEFIT OPTIONS The Owner may choose from three death benefit options: Option 1, Option 2 or Option 3. These options may result in a Base Death Benefit under the Policy which exceeds the Stated Death Benefit. The death benefit option may be changed on any Policy anniversary. See Changes In Death Benefit Option, page 23 Under Option 1, the Base Death Benefit equals the Stated Death Benefit of the Policy. Under Option 2, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the Account Value. Under Option 2, the Base Death Benefit fluctuates daily with the amount of the Account Value, but will never be less than the Stated Death Benefit. Under Option 3, the Base Death Benefit equals the Stated Death Benefit of the Policy plus the sum of all premiums paid minus Partial Withdrawals taken under the Policy. Therefore, the Base Death Benefit generally will increase as premiums are paid and decrease as Partial Withdrawals are taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. Owners who prefer to have any favorable investment experience reflected in increased insurance coverage should choose Option 2. Owners who prefer to have insurance coverage that does not vary in amount, and lower cost of insurance charges, should choose Option 1. Owners who wish to have their coverage generally reflect their premium outlay should choose Option 3. Federal income tax law requires the death benefit to be at least as great as the Account Value times a factor which is defined in the law. The factors are determined based upon the Insureds Age and Premium Class at any point in time as well as the test for compliance selected in the original application for this Policy. See Life Insurance Definition, page 40, for a description of the tests and these factors. We will adjust the Policy the Base Death Benefit if necessary to continue to qualify the Base Death Benefit of the Policy as life insurance under the applicable provisions of the Federal income tax laws in existence at the time the Policy is issued. CHANGES IN DEATH BENEFIT OPTION A change in death benefit option may be requested at least 30 days prior to a Policy anniversary. The change will be effective as of the Policy anniversary. The death benefit option change applies to the entire Stated Death Benefit. For us to approve a change in the death benefit option from Option 1 to Option 2, or from Option 1 to Option 3, evidence that the Insured is insurable according to our normal rules of underwriting for that class of policy must be submitted to us. We may not allow a change that would reduce the Stated Death Benefit below the minimum we require to issue this Policy. After the - ------------------------------------------------------------------------------- Strategic Advantage 23 effective date of the change, the Stated Death Benefit will be changed according to the following table:
OPTION CHANGE STATED DEATH BENEFIT FROM TO FOLLOWING CHANGE EQUALS: Option 1 Option 2 Stated Death Benefit prior to such change minus the Account Value as of the effective date of the change. Option 2 Option 1 Stated Death Benefit prior to such change plus the Account Value as of the effective date of the change. Option 1 Option 3 Stated Death Benefit prior to such change minus (i) the sum of the premiums paid, plus (ii) Partial Withdrawals taken as of the effective date of the change. Option 3 Option 1 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid, minus (ii) Partial Withdrawals taken as of the effective date of the change. Option 2 Option 3 Stated Death Benefit prior to such change plus (i) the Account Value as of the effective date of the change, minus (ii) the sum of the premiums paid minus Partial Withdrawals taken as of the effective date of the change. Option 3 Option 2 Stated Death Benefit prior to such change plus (i) the sum of the premiums paid minus Partial Withdrawals taken as of the effective date of the change, minus (ii) the Account Value as of the effective date of the change.
For purposes of a death benefit option change, the Account Value will be allocated to each coverage segment in the same proportion that the Stated Death Benefit of that segment bears to the sum of all Stated Death Benefit segments. See Changes In Death Benefit Amounts, page 25. We do not adjust the Target Premium when this type of change is made. See Sales Charges, page 34. These increases and decreases in Stated Death Benefit are made so that the amount of the Base Death Benefit remains the same on the date of the change. When the Base Death Benefit remains the same, there is no immediate change in the Net Amount at Risk, which is the amount on which our cost of insurance charges are based. See Cost Of Insurance Charges, page 36. In addition, there will be no change to the amount of term insurance Target Death Benefit if Adjustable Term Insurance Rider has been added. Any changes in the death benefit option of the Policy will go into effect as of the Policy anniversary on or following the date we approve the request for the change. A request for a change must be received at our Customer Service Center at least 30 days prior to the Policy anniversary. After the request is approved, we will send a written notice of the approval showing each change. This notice should be attached to the Policy. We may also ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. GUARANTEED MINIMUM DEATH BENEFIT PROVISION Generally, the length of time the Policy remains in force depends on the Net Account Value of the Policy. Because the charges that maintain the Policy are deducted monthly from the Account Value, coverage will last as long as the Net Account Value is sufficient to pay these charges. The investment experience of any amounts in the Divisions of the Variable Account and the interest earned in the Guaranteed Interest Division will affect the amount of the Account Value and, as a result, the length of time the Policy remains in force without the payment of additional premiums. When applying for the Policy, one of two Guaranteed Minimum Death Benefit provisions may be chosen, which may extend the period that the Stated Death Benefit of the Policy will remain in effect if the Divisions of the Variable Account suffer adverse investment experience. The two options vary primarily by the length of time which they cover, which we call the "Guarantee Period." The first option has a Guarantee Period of 10 Policy years or to the Insureds Age 65, whichever is later; that is, it protects the Stated Death Benefit of the Policy for a limited number of Policy years. The second option has a Lifetime Guarantee Period; it protects the Stated Death Benefit for the life of the Insured to the Maturity Date. See Choice of Guaranteed Minimum Death Benefit Provisions, page 22. However, the Guaranteed Minimum Death Benefit provision does not apply to the Adjustable Term Insurance Rider or to any other Riders. Therefore, if the - ------------------------------------------------------------------------------- Strategic Advantage 24 Net Account Value is insufficient to pay all of the deductions as they come due, only the Stated Death Benefit portion of the Policy will be guaranteed to stay in force under the Guaranteed Minimum Death Benefit provisions; any attached Riders will lapse. See Lapse, page 33. REQUIREMENTS TO MAINTAIN THE GUARANTEE PERIOD The Guaranteed Minimum Death Benefit provisions require premium payment levels referred to as the "Guarantee Period Annual Premium" that are higher than the Minimum Annual Premium. Although the required Guarantee Period Annual Premium levels are different for the two Guarantee Periods, the mechanics of the Guaranteed Minimum Death Benefit provisions are similar. As of each Monthly Processing Date we will perform a test to see if sufficient premiums have been paid to keep the guarantee in place. If (i) the actual premiums paid, minus the amount of any Partial Withdrawals and any Policy Loan and accrued loan interest, equals or exceeds (ii) one twelfth of the Guarantee Period Annual Premium for the option chosen times the number of complete months the Policy has been in force, the Guarantee Period will remain in effect regardless of the investment experience of the Divisions of the Variable Account. If the Policy fails to meet this test on any Monthly Processing Date, the Guarantee Period and therefore the Guaranteed Minimum Death Benefit provision will terminate. The required premiums for the Guarantee Period chosen will be listed in the Schedule of the Policy. If the Policy benefits are increased, the Guarantee Period Annual Premium will also be increased. In order to determine the required premium to maintain the Guarantee Period, one twelfth of each Guarantee Period Annual Premium is multiplied by the number of months this amount was in effect. Each of these resulting amounts is summed and the total is used in (ii) above. The Guarantee Period will also be terminated if the Net Account Value on any Monthly Processing Date is not diversified according to the following rules: a) No more than 35% of the Net Account Value may be invested in any one Division, and b) The Net Account Value must be invested in at least five Divisions. The Automatic Rebalancing feature may be utilized to assist in meeting these diversification requirements. Also, the Policy will be deemed to satisfy our requirements for diversification if Dollar Cost Averaging is being utilized and the resulting transfers are being directed into at least four other Divisions with no more than 35% of any transfer being to any one Division. See Dollar Cost Averaging, page 29, and Automatic Rebalancing, page 30. Once terminated, the Guaranteed Minimum Death Benefit provision cannot be reinstated. There is a charge for the Guaranteed Minimum Death Benefit. See Guaranteed Minimum Death Benefit Charge, page 36. This charge will end at the conclusion of the Ten Year/Age 65 Guarantee Period if that option has been chosen, and it will end for either option if the Policy fails the monthly premium test or the diversification test. Please refer to the Policy for additional information on the Guaranteed Minimum Death Benefit provisions or ask a Registered Representative for a personalized illustration of these options. CHANGES IN DEATH BENEFIT AMOUNTS An increase or a decrease in the death benefit of the Policy may be requested by the Owner. This request must be received by our Customer Service Center at least 30 days prior to the Policy anniversary. Any change in coverage may not be for an amount less than $1,000. Any changes in the death benefit of the Policy will go into effect as of the Policy anniversary on or following the date we approve the request for the change. After the request is approved, we will send a new Schedule which will include the Stated Death Benefit, the benefit under any Riders, if applicable, the guaranteed cost of insurance rates, and the new guideline annual premium. This notice should be attached to the Policy. We may also ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. While the Policy is in force, its Target or Stated Death Benefit may be increased prior to the Policy anniversary on which the Insured is Age 86. The Stated Death Benefit may be decreased if the request occurs at least two years from the Policy Date or at least two years after the last increase was made. Decreases in the death benefit generally may not decrease the Stated Death Benefit below the minimum we require to issue this Policy. Decreases to the Stated Death Benefit will cause an equal decrease to the Target Death Benefit in the current year and all future years, if Adjustable Term Insurance Rider is part of the Policy. There may be tax consequences to the decrease, See Life Insurance Definition, page 40, and Modified Endowment Contracts, page 41. Satisfactory evidence that the Insured is still insurable must be provided when the death benefit is increased. - -------------------------------------------------------------------------------- Strategic Advantage 25 Unless otherwise indicated, any request for an increase to the Target Death Benefit will be assumed to also be a request for an increase to the Stated Death Benefit so that the amount of the Adjustable Term Insurance Rider, if it is included with the Policy at the time of the increase, will not change. A requested increase in the Stated Death Benefit will create a new coverage segment for which cost of insurance and other charges will be computed separately. See CHARGES, DEDUCTIONS AND REFUNDS, page 34. Increases in Stated Death Benefit resulting from death benefit option changes do not create new coverage segments, rather, they merely increase the size of the existing segment(s) of Stated Death Benefit. As discussed below, once created, a new coverage segment of Stated Death Benefit can never be entirely eliminated unless required differently by state law. If an increase creates a new coverage segment of Stated Death Benefit, premiums paid after the increase will be allocated to the original and the new coverage segments in the same proportion that the guideline annual premiums defined by the FederalFederal income tax laws for each segment bear to the sum of the guideline annual premiums for all segments. The guideline annual premiums will be shown in the Schedule for each coverage segment. Net Amount at Risk will be allocated to each coverage segment in the same proportion that the Stated Death Benefit for that segment bears to the sum of the Stated Death Benefit for all segments. Reductions in the death benefit will first be applied to reduce the Target Death Benefit. The Stated Death Benefit will be decreased only after all Adjustable Term Insurance Rider coverage has been reduced to zero. If more than one coverage segment of Stated Death Benefit exists, any subsequent reduction in Stated Death Benefit will be allocated between coverage segments in the same proportion that the Stated Death Benefit of each segment bears to the total Stated Death Benefit prior to the reduction unless required differently by state law. In some cases, we may not approve a requested change because it would disqualify the Policy as life insurance under applicable FederalFederal income tax law. If we do not approve a change, we will provide notification of our decision about making the change. See TAX CONSIDERATIONS, page 40. An increase in the death benefit may be canceled by the Owner within the later of (i) 45 days after the application for the increase is signed, (ii) 20 days after receipt of a new Schedule showing the increase or as otherwise specified by law, or (iii) 10 days after we mail or personally deliver the Notice of Withdrawal Right. If an increase is canceled, we will refund any charges attributable to the increase. If you cancel a scheduled change or ask for an unscheduled decrease increase or decrease to your Target Death Benefit, we may eliminate any future scheduled increases to the Target Death Benefit. BENEFITS AT MATURITY If the Insured is still living on the Maturity Date, we will pay the Net Account Value to the Policy Owner. The Net Account Value is the Account Value reduced by any outstanding Policy Loan and accrued loan interest. The Policy will then end. The Maturity Date is the Policy anniversary nearest the date on which the on whichInsured attains Age is 100. ADDITIONAL BENEFITS The Policy may include additional benefits, which are attached to the Policy by Rider. A charge will be deducted monthly from the Account Value for each additional benefit chosen. These benefits may be canceled at any time. See Modified Endowment Contracts, page 41, for information on the tax effect of adding or canceling these benefits. More details will be included in the Policy if any of these benefits are chosen. From time to time we may make available Riders other than those listed below. Contact a Registered Representative for a complete list of the Riders available. Certain Riders may not be available for all Policies. ACCIDENTAL DEATH BENEFIT RIDER This Rider will pay the benefit amount selected by the Owner if the Insured dies as a result of an accident or if the Insured dies within 90 days of an injury sustained in an accident and the death occurs prior to the Insureds Age 70. ADJUSTABLE TERM INSURANCE RIDER The Death Proceeds may be increased by adding the Adjustable Term Insurance Rider on the life of the Insured. As the name suggests, the Adjustable Term Insurance Rider adjusts over time. At issue, a schedule of death benefits called the Target Death Benefit is specified at levels to meet projected needs in the future. The Target Death Benefit may be scheduled to vary as often as each Policy year. The Target Death Benefit will be listed in the Schedule. - ------------------------------------------------------------------------------- Strategic Advantage 26 Subject to our rules, the Target Death Benefit schedule may be changed after issue. See Changes In Death Benefit Amounts, page 25. The amount of Adjustable Term Insurance Rider in force at any time is the amount needed to fill the difference between the Target Death Benefit specified in the Schedule and the Base Death Benefit in effect. The Adjustable Term Insurance Rider is dynamic in that it adjusts daily for variations in the Base Death Benefit resulting from the Federal income tax law definition of life insurance test chosen. For example, assume the Base Death Benefit increases due to the Federal income tax law definition of life insurancevaries according to the following schedule. The Adjustable Term Insurance Rider will adjust to provide Death Proceeds equal to the Target Death Benefit in each year:
Base Death Target Death Adjustable Term Benefit Benefit Insurance Rider Amount - ------------ ------------ ---------------------- 201,500 250,000 48,500 202,500 250,000 47,500 202,250 250,000 47,750
Since the Adjustable Term Insurance Rider is dynamic, it is possible that the Adjustable Term Insurance Rider amount may be eliminated entirely as a result of increases in the Base Death Benefit due to the definition of life insurance requirementsunder the Policy. Using the example outlined above, if the Base Death Benefit under the Policy grew to $250,000, the Adjustable Term Insurance Rider amount would be reduced to zero. (It can never be reduced below zero.) Even though the Adjustable Term Insurance Rider amount is reduced to zero, the Rider will remain in effect until it is removed from the Policy. Therefore, if the Base Death Benefit under the Policy is subsequently reduced below the Target Death Benefit scheduled, the Adjustable Term Insurance Rider amount will reappear as needed to maintain the Target Death Benefit at the requested level. Partial Withdrawals and base decreases may reduce the amount of the Target Death Benefit. See Partial Withdrawal, page 37. We generally restrict the amount of the Target Death Benefit to an amount not more than 500% of the Stated Death Benefit. For example, if the Stated Death Benefit is $100,000 then the maximum amount of Target Death Benefit we will allow will be $500,000. Given the flexible nature of the Adjustable Term Insurance Rider, there is no defined premium for the amount of coverage. Instead, a cost of insurance charge is deducted monthly from the Account Value for the Adjustable Term Insurance Rider amount in effect. The cost of insurance charge may be lower than the rates applicable to the Base Death Benefit in the early Policy years, and may be higher in the later Policy years. See Cost Of Insurance Charges, page 36. Since there is no defined premium related to the Adjustable Term Insurance Rider, there are no tax or sales charges associated with this coverage. See Changes In Death Benefit Amounts, page 25. The Adjustable Term Insurance Rider provides life insurance coverage on the Insured as long as the Net Account Value is sufficient to pay all of the deductions that are taken out of the Account Value each month. ADDITIONAL INSURED RIDER This Rider provides for death benefits upon the death of immediate family members of the Insured. A maximum of nine Additional Insured Riders may be added to the Policy. The minimum amount of coverage for each Rider is $10,000 and the maximum coverage for all Additional Insured Riders combined equals five times the Stated Death Benefit of the Policy. GUARANTEED INSURABILITY RIDER This Rider will allow the Owner to increase the Stated Death Benefit of the Policy without providing us with evidence that the Insured remains insurable. Increases are limited in amount and timing. RIGHT TO EXCHANGE RIDER This Rider allows the Owner to change the person insured under the Policy. A change of the Insured may have Federal income tax consequences. If an exchange of Insured occurs, the cost of insurance charges in the future may change but the Account Value will remain unchanged as of the exchange date. There is no charge for this Rider. WAIVER OF THE COST OF INSURANCE RIDER This Rider provides that during the total disability of the Insured, while the Policy remains in force, the monthly expense charges, cost of insurance charges and Rider charges will be waived and therefore not deducted from the Account Value. If this Rider is added to the Policy, Waiver of Specified Premium Rider may not also be added. WAIVER OF SPECIFIED PREMIUM RIDER This Rider provides that during the total disability of the Insured, while the Policy remains in force, a specified - ------------------------------------------------------------------------------- Strategic Advantage 27 premium will be credited monthly to the Policy. The amount of premium to be waived, within limits, is the amount specified in the application. If this Rider is added to the Policy, the Waiver of Cost of Insurance Rider may not also be added. POLICY VALUES ACCOUNT VALUE The amount of the Account Value is the sum of the amounts in the Guaranteed Interest Division and in the various Divisions of our Variable Account. It also includes any amount we have set aside in the Loan Division to secure any outstanding Policy Loan. The Account Value therefore reflects all premiums paid, charges made, Loans and Partial Withdrawals taken, investment experience of the Variable Account and earnings accrued in the Guaranteed Interest and Loan Divisions. CASH SURRENDER VALUE The Cash Surrender Value of the Policy equals the Account Value plus any refund of sales charges due. NET CASH SURRENDER VALUE The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of any outstanding Policy Loan and any accrued loan interest. NET ACCOUNT VALUE The Net Account Value of the Policy is equal to the Account Value less the amount of any outstanding Policy Loan and any accrued loan interest. DETERMINING THE VALUE OF AMOUNTS IN THE DIVISIONS OF THE VARIABLE ACCOUNT The amounts included in the Divisions of the Variable Account are measured in terms of Accumulation Units and Accumulation Unit Values. On any given day, the value of the amount in a Division of the Variable Account is equal to the Accumulation Unit Value times the number of Accumulation Units credited to the Policy in that Division. The Accumulation Units of each Division of the Variable Account will have different Accumulation Unit Values. Accumulation Units of a Division are purchased whenever premiums or transfer amounts are allocated to that Division (including transfers from the Loan Division). Accumulation Units are redeemed when Partial Withdrawals are taken or amounts are transferred from a Division of the Variable Account (including transfers to the Loan Division) and to pay the death benefit when the Insured dies. We also redeem Accumulation Units for the monthly deductions from the Account Value and for Policy transaction charges, if any. The number of Accumulation Units purchased or redeemed in a Division of the Variable Account as of any Valuation Date is calculated by dividing the dollar amount of the transaction by the Divisions Accumulation Unit Value calculated after the close of business that day. The Accumulation Unit Value of each Division fluctuates with the investment experience of the corresponding Portfolio and reflects the investment income, realized and unrealized capital gains and losses and expenses of the Portfolio. The Accumulation Unit Values also reflect the mortality and expense risk charges we make each day to the Variable Account. See How We Calculate Accumulation Unit Values for Each Division, page 28. Transactions are processed as of the Transaction Date. The Transaction Date is the date we receive a premium or an acceptable written or telephone request at our Customer Service Center. If the premium or request reaches our Customer Service Center on a day which is not a Valuation Date, or after the close of business on a Valuation Date (that is, after 4:00 p.m. Eastern Time), the Transaction Date will be the next succeeding Valuation Date. Monthly deductions against the Account Value are made as of the Monthly Processing Date. Transaction charges are made as of the Transaction Date. The value of any amount allocated to a Division of our Variable Account will go up or down depending on the investment experience of that Division. For amounts allocated to the Divisions of the Variable Account, there is no guaranteed minimum cash value. HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION We determine Accumulation Unit Values for the Divisions of the Variable Account as of each Valuation Date. All Policy transactions are performed as of a Valuation Date. The Accumulation Unit Value for each Division will generally be set at $10 on the first Valuation Date that there are Policy transactions in that Division of the Variable Account. After that, the Accumulation Unit - ------------------------------------------------------------------------------- Strategic Advantage 28 Value as of any Valuation Date is equal to the Accumulation Unit Value for the preceding Valuation Date multiplied by the Accumulation Experience Factor for that Division for the Valuation Period. We calculate an Accumulation Experience Factor for each Division every Valuation Date as follows: 1. We take the value of the shares belonging to the Division in the corresponding Portfolio as of the close of business that Valuation Date (before giving effect to any Policy transactions for that day, such as premium payments or surrenders). For this purpose, we use the share value reported to us by the managers of the Portfolio. 2. We add any dividends or capital gains distributions declared and reinvested by the Portfolio during the Valuation Period. We subtract from this amount a charge for taxes, if any. 3. We divide this amount by the value of the shares belonging to the Division in the corresponding Portfolio as of the close of business on the preceding Valuation Date. This amount represents the gross experience factor per Accumulation Unit, before reduction for the expenses of the Variable Account. 4. We subtract a charge for the mortality and expense risk assumed by us under the Policy. The daily charge is .002055% of the Accumulation Unit Value, which is equivalent to an annual rate of .75% of the Accumulation Unit Value. If the previous day was not a Valuation Date, then the charge is adjusted for the additional days between valuations. The resulting amount is the Accumulation Experience Factor for the Valuation Period. TRANSFERS OF ACCOUNT VALUES After the Free Look Period, up to 12 transfers between Divisions of the Variable Account or to the Guaranteed Interest Division may be made in each Policy year without charge. There is no limit on the number of transfers that may be made, but we charge a fee of $25 for each additional transfer beyond the first 12. Transfers due to the operation of Automatic Rebalancing or Dollar Cost Averaging are not included in determining the limit on transfers without a charge. Transfer requests should be made in writing to our Customer Service Center. The transfer will take effect as of the Valuation Date we receive the request. The minimum amount we will transfer on any date is $100. This minimum need not come from any one Division or be transferred to any one Division as long as the total amount requested to be transferred equals at least the minimum. However, we will transfer the entire amount in any Division of the Variable Account from which a transfer is requested, if the amount remaining in that Division is less than $100. We reserve the right to limit excessive trading activity, which can disrupt Portfolio management strategy and increase Portfolio expenses. For example, we may refuse to accept or may place certain restrictions on transfers made by third-party agents acting on behalf of multiple Owners or made pursuant to market timing services when we determine, at our sole discretion, that such transfers will be detrimental to the Portfolios and the Owners as a whole. Such transfers may cause increased trading and transaction costs, disruption of planned investment strategies, forced and unplanned portfolio turnover, and lost opportunity costs, and may subject the Portfolios to large asset swings that diminish the Portfolios ability to provide maximum investment return to all Owners. Transfers from the Guaranteed Interest Division may only be made as described below. Once during the first 30 days of each Policy year, the Owner may transfer amounts from the Guaranteed Interest Division. Transfer requests received within 30 days prior to the Policy anniversary will be deemed to occur as of the Policy anniversary. Transfer requests received on the Policy anniversary or within the following 30 days will be processed. Transfer requests received at any other time will not be processed. Transfer amounts from the Guaranteed Interest Division to the Divisions of the Variable Account are limited to the greatest of (i) 25% of the balance in the Guaranteed Interest Division at the time of the first transfer or withdrawal in a Policy year, (ii) the sum of any amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year or, (iii) $100. If telephone privileges have been elected in an application or written notice has been sent to our Customer Service Center requesting this privilege, transfers may be made by telephoning our Customer Service Center. See Telephone Privileges, page 47. DOLLAR COST AVERAGING We offer a feature called Dollar Cost Averaging to Owners who have at least $10,000 of Account Value invested in either the Division investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio of the Variable Account. The main objective of Dollar Cost Averaging is - ------------------------------------------------------------------------------- Strategic Advantage 29 to protect Policy values from short-term price fluctuations. Since the same dollar amount is transferred to other Divisions each month, more units are purchased in a Division if the value per unit that month is low, and fewer units are purchased if the value per unit that month is high. This plan of allocating Policy values reduces the risk of investing too much when the price of a Portfolio's shares is high and too little when the price of a Portfolio's shares is low. With Dollar Cost Averaging, a designated dollar amount of Account Value will be transferred automatically each month from the selected Division to one or more other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to the Guaranteed Interest Division. Percentage allocations of the transfer amount must be designated as whole number percentages; no specific dollar designation may be made to the Divisions of the Variable Account. If the Owner elects to transfer to a particular Division, the minimum percentage that may be transferred to that Division is 1% of the total amount transferred. A date for Dollar Cost Averaging to terminate may be specified. You may also specify a A dollar amount may be specified so that when the balance remaining in either the Division investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio reaches this dollar amount, Dollar Cost Averaging will terminate. The monthly transfer under Dollar Cost Averaging may be no less than $100 per month and may be no more than one twelfth of the Account Value at the time Dollar Cost Averaging is elected in the Division from which the Dollar Cost Averaging transfers are to be made. Each automatic monthly transfer will take place on the Monthly Processing Date beginning with the first Monthly Processing Date which is at least 30 days after our receipt of the request for Dollar Cost Averaging. However, in no event will Dollar Cost Averaging begin before the Monthly Processing Date following the end of the Free Look PeriodFree-look Period. If a request for Dollar Cost Averaging is submitted with the application, the first transfer will take place on the first Monthly Processing Date following the date on which at least $10,000 has been accumulated in the selected Division. If on any Monthly Processing Date, the amount in the Division from which transfers are to be made is equal to or less than the amount to be transferred, the entire remaining amount will be transferred, and Dollar Cost Averaging will end. The amount to be transferred or the Divisions to which transfers are to be made may be changed once each Policy year, and Dollar Cost Averaging may be canceled completely by sending satisfactory notice to our Customer Service Center at least seven days before the next transfer date. If both Dollar Cost Averaging and Automatic Rebalancing are elected, Dollar Cost Averaging will take place first. As of the first Valuation Date of the next calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. Dollar Cost Averaging is available without charge. If telephone privileges have been elected in an application or if written notice has been sent to our Customer Service Center requesting this privilege, changes to your Dollar Cost Averaging options can be made by telephoning our Customer Service Center. See Telephone Privileges, page 47. AUTOMATIC REBALANCING The Automatic Rebalancing feature provides a method for maintaining a balanced approach to investing Account Values and for simplifying the process of asset allocation over time. There is no charge for this feature and any transfers as a result of the operation of this feature are not counted toward the limit of 12 transfers per Policy year without an additional transfer charge. During the operation of the Automatic Rebalancing feature, transfers among the Divisions may be accomplished only by changing premium allocation percentages. The Automatic Rebalancing feature may be elected by designation on the application or at any subsequent time by completing the appropriate form. Automatic Rebalancing matches Account Value allocations over time to the allocation percentages for new premiums. As of the first Valuation Date of each calendar quarter, we will automatically rebalance the amounts in each of the Divisions to match the current premium allocation percentages. This will rebalance the amounts in Divisions that may be out of line with the allocation percentages, which may result, for example, from Divisions which underperform the other Divisions in certain quarters. If this feature is elected, as of the first Valuation Date of the next calendar quarter we will transfer amounts among the Division so that the ratio of the A ccumulat i on Value in each Division to the to tal Account Value matches the selected allocation percentage for that Division. If Automatic Rebalancing is elected with the Policy application , the first transfer will occur as of the first Valuation Date of the next calendar quarter following the end of the Free Look Period. If this feature is elected after the Policy Date, the first transfer will be processed as of the first Valuation Date of the next calendar quarter after we receive notification at our Customer Service Center and the Free Look Period has ended. - -------------------------------------------------------------------------------- Strategic Advantage 30 The allocation percentages for Automatic Rebalancing may be changed at any time and the Account Value will be reallocated as of the Valuation Date that we receive the allocation instructions at our Customer Service Center. Any reduction in the allocation to the Guaranteed Interest Division, however, will be considered a transfer from the Division and, therefore, must comply wit h the maximum transfer amount and time limitations on transfers from the Guaranteed Interest Division, as described in Transfers of Account Values on page 29. We will not process an Automatic Rebalancing request which is in conflict with these provisions. The Automatic Rebalancing feature may be terminated at any time, so long as we receive notice of the termination at least seven days prior to the first Valuation Date of the next calendar quarter. If the Guarantee Period is in effect and the Automatic Rebalancing feature is terminated, diversification of the Net Account Value must be maintained for the guarantee to continue. See Guaranteed Minimum Death Benefit, page 24. If the Automatic Rebalancing feature is active on a Policy and a request for an allocation which does not meet the requirements is made, we will notify the Owner that the allocation must be changed. Any transfers as a result of the operation of the Automatic Rebalancing feature are not counted toward the limit of 12 transfers that can be made each Policy year without a transfer charge. However, we will charge a fee of $25 each time premium allocation is changed more often than five times per Policy year; otherwise, there is no charge for this feature. If both Dollar Cost Averaging and Automatic Rebalancing have been elected, Dollar Cost Averaging will take place first. As of the first Valuation Date of the calendar quarter after Dollar Cost Averaging has terminated, Automatic Rebalancing will begin. If telephone privileges have been elected in an application or if written notice has been sent to our Customer Service Center requesting this privilege, changes to the Automatic Rebalancing options can be made by telephoning our Customer Service Center. See Telephone Privileges, page 47. POLICY LOANS At any time after the first Policy anniversary or as otherwise required by law, the Owner may borrow against the Policy by using it as security for a loan. The amount borrowed is called a Policy Loan. Any new Policy Loan must be at least $100. The maximum amount which can be borrowed as of any Valuation Date equals (a) minus (b) where (a) is equal to 1.) Account Value minus 12 times the current monthly deduction; 2.) multiplied by 1.03; 3.) divided by 1.0375; and where (b) is equal to any outstanding Policy Loan and accrued loan interest. A Policy Loan may be requested by contacting our Customer Service Center. Loan interest charges on a Policy Loan accrue daily at a compound annual interest rate of 3.75%. Interest is due in arrears on each Policy anniversary. If the interest is not paid when it is due, it will be added to the Policy Loan as of the Policy anniversary. When an additional loan is requested, the amount taken will be added to the outstanding Policy Loan so only one loan is outstanding at any time. A Policy Loan may be fully or partially repaid at any time while the Policy is in force. Unless otherwise indicated, we will assume that any payments, other than Scheduled Premiums, constitute Policy Loan repayments and not premiums. When a Policy Loan is taken, or if the loan interest is not paid on the Policy anniversary, an amount equal to the Policy Loan amount or interest due is transferred from the Divisions of the Variable Account and the Guaranteed Interest Division to the Loan Division to secure the loan. The Loan Division is part of our General Account, separate from the Guaranteed Interest Division. When transfers are made to the Loan Division, units of the Variable Account Divisions are redeemed sufficient to cover the amount of the loan which is taken from the Variable Account. We will deduct the amount transferred from each Division in the same proportion that the Account Value in that Division bears to the Net Account Value immediately prior to the loan transaction. The amounts in each Division will be determined as of the Valuation Date we receive the request for a loan. The Loan Division is credited as of each Valuation Date with interest at a compound annual rate of 3% in all Policy years. On Policy anniversaries, the amount of interest credited to the Loan Division for the Policy year will be transferred from the Loan Division. When a loan repayment is made, an amount equal to the payment is transferred from the Loan Division. Amounts transferred from the Loan Division will be allocated to the Divisions of the Variable Account and the Guaranteed Interest Division based on the current premium allocation instructions unless a different allocation is requested. A Loan against the Policy will have a permanent effect on the Account Value and, therefore, on the benefits under this Policy, even if the Loan is repaid. When borrowing against the Policy, an amount equal to the Policy Loan is transferred to the Loan Division where it earns a - ------------------------------------------------------------------------------- Strategic Advantage 31 guaranteed rate of interest. Premiums or transfer amounts may not be allocated to the Loan Division other than by borrowing additional amounts. If not repaid, the Policy Loan and accrued loan interest will be deducted from the amount of the Death Proceeds paid, the Cash Surrender Value paid on surrender, or the Account Value upon maturity. It may also have an effect on the Guarantee Period and on the length of time the Policy remains in force, since in many cases the Policy will lapse when the Account Value minus Policy Loans and accrued loan interest is insufficient to cover the monthly deductions against the Policy's Account Value. If telephone privileges have been elected in an application or requested by written notice to our Customer Service Center, a Policy Loan may be requested by telephoning our Customer Service Center. Any telephone request for a Policy Loan must be for an amount less than $25,000. See Telephone Privileges, page 47. PARTIAL WITHDRAWALS A Partial Withdrawal may be requested on any Monthly Processing Date after the first Policy anniversary by writing to us at our Customer Service Center. One Partial Withdrawal is allowed each Policy year. The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the amount which will leave $500 as the Net Account Value. If a withdrawal of more than this maximum is requested, we will require a full surrender of the Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the Account Value. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when the Base Death Benefit has been increased to qualify the Policy as life insurance under the Federal income tax laws (see Life Insurance Definition, page 40) and the amount withdrawn is no greater than that amount which reduces the Account Value to the level which no longer requires the Base Death Benefit to be increased for Federal income tax law purposes. For a Policy under an Option 1 death benefit, the Stated Death Benefit is not reduced by a Partial Withdrawal in the circumstances described above. In addition, if no more than 16 years have elapsed since the Policy Date and the Insured is not yet Age 81, a Partial Withdrawal of an amount up to 10% of the Account Value or, if greater, 5% of the Stated Death Benefit, calculated immediately before the Partial Withdrawal is taken will not reduce the Stated Death Benefit. Any additional amount withdrawn reduces the Stated Death Benefit by that additional amount. For a Policy under an Option 2 death benefit, a Partial Withdrawal does not reduce the Stated Death Benefit. For a Policy under an Option 3 death benefit, the Stated Death Benefit will be reduced by any amount of the Partial Withdrawal in excess of premiums paid minus prior Partial Withdrawals taken to the date of the Partial Withdrawal (the excess will be treated as if the Policy were under death benefit Option 1). See Death Benefit Options, page 23. No Partial Withdrawal will be allowed if the Stated Death Benefit remaining in force after the Partial Withdrawal would be reduced below the minimum we require to issue this Policy at the time of the reduction. See Group or Sponsored Arrangements, page 40. Under any death benefit option, if the Base Death Benefit has been increased in order to qualify the Policy as a life insurance contract under the Federal income tax laws, the Partial Withdrawal reduces the Base Death Benefit by an amount greater than the withdrawal, but in no event less than the Stated Death Benefit after the Partial Withdrawal. If the Stated Death Benefit of the Policy is reduced by a Partial Withdrawal, the Target Death Benefit, if any, for the current year and all future years will be reduced by an equal amount. Unless otherwise indicated, we will make the withdrawal from the Guaranteed Interest Division and the Divisions of the Variable Account in the same proportion that each Division bears to the Net Account Value immediately prior to the withdrawal. Withdrawals from the Guaranteed Interest Division may not exceed an amount that is greater than the total withdrawal times the ratio of the Account Value in the Guaranteed Interest Division to the total Net Account Value immediately prior to the withdrawal. A new Schedule reflecting the effect of the withdrawal will be sent if there is a change to the Stated Death Benefit or to the Target Death Benefit. We may ask that the Policy be returned to our Customer Service Center to make this change. The withdrawal and any reductions in death benefits will be effective as of the Valuation Date we receive the request. If telephone privileges have been elected, requests for Partial Withdrawals may be made by telephoning our Customer Service Center. Any telephone request for a Partial Withdrawal must be for an amount less than $25,000. See Telephone Privileges, page 47. Partial Withdrawals may have adverse tax consequences. See Modified Endowment Contracts, page 41. - ------------------------------------------------------------------------------- Strategic Advantage 32 SURRENDER The Policy may be surrendered for its Net Cash Surrender Value at any time while the Insured is living. In order to surrender the Policy, a written request and the Policy should be sent to our Customer Service Center. The Net Cash Surrender Value of the Policy equals the Cash Surrender Value minus any Policy Loan and accrued loan interest. We will compute the Net Cash Surrender Value as of the Valuation Date we receive the request and the Policy at our Customer Service Center, and all insurance coverage under the Policy will end as of that date. A surrender of the Policy for its Net Cash Surrender Value may have adverse tax consequences. See Modified Endowment Contracts, page 41. RIGHT TO EXCHANGE POLICY During the first 24 months following the date we issue the Policy or add a coverage segment, the Policy provides a right to exchange the Policy from one in which the investment experience is not guaranteed into a guaranteed Policy. This is accomplished by the transfer of the entire amount in the Divisions of the Variable Account to the Guaranteed Interest Division, and the allocation of all future premium payments to the Guaranteed Interest Division. This will, in effect, serve as an exchange of the Policy for the equivalent of a flexible premium universal life insurance policy. No charge will be imposed on the transfer in exercising this exchange privilege. See The Guaranteed Interest Division, page 20. When this right is exercised, we will not allow for the allocation of future premium payments or transfers to the Divisions of the Variable Account. LAPSE The insurance coverage provided by the Policy will continue as long as the Net Account Value of the Policy is sufficient to pay all the deductions that are taken out of the Account Value each month. In addition, during the first three Policy years (the special continuation period), if on each Monthly Processing Date the sum of premiums paid, less the sum of Partial Withdrawals taken and any outstanding Policy Loan and accrued loan interest is greater than or equal to one twelfth of the Minimum Annual Premium times the number of completed Policy months, the Policy and all attached Riders are guaranteed not to lapse, regardless of the Net Account Value. IF GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS NOT IN EFFECT Unless the Guaranteed Minimum Death Benefit provision is in effect, or the special continuation period is in effect and its requirements have been met, the Policy including all attached Riders will lapse in its entirety on any Monthly Processing Date that the Net Account Value of the Policy is not sufficient to pay all the monthly deductions from the Account Value. A 61-day grace period will begin on that Monthly Processing Date. See Grace Period, page 34. If we do not receive payment of the requested amount in full within the 61 days, the Policy and all Riders attached will lapse without value. We will withdraw any remaining balance of the Account Value from the Divisions of the Variable Account and Guaranteed Interest Division. We will deduct any amount owed to us against the Account Value. We will inform the Owner that the Policy has ended. If the Insured dies during the grace period, we will pay the Death Proceeds to the Beneficiary that reflect reductions for Policy Loans, accrued loan interest and any monthly deductions due. IF THE GUARANTEED MINIMUM DEATH BENEFIT PROVISION IS IN EFFECT If the Guaranteed Minimum Death Benefit provision is in effect, the Stated Death Benefit of the Policy will not lapse during the Guarantee Period even if the Net Account Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date. See Guaranteed Minimum Death Benefit, page 24. The benefits provided by Riders attached to the Policy and any amount by which the Base Death Benefit exceeds the Stated Death Benefit are not protected by the Guaranteed Minimum Death Benefit provision. Therefore, these portions of the Policy benefits will lapse if the Net Account Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date. While the Guaranteed Minimum Death Benefit provision applies, the Account Value may be reduced by monthly deductions, but not below zero. Any monthly deductions during the Guarantee Period which would reduce the Net Account Value below zero will be permanently waived. The Guaranteed Minimum Death Benefit provision will be terminated if the Policy does not meet the monthly premium test or if the Net Account Value is not diversified according to our requirements as explained in - ------------------------------------------------------------------------------- Strategic Advantage 33 Guaranteed Minimum Death Benefit, page 24. If the Guaranteed Minimum Death Benefit provision is terminated the normal premium test for lapse will resume. See Lapse, page 33. GRACE PERIOD If the following conditions occur as of a Monthly Processing Date, the Policy will enter into the 61-day Grace Period: (i) The Account Value is zero or less; and (ii) The three year special continuation period has expired or the required premium has not been paid; and (iii) The Guarantee Period has expired or been terminated. We will, at least 30 days before the end of a grace period, notify the Owner or any assignee in writing at the last known address on our records that the grace period has begun. The notification will include the amount of premium payment necessary to reinstate the Policy and all Riders attached. The premium required to reinstate the Policy is generally the amount of past due charges plus the amount that will cover estimated monthly deductions for the Policy and all attached Riders for the following two months. If we receive payment of this amount before the end of the grace period, we will use the amount sent us to make the overdue deductions. Any balance remaining will be applied to the Account Value in the same manner as other premium payments. REINSTATEMENT The Policy and its Riders may be reinstated within five years after lapse for failure to pay sufficient premiums prior to the end of the grace period. We will reinstate the Policy and any Riders if: (i) The Policy has not been surrendered for its Net Cash Surrender Value; (ii) Evidence satisfactory to us that the Insured and the Insureds under any Riders are still insurable according to our normal rules of underwriting for this type of Policy is provided to us; and (iii) A premium payment sufficient to keep the Policy and any Riders in force from the beginning of the grace period to the end of the grace period and for two months following the date of the reinstatement is made. The reinstatement will be effective as of the Monthly Processing Date following our approval of the reinstatement application. We will also reinstate any Policy Loan which existed when coverage ended, with accrued loan interest to the date of lapse. Net Premiums received after reinstatement will be allocated according to the premium allocation instructions in effect at the start of the grace period or as otherwise directed by the Owner. CHARGES, DEDUCTIONS AND REFUNDS DEDUCTIONS FROM PREMIUMS Unless a Policy Loan is outstanding (see Policy Loans, page 31), any payment received before the Maturity Date is considered a premium. Certain expenses are deducted from premium payments. The remainder of each premium (the Net Premium) is then added to the Account Value. The expenses which are deducted from the premium include the tax charges and the sales charge. TAX CHARGES All states levy taxes on life insurance premium payments. The amount of these taxes vary from state to state, and may vary from jurisdiction to jurisdiction within a state. We currently deduct an amount equal to 2.5% of each premium to pay applicable premium taxes. The 2.5% rate approximates the average tax rate we expect to pay on premiums from all states. A charge currently equal to 1.5% of each premium payment is deducted to cover our estimated cost for the Federal income tax treatment of deferred acquisition costs determined solely by the amount of life insurance premiums we receive. This charge for deferred acquisition costs is reasonable in relation to Security Life's increased Federal income tax burden under Internal Revenue Code Section 848 resulting from the receipt of premium payments. We reserve the right to increase or decrease the premium expense charge for taxes due to any change in tax law. We further reserve the right to increase or decrease the premium expense charge for the Federal income tax treatment of deferred acquisition costs due to any change in the cost to us. SALES CHARGES A percentage of each premium is deducted to compensate us for a portion of the cost of selling the Policy. The - ------------------------------------------------------------------------------- Strategic Advantage 34 percentage deducted is based on the amount of premium paid and the number of years since the Policy Date or the date of an increase in coverage. For each of the first five Policy years, this charge is equal to 8% of premiums paid up to the Target Premium and 3% of premiums paid in excess of the Target Premium. In the sixth Policy year and thereafter, the sales charge is equal to 3% of all premiums paid. Target Premiums are not based on the Scheduled Premium determined when the Policy is purchased. Target Premiums are actuarially determined based on the Age, sex and Premium Class of the Insured. See Premiums, page 21. The Target Premium for the Policy and any Stated Death Benefit coverage segments added since the Policy Date will be listed in the Schedule. For a Policy with multiple coverage segments of Stated Death Benefit, premiums paid are allocated to the segments in the same proportion that the guideline annual premium (as defined by the Federal income tax law) for each segment bears to the total guideline annual premium for the Stated Death Benefit of the Policy. The sales charge covers the cost of distribution, costs of preparing our sales literature, other promotional expenses, and other direct and indirect expenses. The amount of this charge cannot be specifically related to sales expenses in a particular year since we recover these costs over the period the Policies remain in effect. We pay the sales expenses from our own resources, including this sales charge and any profit we may earn on the other charges deducted under the Policy. The sales charge may be reduced or waived for certain group or sponsored arrangements. DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT MORTALITY AND EXPENSE RISK CHARGE Each day a charge is deducted for mortality and expense risks we assume. This charge is equal to 0.002055% per day of the amount in the Divisions of the Variable Account, which is equivalent to an annual rate of 0.75% of the portion of the Account Value allocated to the Variable Account. We assess the mortality and expense risk charge to compensate us for assuming mortality and expense risks under the Policies. The mortality risk we assume is that Insureds, as a group, may live for a shorter period of time than estimated. The expense risk we assume is that other expenses we incur in issuing and administering the Policies and operating the Variable Account will be greater than the amount we estimated when setting the charges for these expenses. We will realize a profit from this fee to the extent it is not needed to provide benefits and pay expenses under the Policies. We may use this profit for other purposes, including any distribution expenses not covered by the sales charge. This charge is not assessed against the amount of Account Value which is allocated to the Guaranteed Interest Division, nor to amounts in the Loan Division. We credit the Account Value with a persistency refund equivalent to 0.5% per year for each coverage segment of Stated Death Benefit that has been in force for at least 10 Policy years, which effectively reduces the charge for mortality and expense risks. See Persistency Refund, page 37. MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE The following charges are deducted from the Account Value on each Monthly Processing Date. These deductions are taken from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the total Net Account Value as of the Monthly Processing Date. INITIAL POLICY CHARGE The initial Policy charge is $10 per month for the first five Policy years and is guaranteed never to exceed this amount. This charge covers the costs of setting up the Policy, other than sales expenses, such as application processing, medical examinations, establishment of Policy records and insurance underwriting costs. This charge is designed to reimburse us for expenses and we do not expect to gain from it. MONTHLY ADMINISTRATIVE CHARGE This charge is comprised of a per Policy charge of $5 per month plus a charge of $0.0125 per thousand of Stated Death Benefit or Target Death Benefit, if greater, and is guaranteed never to exceed this amount. This charge is limited to a maximum of $20 per month. This charge is designed to cover the ongoing costs of maintaining the Policy, such as premium billing and collections, claim processing, Policy transactions, recordkeeping, reporting and other communications with Owners, and other expenses and overhead. This charge is designed to reimburse us for expenses and we do not expect to gain from it. - ------------------------------------------------------------------------------- Strategic Advantage 35 COST OF INSURANCE CHARGES The cost of insurance charges compensate us for providing insurance protection under the Policy. The cost of insurance charges are calculated monthly, and equal our current monthly cost of insurance rate times the Net Amount at Risk for each portion of the death benefit. Net Amount at Risk for each portion of the death benefit is calculated at the beginning of the Policy month. The Net Amount at Risk for the Base Death Benefit is equal to the difference between the current Base Death Benefit and the amount of the Account Value. For this purpose, the amount of the Account Value is determined after deduction of charges due on that date, other than cost of insurance charges for the Base Death Benefit, any Adjustable Term Insurance Rider, and Waiver of Cost of Insurance Rider. The Net Amount at Risk for the Adjustable Term Insurance Rider is equal to the amount of the benefit provided. If the Base Death Benefit at the beginning of the month is increased due to the requirements of Federal income tax law definition of life insurance, Net Amount at Risk for the Base Death Benefit that month will also increase, but the Net Amount at Risk for any Adjustable Term Insurance Rider may be reduced. Therefore, the amount of the cost of insurance charges will vary from month to month with changes in the Net Amount at Risk, changes in the relative makeup of the death benefit, and with increasing Age of the Insured. The cost of insurance rates are based on the Age, sex and Premium Class of the Insured on the Policy Date or at the time a Base coverage segment is added, as well as the length of time the Policy or coverage segment has been in effect. Unisex rates are used where appropriate under applicable law, currently including the state of Montana and any Policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Net Amount at Risk is allocated to Stated Death Benefit coverage segments in the same proportion that the Stated Death Benefit of each segment bears to the sum of the Stated Death Benefit for all coverage segments as of the Monthly Processing Date. Separate cost of insurance rates apply to the Base Death Benefit, the Adjustable Term Insurance Rider and any additional Base coverage segments. We may change these rates from time to time, but they will never be more than the guaranteed maximum rates set forth in the Policy. The guaranteed maximum rates for fully underwritten policies are based on the 1980 Commissioners Standard Ordinary Mortality Table. We may offer Policies on a guaranteed issue basis to certain group or sponsored arrangements. If an eligible group or sponsored arrangement purchases Policies on a guaranteed issue basis, the Policies will be issued up to a predetermined face amount limit, with only minimal evidence of insurability. Because only limited underwriting information is obtained, Policies issued on a guaranteed issue basis may present additional mortality cost to us compared to underwritten Policies. We will charge increased cost of insurance rates for guaranteed issue Policies. The amount of the increased charges will depend on the issue Age of the Insured, and may also depend on the size of the group and the total premium to be paid by the group. Under guaranteed issue Policies, the overall charges for insurance will be higher than under a comparable underwritten Policy issued in the nonsmoker standard or smoker standard class. This means that an Insured may be able to obtain individual, underwritten insurance coverage at a lower overall cost. The guaranteed rates for guarantee issue policies are no greater than 135 percent of the maximum rates that could be charged based on the 1980 Commissioner's Standard Ordinary Mortality Table ("1980 CSO Table"). The guaranteed rates are higher than 100 percent of the maximum rates in the 1980 CSO Table because we use simplified underwriting procedures whereby the Insured may not be required to submit to a medical or paramedical examination. The current cost of insurance rates after the 15th Policy Year are generally lower than 100 percent of the 1980 CSO Table. Any change in the current cost of insurance rates will apply to all persons of the same Age and rate class. The maximum rates for the initial and any new coverage segment will be printed in the Schedule which we will provide to you. CHARGES FOR ADDITIONAL BENEFITS The cost of any additional benefits added by Rider will be deducted monthly on the Monthly Processing Date. We may change these charges, but the Schedule contains tables showing the guaranteed maximum rates for all of these benefits. See Additional Benefits, page 26. GUARANTEED MINIMUM DEATH BENEFIT CHARGE If the Guaranteed Minimum Death Benefit is purchased, we currently charge $0.005 per thousand of Stated Death Benefit each month during the Guarantee Period. This charge is guaranteed never to exceed $0.01 per thousand of Stated Death Benefit each month. CHANGES IN MONTHLY CHARGES Any changes in the cost of insurance charges, charges for additional benefits, or guaranteed minimum death benefit charge will be made by class of Insured and will be based on changes in future expectations about such things as - ------------------------------------------------------------------------------- Strategic Advantage 36 investment earnings, mortality, the length of time policies will remain in effect, expenses and taxes. In no event will they exceed the guaranteed maximum rates defined in the Policy. POLICY TRANSACTION FEES In addition to the deductions described above, we charge fees for certain Policy transactions. Transaction fees are taken from the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the total Net Account Value immediately before the transaction for which the fee is charged. PARTIAL WITHDRAWAL A service fee equal to the lesser of $25 or 2% of the amount requested will be charged against the Account Value for each Partial Withdrawal. See Partial Withdrawals, page 32. TRANSFERS We charge a fee of $25 for each additional transfer beyond the first twelve in a Policy year. See Transfers of Account Values, page 29. All transfers for a single Policy included in one transfer request count as a single transfer when we calculate the fee. There will not be a transfer fee for transfers of Account Value into the Guaranteed Interest Division pursuant to the Exchange Right provided by this Policy. See Right to Exchange Policy, page 33. PREMIUM ALLOCATION CHARGES We charge a fee of $25 each time the premium allocation is changed beyond five times per Policy year. ILLUSTRATIONS We reserve the right to charge a fee, not to exceed $25, for Policy illustrations in excess of one per Policy year. PERSISTENCY REFUND Long-term Owners of Strategic Advantage will receive a persistency refund. Each month the Policy or a coverage segment of Stated Death Benefit remains in force after its tenth Policy anniversary, we will credit the Account Value with a refund equivalent to 0.5% of the Account Value on an annual basis for that segment (0.04167% monthly). For purposes of this calculation, Account Value will be allocated to each coverage segment based upon the number of completed Policy years that segment has been in force and the size of the guideline annual premium as defined by the Federal income tax law definition of life insurance. The Persistency refund will be added to the Divisions of the Variable Account and the Guaranteed Interest Division in the same proportion that the Account Value in each Division bears to the Net Account Value as of the Monthly Processing Date. The following is an example of how the persistency refund affects the Account Value each month if the policy has no loan: Account Value = $10,000 (all in the Variable Divisions) Monthly persistency refund Rate = .0004167 Persistency refund = 10,000 x .0004167 = $4.17 Before Persistency After Persistency Refund Refund ------------------ ----------------- Variable $10,000.00 $10,004.17 Divisions The following is an example of how the persistency refund affects the Account Value each month if the Policy has a loan: Account Value = $10,000 Account Value in the Variable Divisions = $5,000 Account Value in the Loan Division = $5,000 Monthly persistency refund Rate = .0004167 Persistency refund = 10,000 x .0004167=$4.17 Before Persistency After Persistency Refund Refund ------------------ ----------------- Variable $5,000.00 $5,004.17 Divisions Loan $5,000.00 $5,000.00 Division - -------------------------------------------------------------------------------- Strategic Advantage 37 REFUND OF SALES CHARGES If the Policy has not lapsed, we will, upon full surrender of the Policy within the first two Policy years, refund a portion of the sales charges previously deducted from premiums paid. In the first Policy year, the amount of the refund is equal to 5% of the premiums paid in that year. In the second Policy year, the refund is equal to 2.5% of the premiums paid in the first Policy year. After the second Policy anniversary, there is no refund of sales charges. CHARGES FROM PORTFOLIOS Our Variable Account purchases shares of the Portfolios at net asset value. That price reflects investment management fees and other direct expenses that have already been deducted from the assets of the Portfolio. The following table describes these investment management fees and other direct expenses of the Portfolios. - ------------------------------------------------------------------------------- Strategic Advantage 38
PORTFOLIO ANNUAL EXPENSES (AS A PERCENTAGE OF PORTFOLIO AVERAGE NET ASSETS)/1/ TOTAL MANAGEMENT OTHER PORTFOLIO PORTFOLIO FEES EXPENSES EXPENSES - --------------------------- ---------- -------- --------- Neuberger & Berman Advisers Management Trust /2/ Limited Maturity Bond Portfolio 0.65% 0.10% 0.75% Government Income Portfolio /3/ 0.00% 1.04% 1.04% Growth Portfolio 0.84% 0.10% 0.94% Partners Portfolio 0.85% 0.30% 1.15% The Alger American Fund Alger American Small Capitalization Portfolio 0.85% 0.07% 0.92% Alger American MidCap Growth Portfolio 0.80% 0.10% 0.90% Alger American Growth Portfolio 0.75% 0.10% 0.85% Alger American Leveraged AllCap Portfolio 0.85% 0.71%/4/ 1.56%/4/ Fidelity Variable Insurance Products Fund VIP Growth Portfolio 0.61% 0.09% 0.70% VIP Overseas Portfolio 0.76% 0.15% 0.91% VIP Money Market Portfolio 0.24% 0.09% 0.33% Fidelity Variable Insurance Products Fund II VIP II Asset Manager Portfolio 0.71% 0.08% 0.79%/5/ VIP II Index 500 Portfolio 0.00% 0.28% 0.28%/6/ INVESCO Variable Investment Funds, Inc. INVESCO VIF - Total Return Portfolio 0.75% 0.26% 1.01%/7//8/ INVESCO VIF - Industrial Income Portfolio 0.75% 0.28% 1.03%/7//9/ INVESCO VIF - High Yield Portfolio 0.60% 0.37% 0.97%/7//10/ INVESCO VIF - Utilities Portfolio 0.60% 1.20% 1.80%/7//11/ Van Eck Worldwide Insurance Trust Worldwide Balanced Fund 0.00%/12/ 0.00%/12/ 0.00%/12/ Gold and Natural Resources Fund 1.00% 0.21% 1.21%
- ------------ /1/ The preceding Portfolio expense information was provided to us by the Portfolios, and we have not independently verified such information. These Portfolio expenses are not direct charges against Division assets or reductions from Account Values; rather these Portfolio expenses are taken into consideration in computing each underlying Portfolio's net asset value, which is the share price used to calculate the unit values of the Divisions. For a more complete description of the Portfolios costs and expenses, see the prospectuses for the Portfolios. /2/ 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. Expenses in the table reflect expenses of the Portfolios and include each Portfolio's pro rata portion of the operating expenses of each Portfolio's corresponding Series. The Portfolios pay Neuberger & Berman Management, Inc. ("NBMI"), an administration fee based on the Portfolio's net asset value. Each Portfolio's corresponding Series pays NBMI a management fee based on the Series' average daily net assets. Accordingly, this table combines management fees at the Series level and administration fees at the Portfolio level in a unified fee rate. See "Expenses" in the Trust's Prospectus. /3/ Expenses reflect expense reimbursement. NBMI has undertaken to reimburse the Government Income Portfolio for certain operating expenses, including the compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed 1% of the Government Income Portfolios average daily net asset value. Absent such reimbursement, the "Total Portfolio Expenses" for the year ended December 31, 1995, would have been 4.80%. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolio. /4/ The Alger American Leveraged AllCap Portfolio's "Other Expenses" includes 0.06% of interest expense. Absent reimbursements to the Portfolio by its Manager, the amount of "Other Expenses" and "Total Portfolio Expenses" would have been 3.07% and 3.92%, respectively. /5/ A portion of the brokerage commissions the Portfolio paid was used to reduce its expenses. Without this reduction, "Total Portfolio Expenses" would have been 0.81%. /6/ The Portfolio's expenses were voluntarily reduced by the Portfolio's investment adviser. Absent such reimbursement, "Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have been 0.28%, 0.19% and 0.47%, respectively. /7/ The Portfolio's custodian fees were reduced under an expense offset arrangement. In addition, certain expenses of the Portfolios are being absorbed voluntarily by INVESCO Funds Group, Inc. ("IFG"). The above ratios reflect total expenses, less expenses absorbed by IFG, prior to any expense offset. /8/ In the absence of the voluntary expense limitation, the Total Return Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have been 1.76% and 2.51%, respectively, based on the Portfolio's actual expenses for the fiscal year ended December 31, 1995. /9/ In the absence of the voluntary expense limitation, the Industrial Income Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have been 1.56% and 2.31%, respectively, based on the Portfolio's actual expenses for the fiscal year ended December 31, 1995. /10/ In the absence of the voluntary expense limitation, the High Yield Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have been 2.11% and 2.71%, respectively, based on the Portfolio's actual expenses for the fiscal year ended December 31, 1995. /11/ In the absence of the voluntary expense limitation, the Utilities Portfolio's "Other Expenses" and "Total Portfolio Expenses" would have been 56.53% and 57.13%, respectively, based on the Portfolio's actual expenses for the fiscal year ended December 31, 1995. /12/ The Portfolio's expenses were voluntarily reduced by the Portfolio's investment manager. Absent such reimbursement, "Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have been 0.75%, 0.60% and 1.35%, respectively. "Other Expenses" of 0.60% are based on a net asset estimation of $30 million. - ------------------------------------------------------------------------------- Strategic Advantage 39 GROUP OR SPONSORED ARRANGEMENTS This Policy is available for purchase by individuals, corporations and other institutions. For group or sponsored arrangements (including home office employees of Security Life) and for special exchange programs which Security Life may offer from time to time, we may reduce or eliminate the sales charge, the length of time the sales charge applies, the administrative charge, the minimum Stated Death Benefit, the maximum Target Death Benefit, the Minimum Annual Premium, the Target Premium, cost of insurance charges, or other charges normally assessed to reflect the expected economies resulting from a group or sponsored arrangement. We may also allow Partial Withdrawals to be taken without a charge. Group arrangements include those in which a trustee, an employer or an association either purchases Policies covering a group of individuals on a group basis or endorses the 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 costs for sales, administration and mortality generally vary with the size and stability of the group, among other factors. We take all these factors into account when reducing charges. To qualify for reduced charges, a group or sponsored arrangement must meet certain requirements. We will make any reductions according to our rules in effect when an application form for a Policy is approved. We may change these rules from time to time. Any variation in the sales charge, administrative charge or other charges, fees and privileges will reflect differences in costs or services and will not be unfairly discriminatory. OTHER CHARGES Under current law we pay no tax on investment income and capital gains reflected in variable life insurance policy reserves (except to the extent the Federal deferred acquisition cost may be considered such a tax). Consequently, no charge is currently being made to any Division of our Variable Account for our Federal income taxes. We reserve the right, however, to make such a charge in the future if the tax law changes and we incur Federal income tax which is attributable to the Variable Account. We must pay state and local taxes (in addition to applicable taxes based on premiums) in several states. At the present time, these taxes are not substantial. However, if these taxes increase, we also reserve the right to make charges for such taxes when they are attributable to our Variable Account. TAX CONSIDERATIONS The following discussion provides a general description of the Federal income tax consequences of the Policy, based on our understanding of the present Federal income tax laws as they are currently interpreted by the Internal Revenue Service ("IRS"). No representation is made as to the likelihood of continuation of the present Federal income tax laws or of the current interpretations by the IRS. This discussion is general in nature, and should not be considered tax advice. Further, it is not intended to present an exhaustive survey of all the tax issues that might arise under the Policy. Because of the complexity of the laws and the fact that tax results will vary according to the particular circumstances of the Owner, a legal or tax adviser should be consulted prior to purchasing the Policy. LIFE INSURANCE DEFINITION Section 7702 of the Internal Revenue Code of 1986, as amended (the "Code"), sets forth the definition of a life insurance contract for Federal tax purposes. The Secretary of the Treasury (the "Treasury") is authorized to prescribe regulations implementing Section 7702. While proposed regulations and other interim guidance has been issued, final regulations have not been adopted. In short, guidance as to how Section 7702 is to be adopted is limited. If a Policy were determined not to be a life insurance contract for purposes of Section 7702, such Policy would not qualify for the favorable tax treatment normally provided to a life insurance policy. Section 7702 provides that if one of two alternate tests are met, a Policy will be treated as a life insurance policy for Federal income tax purposes. These tests are referred to as the "Cash Value Accumulation Test" and the "Guideline Premium/Cash Value Corridor Test." 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's Age, sex and Premium Class at any point in time, times the Account Value. See APPENDIX A, page 120, for a table of the Cash Value Accumulation Test factors. The Guideline Premium/Cash Value Corridor Test provides for a maximum premium in relation to the Death Benefit, and a minimum "corridor" of death benefit in relation to Account Value. In most situations, the death benefit that results from the Guideline Premium/Cash Value Corridor Test will ultimately be less than the amount of death benefit required under the Cash Value - ------------------------------------------------------------------------------- Strategic Advantage 40 Accumulation Test. See APPENDIX B, page 128, for a table of the Guideline Premium/Cash Value Corridor Test factors. This Policy allows the Owner to choose, at the time of application, which of these tests we will always apply to the Policy. A choice of tests is irrevocable. Regardless of which test is chosen, 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. Therefore, the entire death benefit should be excludable from gross income of the beneficiary under Section 101(a)(1) of the Code. In addition, so 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. The favorable tax treatment of Section 101(a) will not apply to benefits paid at maturity of the policy (age 100). See Benefits at Maturity, page 26. Also, any interest payment accrued on Death Proceeds paid either as a lump sum or other than in one lump sum may be subject to tax. See Settlement Provisions, page 48. The Federal government has in the past and may in the future consider new legislation or regulations that, if enacted, could change the FederalFederal income tax treatment of life insurance policy income or death benefits. Any such change could have a retroactive effect. Such concerns should be addressed by a legal or tax adviser. DIVERSIFICATION REQUIREMENTS In addition to meeting the tests required under Section 7702, Section 817(h) of the Code requires that the investments of separate accounts such as the Variable Account be adequately diversified. Regulations issued by the Secretary of the Treasury set the standards for measuring the adequacy of this diversification. To be adequately diversified, each Division of the Variable Account must meet certain tests. A variable life policy that is not adequately diversified under these regulations would not be treated as life insurance under Section 7702 of the Code. If this were to occur, the Owner would be subject to Federal income tax on the income under the Policy as it is earned. The Portfolios in which the Variable Account invests have provided certain assurances that they will meet the applicable diversification standards. In certain circumstances, owners of variable life insurance contracts may be considered the owners, for Federal income tax purposes, of the assets of the separate account used to support their contracts. In those circumstances, income and gains from the separate account assets would be includable in the variable contract owner's gross income. The IRS has stated in published rulings that a variable contract owner will be considered the owner of separate account assets if the contract owner possesses incidents of ownership in those assets, such as the ability to exercise investment control over the assets. The Treasury also announced, in connection with the issuance of temporary regulations concerning diversification, that those regulations "do not provide guidance concerning the circumstances in which investor control of the investments of a segregated asset account may cause the investor (i.e., the policyowner), rather than the insurance company, to be treated as the owner of the assets in the account." This announcement also stated that guidance would be issued by way of regulations or rulings on the "extent to which policyholders may direct their investments to particular subaccounts without being treated as owners of the underlying assets." The ownership rights under the Policy are similar to, but different in certain respects from, those described by the IRS in rulings in which it was determined that policy holders were not owners of separate account assets. For example, the Owner has additional flexibility in allocating premium payments and Policy values. These differences could result in an Owner being treated as the owner of a pro rata portion of the assets of the Variable Account. In addition, Security Life does not know what standards will be set forth, if any, in the regulations or rulings which the Treasury has stated it expects to issue. Security Life therefore reserves the right to modify the Policy as necessary to attempt to prevent an Owner from being considered the owner of a pro rata share of the assets of the Variable Account or to otherwise qualify the Policy for favorable tax treatment. MODIFIED ENDOWMENT CONTRACTS Code Section 7702A establishes a class of life insurance contracts designated as "Modified Endowment Contracts," which applies to Policies entered into or materially changed after June 20, 1988. Due to the Policy's flexibility, classification as a Modified Endowment Contract will depend on the individual circumstances of each Policy. In general, a Policy will be a Modified Endowment Contract if the accumulated premiums paid at any time during the first seven Policy years exceeds the sum of the net level premiums which would have been paid on or before such time if the Policy provided for paid-up future benefits after the payment of seven level annual premiums. The determination of whether a Policy will be a Modified - ------------------------------------------------------------------------------- Strategic Advantage 41 Endowment Contract after a material change generally depends upon the relationship of the death benefit and the Account Value at the time of such change and the additional premiums paid in the seven years following the material change. The rules relating to whether a Policy will be treated as a Modified Endowment Contract are extremely complex and cannot be fully described in the limited confines of this summary. Therefore, a current or prospective Owner should consult with a competent advisor to determine whether a Policy transaction will cause the Policy to be treated as a Modified Endowment Contract. Security Life will, however, monitor Policies and will attempt to notify an Owner on a timely basis if the Owner's Policy becomes a Modified Endowment Contract. TAX TREATMENT OF PREMIUMS No deduction is allowed for premiums paid on any life insurance policy covering the life of any officer or employee, or of any person financially interested in any business carried on by the taxpayer, when the taxpayer is a beneficiary (directly or indirectly) under such policy. LOANS, SURRENDERS AND WITHDRAWALS IF THE POLICY IS NOT A MODIFIED ENDOWMENT CONTRACT If a Policy is not a Modified Endowment Contract, as long as it remains in force, a loan under the Policy will be treated as indebtedness and no part of the loan will be subject to current Federal income tax. Interest paid (or accrued by an accrual basis taxpayer) on the loan may or may not be tax deductible. Consult your tax adviser for advice on the availability of deductions. Any time a Policy is surrendered or lapses, the excess, if any, of the Cash Surrender Value over the Owner's "investment in the Policy" will be subject to Federal income tax as ordinary income. ("investment in the Policy" means (i) the aggregate amount of any premiums or other consideration paid for a Policy, minus (ii) the aggregate amount received under the Policy which is excluded from gross income of the Owner (except that the amount of any loan from, or secured by, a Policy that is a Modified Endowment Contract, to the extent such amount is excluded from gross income, will be disregarded), plus (iii) the amount of any loan from, or secured by a Policy that is a Modified Endowment Contract to the extent that such amount is included in the gross income of the Owner.) It is important to note that for this calculation, if the Policy terminates while a Policy Loan is outstanding, the total amount of the loan and accrued loan interest will be treated as a distribution and could be subject to tax under the above rules. As a result, in certain circumstances this may result in taxable income to the Owner even though the Policy has no Net Cash Surrender Value. Proceeds received on a Withdrawal may or may not be taxable depending on the Owners particular circumstances. During the first 15 Policy years, the proceeds from a Partial Withdrawal could be subject to Federal income tax to the extent the Cash Surrender Value exceeds investment in the Policy. The portion subject to tax will depend upon the ratio of the death benefit to Account Value under the Policy and the Age of the Insured at the time of the withdrawal. After the first 15 Policy years, the proceeds from a Partial Withdrawal will not be subject to Federal income tax except to the extent such proceeds exceed investment in the Policy. IF THE POLICY IS A MODIFIED ENDOWMENT CONTRACT If a Policy is a Modified Endowment Contract, any pre-death distribution from the Policy will be taxed on an "income-first" basis, similar to the treatment of annuities for individuals. Distributions for this purpose include a surrender, Partial Withdrawal or Policy Loan, including any increase in a loan amount to pay interest on an existing loan or an assignment or a pledge to secure a loan. Any such distributions will be considered taxable income to the Owner to the extent the Account Value exceeds investment in the Policy immediately before the distribution. All Modified Endowment Contracts that are issued by Security Life (and its affiliates) to the same Owner during any calendar year are treated as one Modified Endowment Contract for purposes of determining the amount includable in the gross income under Code Section 72(c). A 10% penalty tax will also apply to the taxable portion of a distribution from a Modified Endowment Contract, unless an exception applies. The penalty tax will not apply to distributions (i) when the taxpayer is at least 59 1/2 years of age, (ii) in the case of a disability (as defined in the Code) or (iii) received as part of a series of substantially equal periodic payments, made at least annually for the life (or life expectancy) of the taxpayer or the joint lives (or joint life expectancies) of the taxpayer and his or her beneficiary. Since these exclusions do not apply to corporations or other business entities, the 10% penalty tax would always apply to these types of owners. If the Policy is surrendered, the excess, if any, of the Cash Surrender Value over investment in - ------------------------------------------------------------------------------- Strategic Advantage 42 the Policy will be subject to Federal income tax and, unless one of the above exceptions applies, the 10% penalty tax. If a Policy was not originally a Modified Endowment Contract but later becomes one, distributions that occur during the Policy year it becomes a Modified Endowment Contract and any subsequent Policy year will be taxed as described in the two preceding paragraphs. In addition, any distributions from the Policy made within two years before it becomes a Modified Endowment Contract will be treated as having been made in anticipation of the change and will be subject to tax in this manner. This means that a distribution made from a Policy that is not a modified endowment could later become taxable as a distribution from a Modified Endowment Contract. The Treasury has been authorized to prescribe rules which would address this issue. ALTERNATIVE MINIMUM TAX For purposes of the alternative minimum tax adjusted current earnings adjustment, special rules apply with respect to life insurance contracts. Under these rules, death benefit proceeds are taken into account, increases in cash value attributable to investment performance are taken into account currently and the distribution tax rules apply in a modified form. TAX-EXEMPT POLICY OWNERS Special rules may apply in the case of a Policy owned by a tax-exempt entity. Accordingly, tax-exempt entities should consult with a tax advisor regarding the consequences of purchasing and owning a Policy, including the effect, if any, on the tax-exempt status of the entity and the application of the unrelated business income tax. CHANGES TO COMPLY WITH LAW To assure that the Policy continues to qualify as life insurance under the Code, we reserve the right to decline to accept all or part of any premium payments, to decline to change death benefits, or to decline to make Partial Withdrawals that would cause the Policy to fail to qualify. We may also make changes in the Policy or its Riders, require additional premium payments or make distributions from the Policy to the extent we deem necessary to qualify the Policy as life insurance for tax purposes. Any such change will apply uniformly to all policies that are affected. The Policy Owner will be given advance notice of such changes. The tax law limits the allowable charges for mortality costs and other expenses that may be used in making calculations to determine whether a Policy qualifies as life insurance for Federal income tax purposes. These calculations must be based upon reasonable mortality charges and other charges reasonably expected to be paid. The Treasury has issued proposed regulations on the reasonableness standards for mortality charges. Security Life believes that the charges used for this purpose in the Policy should meet the current requirement for reasonableness. Security Life reserves the right to make modifications to the mortality charges if future regulations contain standards which make modification necessary in order to continue qualification of the Policy as life insurance for Federal income tax purposes. In addition, assuming that the Policy is not intended by the Owner to be or become a Modified Endowment Contract, we will include an endorsement to the Policy whereby we reserve the right to amend the Policy, including any Rider, to assure that the Policy continues to comply with the seven-pay test for Federal income tax purposes. If at any time the premium paid under the Policy exceeds the seven-pay limit, we reserve the right to remove such excess premium or make any appropriate adjustments to the Policy's Account Value and death benefits. Any death benefit increase will cause an increase in the cost of insurance charges. OTHER The Policies may be used in various arrangements, including nonqualified deferred compensation or salary continuance plans, split dollar insurance plans, executive bonus plans, retiree medical benefit plans and others. The tax consequences of such plans may vary depending on the particular facts and circumstances of each individual arrangement. Therefore, if the Owner is contemplating the use of the Policies in any arrangement the value of which depends in part on its tax consequences, the Owner should be sure to consult a qualified tax advisor regarding the tax attributes of the particular arrangement. We are required to withhold income taxes from any portion of the amounts received by individuals in a taxable transaction, unless an election is made in writing not to have withholding apply. If the election not to have withholding is made, or if the amount withheld is insufficient, income taxes, and possibly penalties, may have to be paid later. Federal estate and gift taxes and state and local inheritance, estate, and other tax consequences of ownership or receipt of Policy benefits depend on the - ------------------------------------------------------------------------------- Strategic Advantage 43 particular jurisdiction and the circumstances of each Owner and Beneficiary. QUALIFIED LEGAL OR TAX ADVISERS SHOULD BE CONSULTED FOR COMPLETE INFORMATION ON FEDERAL, STATE, LOCAL AND OTHER TAX CONSIDERATIONS. ADDITIONAL INFORMATION ABOUT THE POLICY VOTING PRIVILEGES We invest the assets in the Divisions of the Variable Account in shares of the corresponding Portfolios. See Investment Objectives of the Portfolios, page 17. We are the legal owner of the shares held in the Variable Account and, as such, have the right to vote on certain matters. Among other things, we may vote on any matters described in the Funds current prospectus or requiring a vote by shareholders under the Investment Company Act of 1940. Even though we own the shares, to the extent required by the interpretations of the SEC, we give Owners the opportunity to tell us how to vote the number of shares that are attributable to their Policies. We will vote those shares at meetings of Portfolio shareholders according to these instructions. We will also vote any Portfolio shares that are not attributable to the Policies and shares for which instructions from Owners were not received in the same proportion that Owners vote. If the FederalFederal securities laws or regulations or interpretations of them change so that we are permitted to vote shares of a Portfolio in our own right or to restrict Owner voting, we reserve the right to do so. Owners may participate in voting only on matters affecting the Portfolios in which the Owners assets have been invested. We determine the number of Portfolio shares in each Division that are attributable to a Policy by dividing the Account Value allocated to that Division by the net asset value of one share of the corresponding Portfolio. The number of shares as to which an Owner may give instructions will be determined as of the record date set by the Portfolios Board for the Portfolio's shareholders meeting. We count fractional shares. Owners having a voting interest will be sent proxy material and a form for giving us voting instructions. All Portfolio shares are entitled to one vote. The votes of all Portfolios are cast together on an aggregate basis, except on matters where the interests of the Portfolios differ. In such cases, voting is on a portfolio-by-portfolio basis. In these cases, the approval of the shareholders in one Portfolio is not needed in order to make a decision in another Portfolio. Examples of matters that would require a portfolio-by-portfolio vote are changes in the fundamental investment policy of a particular Portfolio or approval of an investment advisory agreement. Shareholders in a Portfolio not affected by a particular matter generally would not be entitled to vote on it. The Boards of the Portfolios and Security Life and any other insurance companies participating in the Portfolios are required to monitor events to identify any material conflicts that may arise from the use of the Portfolios for variable life and variable annuity separate accounts. Conflict might arise as a result of changes in state insurance law or Federal income tax law, changes in investment management of any Portfolio, or differences in voting instructions given by owners of variable life insurance policies and variable annuity contracts. Shares of these Portfolios may also be sold to certain qualified pension and retirement plans qualifying under Section 401 of the Code that include cash or deferred arrangements under Section 401(k) of the Code. As a result, there is a possibility that a material conflict may arise between the interests of owners generally or certain classes of owners, and such retirement plans or participants in such retirement plans. If there is a material conflict, we will have an obligation to determine what action should be taken including the removal of the affected Portfolios from eligibility for investment by the Variable Account. We will consider taking other action to protect Owners. However, there could be unavoidable delays or interruptions of operations of the Variable Account that we may be unable to remedy. In certain cases, when required by state insurance regulatory authorities, we may disregard instructions relating to changes in the Portfolio's adviser or the investment policies of the Portfolios. In the event we do disregard voting instructions, we will include a summary of our actions and give our reasons in the next semi-annual report to Owners. Under the Investment Company Act of 1940, certain actions affecting the Variable Account (such as some of those described under Right To Change Operations) may require Owner approval. In that case, each Owner will be entitled to one vote for every $100 of value held in the Divisions of the Variable Account. We will cast votes attributable to amounts in the Divisions of the Variable Account not attributable to Policies in the same proportions as votes cast by Owners. - ------------------------------------------------------------------------------- Strategic Advantage 44 RIGHT TO CHANGE OPERATIONS We may from time to time make the following changes to the Variable Account: (i) Make additional Divisions available. These Divisions will invest in Portfolios we find suitable for the Policy. (ii) Eliminate Divisions from the Variable Account, combine two or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may also happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions, or because the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. (iii) Transfer assets of the Variable Account, which we determine to be associated with the class of policies to which an Owner's Policy belongs, to another Variable Account. (iv) Withdraw the Variable Account from registration under the 1940 Act. (v) Operate the Variable Account as a management investment company under the 1940 Act. (vi) Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. (vii) Discontinue the sale of Policies and certificates. (viii) Terminate any employer or plan trustee agreement with us pursuant to its terms. (ix) Restrict or eliminate any voting rights as to the Variable Account. (x) Make any changes required by the 1940 Act or the rules or regulations thereunder. No such changes will be made without any necessary approval of the SEC and applicable state insurance departments. Owners will be notified of any changes. If an Owner then wishes to transfer the amount in that Division to another Division of the Variable Account or to the Guaranteed Interest Division, they may do so, without charge, by notifying us. At the same time, changes in Net Premium and deduction allocations may also be made, without charge. REPORTS TO OWNERS We will maintain all records relating to the Variable Account, its Divisions and the Guaranteed Interest Division. At the end of each Policy year we will send the Owner a report that shows the Total Policy Death Benefit (Base Death Benefit plus Adjustable Term Insurance Rider Death Benefit, if any), the Account Value, the Policy Loan plus accrued Loan Interest and Net Cash Surrender Value.amount of the Stated Death Benefit for the Policy, the Target Death Benefit if the Adjustable Term Insurance Rider is included, the current Death Benefit, the Account Value, the Cash Surrender Value of the Policy, the amount of any outstanding Policy Loan, and the amount of any interest owed on the loan. We will also include information about the Divisions of the Variable Account. The report also shows any transactions involving the Account Value that occurred during the year such as premium allocations, deductions, and any loanstransfers or withdrawals in that year. We will also send semi-annual reports to the Owner, which will include financial information on the Portfolios, including a list of the investments held by each Portfolio. Confirmation notices will be sent to the Owner during the year for certain Policy transactions. OTHER GENERAL POLICY PROVISIONS FREE LOOK PERIOD Owners have the right to examine the Policy. If for any reason the Owner is not satisfied with the Policy, it may be returned to us or the Registered Representative within the time limit described below and it will be deemed void as of the Policy Date. A request to cancel this Policy must be postmarked no later than i) 45 days after Part I of the Policy application, ii) 20 days after the Policy is received, or iii) 10 days after we mail the Notice of Withdrawal Right, whichever is latest or as otherwise specified by the state. The Policy will be deemed to have been received by the Owner 15 days after it is mailed from our Customer Service Center. If a Policy is canceled under this provision, we will refund an amount equal to the full amount of any premiums paid. Insurance coverage ends when the request is sent. Amounts allocated to the Divisions of the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio until the end of the Free Look Period. At the end of the Free Look Period, this portion of the Account Value will be reallocated according to the most recent premium allocation instructions. - ------------------------------------------------------------------------------- Strategic Advantage 45 THE POLICY This Policy is a contract between the Owner and us. The Policy, including a copy of the original application and any applications for an increase, Riders, endorsements, Schedule pages, and any reinstatement applications make up the entire contract. A copy of any application as well as a new Schedule will be attached or furnished to the Owner for attachment to the Policy at the time of any change in coverage. In the absence of fraud, all statements made in any application will be considered representations and are not warranties. No statement will be used to deny a claim unless it is in an application. AGE This Policy is issued at the Age stated in the Schedule. This is the Insured's Age nearest birthday, calculated as of the Policy Date. The Age of the Insured at any time is calculated by adding the number of completed Policy years to the Age shown in the Schedule. OWNERSHIP The original Owner is the person named in the application. The Owner can exercise all rights and receive the benefits during the Insured's lifetime before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. An Owner may name a new Owner by giving us written notice. The effective date of the change to the new Owner will be the date the notice is signed. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. BENEFICIARY The Owner names the Beneficiary when applying for the Policy. The primary Beneficiary surviving the Insured will receive any Death Proceeds which become payable. Surviving contingent Beneficiaries are paid Death Proceeds only if no primary Beneficiary has survived the Insured. If more than one Beneficiary survives the Insured, they will share the Death Proceeds equally, unless the designation provides otherwise. If there is no designated Beneficiary surviving, Death Proceeds will be paid to the Owner or the Owner's estate. The Beneficiary designation will be on file with us or at a location designated by us. A new Beneficiary may be named during the Insured's lifetime. We will pay the proceeds to the most recent Beneficiary designation on file. We will not be subject to multiple payments. COLLATERAL ASSIGNMENT This Policy may be assigned as collateral security by sending written notice to us. Once it is recorded with us, the rights of the Owner and the Beneficiary are subject to the assignment. It is the Owners responsibility to make sure the assignment is valid. INCONTESTABILITY We can challenge the validity of the insurance Policy if it appears that there have been material misstatements in the application. However, there are limits as to how and when we can challenge the Policy: .. We will not contest the statements in the application attached at issue after the Policy has been in effect, during the Insured's lifetime, for two years from the Policy Date. .. We will not contest the statements in the application for any reinstatement after the reinstatement has been in effect, during the Insured's lifetime, for two years from the effective date of such reinstatement. .. We will not contest the statements in the application for any coverage change that increases any benefit with respect to the Insured (such as an increase in Stated Death Benefit) after the change has been in effect, during the Insured's lifetime, for two years from the effective date of such increase. MISSTATEMENTS OF AGE OR SEX If the Age or sex of the Insured has been misstated, the death benefit will be adjusted. The death benefit will be adjusted to the amount which would have been purchased for the Insured's correct Age and sex based on the cost of insurance charges which were deducted from the Account Value on the last Monthly Processing Date prior to the Insureds death. If unisex cost of insurance rates apply, we will not make an adjustment for a misstatement of sex. SUICIDE If the Insured commits suicide within two years of the Policy Date or date of reinstatement, the death benefit will be limited to the total of all premiums that have been paid to the time of death minus the amount of any outstanding Policy Loan and accrued loan interest and minus any withdrawals, unless otherwise required by law. - ------------------------------------------------------------------------------- Strategic Advantage 46 If the Insured has been changed and the new Insured dies by suicide within two years of the exchange date, the death benefit will be limited to the Net Account Value as of the exchange date, plus the premiums paid since that date, less the sum of any increases in Policy Loan, accrued loan interest and any Withdrawals since the exchange date. If the Insured commits suicide within two years after the effective date of an increase in the Stated Death Benefit or the Target Death Benefit that was requested, we will pay the death benefit which was in effect before the increase, plus a refund of the amount of the monthly cost of insurance deductions related to the increased death benefit, unless otherwise required by law. PAYMENT We will pay the Death Proceeds, Net Cash Surrender Value upon surrender, Partial Withdrawals, and loan proceeds within seven days after we receive the information required to process the payment. We will also execute a transfer among Divisions of the Variable Account as of the Valuation Date on or next following our receipt of a request at our Customer Service Center. Transfers from the Guaranteed Interest Division to the Divisions of the Variable Account will be made only within the time periods indicated in this prospectus. See Transfers of Account Values, page 29. We may, however, postpone the processing of any such transactions for any of the following reasons: .. When the NYSE is closed for trading; .. When trading on the NYSE is restricted by the SEC; .. When an emergency exists such that it is not reasonably practical to dispose of securities in the applicable Division of the Variable Account or to determine the value of its assets; or .. When a governmental body having jurisdiction over the Variable Account permits such suspension by order. Rules and regulations of the SEC, if any, are applicable and will govern the determination as to whether the above conditions exist. Death Proceeds are determined as of the Valuation Date we receive due proof of death of the Insured. Once we determine this amount, the Death Proceeds will not be affected by subsequent changes in the values of the Divisions of the Variable Account. We will pay interest at the rate declared by us or at any higher rate required by law from the date we determine the amount of the Death Proceeds to the date of payment. Death Proceeds are not subject to deferment. However, we may defer for up to six months payment of any surrender proceeds, withdrawal amounts, or loan amounts from our Guaranteed Interest Division, unless otherwise required by law. We will pay interest at the rate declared by us or at any higher rate required by law from the date we receive a request if we delay payment more than 30 days. NOTIFICATION AND CLAIMS PROCEDURES We must receive in writing any election, designation, change, assignment, or request made. It must be on a form acceptable to us. We are not liable for any action we take before we receive and record the written notice. We may require that the Policy be returned for any Policy change or upon its surrender. We, or the Registered Representative, should be informed as soon as possible following an Insured's death while the Policy is in force. Claim procedure instructions will be sent immediately. As due proof of death, we may require proof of Age and a certified copy of a death certificate. We may also require the Beneficiary and the Insured's next of kin to sign authorizations as part of this process. These authorization forms allow us to obtain information about the Insured, including but not limited to medical records of physicians and hospitals used by the Insured. TELEPHONE PRIVILEGES If telephone privileges have been elected in a form required by us, transfers or changes in your Dollar Cost Averaging and Automatic Rebalancing options, or requests for Partial Withdrawals and Policy Loans may be made by telephoning our Customer Service Center. Our Customer Service Center will employ reasonable procedures to confirm that instructions communicated by telephone are genuine. Such procedures may include, among others, requiring some form of personal identification prior to acting upon instructions received by telephone, providing written confirmation of such transactions, and/or tape recording of telephone instructions. A request for telephone privileges authorizes us to record telephone calls. If reasonable procedures are not used in confirming instructions, we may be liable for any losses due to unauthorized or fraudulent instructions. We reserve the right to discontinue this privilege at any time. - -------------------------------------------------------------------------------- Strategic Advantage 47 NON-PARTICIPATING The Policy does not participate in Security Life's surplus earnings. DISTRIBUTION OF THE POLICIES The principal underwriter and distributor for the policies is ING America Equities, a wholly-owned subsidiary of Security Life. ING America Equities is registered as a broker-dealer with the SEC and is a member of the NASD. We pay ING America Equities for acting as the principal underwriter under a Distribution Agreement. We sell our Policies through Registered Representatives of other broker-dealers which have entered into selling agreements with us. These Registered Representatives are also licensed by state insurance officials to sell our variable life policies. Each of the broker-dealers we enter into selling agreements with are registered with the SEC and are members of the NASD. Under these selling agreements, we pay a distribution allowance to the other broker-dealers, which in turn pay commissions to the Registered Representative who sells this Policy. During the first Policy year, the distribution allowance may equal an amount up to 15% of the Target Premium paid and 3% of premiums paid in excess of the Target Premium. For Policy years 2 through 5, the allowance may equal an amount up to 10% of Target Premium and 3% of premiums paid in excess of the Target Premium. For subsequent Policy years the distribution allowance may equal 3% of premiums paid. Broker-dealers may also receive annual renewal compensation of up to 0.15% of the Net Account Value beginning in the sixth Policy year. Compensation arrangements may vary among broker-dealers. In addition, we may also pay override payments, expense allowances, bonuses, wholesaler fees, and training allowances. Registered Representatives who meet specified production levels may qualify, under our sales incentive programs, to receive non-cash compensation such as expense-paid trips, expense-paid educational seminars and merchandise. We pay the distribution allowance from our own resources (including any sales charges deducted from premiums). SETTLEMENT PROVISIONS During the Insured's lifetime, the Owner may elect that the Beneficiary receive the Death Proceeds other than in one sum. If this election has not been made, the Beneficiary may do so within 60 days after the Insured's death. The Owner may also elect to take the Net Cash Surrender Value other than in one sum. Payments under these options are not affected by the investment experience of any Division of our Variable Account. Instead, interest accrues pursuant to the options chosen. Payment options will also be subject to our rules at the time of selection. Currently, these alternate payment options are only available if the proceeds applied are $2000 or more and any periodic payment will be at least $20. The following payment options are available: Option I: Payouts for a Designated Period: Payouts will be made in 1, 2, 4 or 12 installments per year as elected for a designated period, which may be 5 to 30 years. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table I in the Policy. Option II: Life Income with Payouts Guaranteed for a Designated Period: Payouts will be made in 1, 2, 4 or 12 installments per year throughout the payees lifetime, or if longer, for a period of 5, 10, 15, or 20 years as elected. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II in the Policy. This option is not available for ages not shown in this Table. Option III: Hold at Interest: Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4 or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. Option IV: Payouts of a Designated Amount: Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. - ------------------------------------------------------------------------------- Strategic Advantage 48 Option V: Other: The Owner may ask us to apply the money under any option that we make available at the time the benefit is paid. The Beneficiary or any other person who is entitled to receive payment may name a successor to receive any amount that we would otherwise pay to that person's estate if that person died. The person who is entitled to receive payment may change the successor at any time. We must approve any arrangements that involve a payee who is not a natural person (for example, a corporation), or a payee who is a fiduciary. Also, the details of all arrangements will be subject to our rules at the time the arrangements take effect. This includes rules on the minimum amount we will pay under an option, minimum amounts for installment payments, withdrawal or commutation rights (i.e., the rights to receive payments over time, for which we may offer a lump sum payment), the naming of people who are entitled to receive payment and their successors, and the ways of proving Age and survival. - ------------------------------------------------------------------------------- Strategic Advantage 49 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS The following tables illustrate how the key financial elements of the Policy work, specifically, how the death benefits, Account Values and Cash Surrender Values could vary over an extended period of time. In addition, each table compares these values with premiums paid accumulated with interest. The Policies illustrated include the following:
Definition Death of Life Stated Target Smoker Benefit Insurance Death Death Sex Age Status Option Test Benefit Premium Benefit Page - -------------------------------------------------------------------------------- Male 45 Non-Smoker 1 CVAT 300,000 $5,750 300,000 52 Male 45 Non-Smoker 1 CVAT 150,000 $5,750 300,000 54 Male 45 Non-Smoker 1 GP 300,000 $5,750 300,000 56
The tables show how death benefits, Account Values and Cash Surrender Values of a hypothetical Policy could vary over an extended period of time if the Divisions of the Variable Account had constant hypothetical gross annual investment returns of 0%, 6% or 12% over the periods indicated in each table. The values will differ from those shown in the tables if the annual investment returns are not absolutely constant. That is, the death benefits, Account Values and Cash Surrender Values will be different if the returns averaged 0%, 6% or 12% over a period of years but went above or below those figures in individual Policy years. These illustrations assume that no Policy Loan has been taken. The amounts shown would differ if female or unisex rates were used or for a risk classification other than non-smoker standard. The third column of each table shows what would happen if an amount equal to the premiums were invested to earn interest, after taxes, of 5% compounded annually. All premium payments are illustrated as if they were made at the beginning of the year. The amounts shown for death benefits, Account Values and Cash Surrender Values reflect the fact that the net investment return on the Policy is lower than the gross investment return on the Divisions of the Variable Account. This results from the charges levied against the Divisions of the Variable Account (i.e., the mortality and expense risk charge) as well as the premium loads, and administrative charges. The difference between the Account Value and the Cash Surrender Value in the first 2 years is the refund of sales charges. The tables illustrate cost of insurance and expense charges at both our current rates (which are described under Cost Of Insurance Charges, page 36) and at the maximum rates we guarantee in the Policies. The amounts shown at the end of each Policy year reflect a daily charge against the Variable Account Divisions. This charge includes the charge against the Variable Account for mortality and expense risks and the effect on each Divisions investment experience of the charge to Portfolio assets for investment management and direct expenses. The mortality and expense risk fee is 0.75% annually on a guaranteed basis; illustrations showing current rates reflect a guaranteed persistency refund equivalent to 0.5% of the Account Value annually beginning after the 10th Policy anniversary. The tables also reflect a daily investment advisory fee equivalent to an annual rate of 0.6127% of the aggregate average daily net assets of the Portfolios. This hypothetical rate is representative of the average maximum investment advisory fee applicable to the Divisions of the Variable Account. Other expenses of the Portfolios are assumed at the rate of 0.2892% of the average daily net assets of the Portfolio, which is an average of all the Portfolio's other expenses, including interest expenses. This amounts to 0.9019% of the average daily net assets of an investment division including the investment advisory fee. Actual fees vary by Portfolio and may be subject to agreements by the sponsor to waive or otherwise reimburse each investment Division for operating expenses which exceed certain limits. There can be no assurance that the expense reimbursement arrangements will continue in the future, and any unreimbursed expenses would be reflected in the values included on the tables. The effect of these investment management, direct expenses and mortality and expense risk charges on a 0% gross rate of return would result in a net rate of return of (1.65)%, on 6% it would be 4.31%, and on 12% it would be 10.26%. - ------------------------------------------------------------------------------- Strategic Advantage 50 The tables assume the deduction of charges including administrative and sales charges. The tables reflect the fact that we do not currently make any charge against the Variable Account for state or Federal taxes. If such a charge is made in the future, it will take a higher gross rate of return than the rates shown to produce the death benefits, Account Values and Cash Surrender Values shown. We will furnish, upon request, a comparable illustration based on the Age and sex of the proposed Insured, standard Premium Class assumptions and any initial Stated Death Benefit, death benefit option and Scheduled Premiums requested and consistent with the Policy form. If a Policy is purchased, we will deliver an individualized illustration reflecting the Scheduled Premium chosen and the Insured's actual risk class. After issuance we will provide upon request an illustration of future Policy benefits based on both guaranteed and current cost factor assumptions and actual Account Value. - ------------------------------------------------------------------------------- Strategic Advantage 51 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 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 5750 6037 3782 4070 300000 4309 4597 300000 4045 4333 300000 2 5750 12377 7437 7581 300000 8994 9137 300000 8199 8343 300000 3 5750 19033 10961 10961 300000 14090 14090 300000 12461 12461 300000 4 5750 26022 14353 14353 300000 19640 19640 300000 16835 16835 300000 5 5750 33361 17606 17606 300000 25683 25683 300000 21317 21317 300000 6 5750 41067 21120 21120 300000 32717 32717 300000 26334 26334 300000 7 5750 49157 24474 24474 300000 40391 40391 300000 31471 31471 300000 8 5750 57653 27653 27653 300000 48761 48761 300000 36721 36721 300000 9 5750 66573 30646 30646 300000 57898 57898 300000 42078 42078 300000 10 5750 75939 33434 33434 300000 67873 67873 300000 47531 47531 300000 15 5750 130281 44883 44883 300000 137318 137318 300000 77897 77897 300000 20 5750 199636 48627 48627 300000 248792 248792 443099 111166 111166 300000 25 5750 288152 38926 38926 300000 416107 416107 657032 146353 146353 300000 30 5750 401124 3208 3208 300000 660366 660366 939040 183203 183203 300000 AGE 65 5750 215655 47991 47991 300000 277161 277161 481152 118055 118055 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantage 52 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 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 5750 6037 4237 4524 300000 4792 5080 300000 4514 4802 300000 2 5750 12377 8177 8321 300000 9838 9982 300000 8991 9134 300000 3 5750 19033 11867 11867 300000 15209 15209 300000 13470 13470 300000 4 5750 26022 15408 15408 300000 21047 21047 300000 18056 18056 300000 5 5750 33361 18885 18885 300000 27487 27487 300000 22838 22838 300000 6 5750 41067 22699 22699 300000 35038 35038 300000 28246 28246 300000 7 5750 49157 26442 26442 300000 43374 43374 300000 33887 33887 300000 8 5750 57653 30079 30079 300000 52543 52543 300000 39736 39736 300000 9 5750 66573 33592 33592 300000 62619 62619 300000 45783 45783 300000 10 5750 75939 36976 36976 300000 73699 73699 300000 52034 52034 300000 15 5750 130281 52644 52644 300000 151784 151784 309336 88317 88317 300000 20 5750 199636 61671 61671 300000 276329 276329 492143 130113 130113 300000 25 5750 288152 60272 60272 300000 467137 467137 737610 178915 178915 300000 30 5750 401124 39192 39192 300000 751332 751332 1068394 236350 236350 336090 AGE 65 5750 215655 62406 62406 300000 308398 308398 535379 139234 139234 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantage 53 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $ 150000 ANNUAL PREMIUM: $ 5750.00 CASH VALUEACCUMULATION 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 5750 6037 3782 4069 300000 4309 4596 300000 4045 4332 300000 2 5750 12377 7436 7580 300000 8993 9136 300000 8198 8342 300000 3 5750 19033 10960 10960 300000 14089 14089 300000 12460 12460 300000 4 5750 26022 14352 14352 300000 19638 19638 300000 16833 16833 300000 5 5750 33361 17604 17604 300000 25680 25680 300000 21315 21315 300000 6 5750 41067 21118 21118 300000 32714 32714 300000 26331 26331 300000 7 5750 49157 24472 24472 300000 40388 40388 300000 31468 31468 300000 8 5750 57653 27651 27651 300000 48758 48758 300000 36718 36718 300000 9 5750 66573 30644 30644 300000 57894 57894 300000 42076 42076 300000 10 5750 75939 33433 33433 300000 67870 67870 300000 47530 47530 300000 15 5750 130281 44897 44897 300000 137322 137322 300000 77911 77911 300000 20 5750 199636 48699 48699 300000 248799 248799 443111 111236 111236 300000 25 5750 288152 39204 39204 300000 416116 416116 657048 146577 146577 300000 30 5750 401124 4178 4178 300000 660380 660380 939061 183803 183803 300000 AGE 65 5750 215655 48087 48087 300000 277169 277169 481165 118145 118145 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantage 54 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $150000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $150000 ANNUAL PREMIUM: $ 5750.00 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 5750 6037 4417 4705 300000 4984 5272 300000 4701 4988 300000 2 5750 12377 8611 8755 300000 10322 10466 300000 9449 9593 300000 3 5750 19033 12610 12610 300000 16081 16081 300000 14276 14276 300000 4 5750 26022 16475 16475 300000 22366 22366 300000 19244 19244 300000 5 5750 33361 20252 20252 300000 29281 29281 300000 24405 24405 300000 6 5750 41067 24344 24344 300000 37338 37338 300000 30193 30193 300000 7 5750 49157 28345 28345 300000 46217 46217 300000 36213 36213 300000 8 5750 57653 32245 32245 300000 55996 55996 300000 42468 42468 300000 9 5750 66573 36032 36032 300000 66751 66751 300000 48954 48954 300000 10 5750 75939 39689 39689 300000 78540 78540 300000 55670 55670 300000 15 5750 130281 56573 56573 300000 160697 160697 327500 94413 94413 300000 20 5750 199636 67239 67239 300000 290506 290506 517391 139249 139249 300000 25 5750 288152 69270 69270 300000 489331 489331 772654 192253 192253 303567 30 5750 401124 55280 55280 300000 785407 785407 1116849 252306 252306 358779 AGE 65 5750 215655 68457 68457 300000 323925 323925 562335 149109 149109 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantate 55 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM 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 5750 6037 3782 4070 300000 4309 4597 300000 4045 4333 300000 2 5750 12377 7437 7581 300000 8994 9137 300000 8199 8343 300000 3 5750 19033 10961 10961 300000 14090 14090 300000 12461 12461 300000 4 5750 26022 14353 14353 300000 19640 19640 300000 16835 16835 300000 5 5750 33361 17606 17606 300000 25683 25683 300000 21317 21317 300000 6 5750 41067 21120 21120 300000 32717 32717 300000 26334 26334 300000 7 5750 49157 24474 24474 300000 40391 40391 300000 31471 31471 300000 8 5750 57653 27653 27653 300000 48761 48761 300000 36721 36721 300000 9 5750 66573 30646 30646 300000 57898 57898 300000 42078 42078 300000 10 5750 75939 33434 33434 300000 67873 67873 300000 47531 47531 300000 15 5750 130281 44883 44883 300000 137318 137318 300000 77897 77897 300000 20 5750 199636 48627 48627 300000 254777 254777 310829 111166 111166 300000 25 5750 288152 38926 38926 300000 451665 451665 523931 146353 146353 300000 30 5750 401124 3208 3208 300000 773536 773536 827684 183203 183203 300000 AGE 65 5750 215655 47991 47991 300000 286950 286950 344340 118055 118055 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantage 56 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE STRATEGIC ADVANTAGE VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $ 300000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $5750.00 GUIDELINE PREMIUM 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 5750 6037 4237 4524 300000 4792 5080 300000 4514 4802 300000 2 5750 12377 8177 8321 300000 9838 9982 300000 8991 9134 300000 3 5750 19033 11867 11867 300000 15209 15209 300000 13470 13470 300000 4 5750 26022 15408 15408 300000 21047 21047 300000 18056 18056 300000 5 5750 33361 18885 18885 300000 27487 27487 300000 22838 22838 300000 6 5750 41067 22699 22699 300000 35038 35038 300000 28246 28246 300000 7 5750 49157 26442 26442 300000 43374 43374 300000 33887 33887 300000 8 5750 57653 30079 30079 300000 52543 52543 300000 39736 39736 300000 9 5750 66573 33592 33592 300000 62619 62619 300000 45783 45783 300000 10 5750 75939 36976 36976 300000 73699 73699 300000 52034 52034 300000 15 5750 130281 52644 52644 300000 151793 151793 300000 88317 88317 300000 20 5750 199636 61671 61671 300000 283092 283092 345372 130113 130113 300000 25 5750 288152 60272 60272 300000 500480 500480 580557 178915 178915 300000 30 5750 401124 39192 39192 300000 856823 856823 916800 239145 239145 300000 AGE 65 5750 215655 62406 62406 300000 318528 318528 382234 139234 139234 300000
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. THE ABOVE VALUES ASSUME NO LOANS OR WITHDRAWALS ARE TAKEN. - ------------------------------------------------------------------------------- Strategic Advantage 57 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 an asterisk (*), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with an asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- R. Glenn Hilliard* Chairman of the Board of Directors Robert J. St. Jacques* Director, Vice Chairman and Chief Executive Officer Stephen M. Christopher Director, President and Chief Operating Officer Catherine T. Fitzgerald* Executive Vice President Keith T. Glover* Executive Vice President Thomas F. Conroy Director and President - Reinsurance and Institutional Markets Michael W. Cunningham* Director Linda B. Emory* Director Wayne D. Bidelman Sr. Vice President and Chief Operating Officer - Reinsurance Eugene L. Copeland Sr. Vice President, General Counsel & Corporate Secretary Benjamin A. Currier Sr. Vice President - Operations James L. Livingston Sr. Vice President and Chief Actuary Jeffery W. Seel* Sr. Vice President and Chief Investment Officer Jess A. Skriletz Sr. Vice President - Institutional Markets - -------------------------------------------------------------------------------- Strategic Advantage 58 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Louis N. Trapolino Sr. Vice President - Marketing and Chief Marketing Officer William D. Tyler Sr. Vice President and Chief Information Officer Kevin W. Ahern Vice President and Sr. Portfolio Manager William H. Alexander Vice President and Medical Director - Reinsurance Evelyn A. Bentz Vice President - M Financial Sales Daniel S. Clements Vice President and Chief Underwriter Jeffery L. Davis Vice President - Marketing Systems Linda Elliott Vice President - Systems Development Lyndon E. Oliver* Vice President and Treasurer John F. Kerper* Vice President and Actuary Richard D. King Vice President and Medical Director Philip R. Kruse Vice President - Reinsurance Marketing Charles D. Lewis, Jr. Vice President - Corporate Education and Development Charles Lynn McPherson* Vice President - Business Insurance Operations Sue A. Miskie Vice President - Corporate Services Donna T. Mosely Vice President - Valuation Daniel G. Patsey Vice President - Strategic Technology Ronald K. Peterson Vice President - Pricing & Financial Planning Kristen Rhodes-Anderson Vice President - Strategic Marketing - ------------------------------------------------------------------------------- Strategic Advantage 59 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Christiaan M. Rutten Vice President - Structured Reinsurance Mark A. Smith Vice President - Insurance Services Jerome M. Strop Vice President - Finance William J. Wagner Vice President - Product Development James L. Walker Vice President and Chief Underwriter - Reinsurance Richard L. Wisott Vice President - New Market Development Frank T. Wright Vice President - Variable Sales T. Kirby Brown, Jr. Second Vice President and Senior Portfolio Manager John G. Grant Second Vice President and Senior Portfolio Manager Edward K. Campbell Legal Officer Irene M. Colorosa Assistant Secretary Marsha K. Crest Agency Administration Officer John B. Dickinson Actuarial Officer Denise S. Dumont Computer Services Officer Pamela C. Erbes New Market Development Officer Relda A. Fleshman Legal Officer Leonard Heim Actuarial Officer Shirley A. Knarr Actuarial Officer Casey J. Scott Field Operations Officer - ------------------------------------------------------------------------------- Strategic Advantage 60 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Lisa K. Smith Denver Operations Management Officer Glen E. Stark Actuarial Officer Gary W. Waggoner Legal Officer Amy L. Winsor Finance and Tax Officer STATE 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, on 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 Eugene L. Copeland, the General Counsel of Security Life. 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, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, and the financial statements of the Separate Account L1 at December 31, 1995, and for each of the two years in the period ended December 31, 1995, 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 in the registration statement, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. Actuarial matters in this prospectus have been examined by Shirley A. Knarr, F.S.A., M.A.A.A., who is the Variable Products Portfolio Manager and Actuarial Officer of Security Life. Her opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. - ------------------------------------------------------------------------------- Strategic Advantage 61 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 SECs principal office in Washington, DC. You will have to pay a fee for the material. FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1995 and 1994, and for each of the two years in the period ended December 31, 1995, are prepared in accordance with generally accepted accounting principles and start on page 63. The financial statements included for the Security Life Separate Account L1 at December 31, 1995 and for the year then ended, 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 referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the Policies. They should not be considered as bearing upon the investment experience of the Divisions of Security Life Separate Account L1. - -------------------------------------------------------------------------------- Strategic Advantage 62 CONSOLIDATED FINANCIAL STATEMENTS SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 WITH REPORT OF INDEPENDENT AUDITORS - -------------------------------------------------------------------------------- 63 Security Life of Denver Insurance Company and Subsidiaries Consolidated Financial Statements and Schedules Years ended December 31, 1995, 1994 and 1993 CONTENTS PAGE Report of Independent Auditors......................... 65 Audited Consolidated Financial Statements Consolidated Balance Sheets....................... 66 Consolidated Statements of Income................. 68 Consolidated Statements of Stockholder's Equity... 69 Consolidated Statements of Cash Flows............. 70 Notes to Consolidated Financial Statements........ 72 - ------------------------------------------------------------------------------- 64 [LETTERHEAD 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, 1995 and 1994, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended December 31, 1995. 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, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. As discussed in Note 1 to the consolidated financial statements, the Company made certain accounting changes in 1995, 1994 and 1993. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Denver, Colorado April 5, 1996 - ------------------------------------------------------------------------------- 65 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS)
DECEMBER 31 1995 1994 ---------- ---------- ASSETS Investments (Note 4): Fixed maturities $2,470,944 $1,955,460 Equity securities 8,369 11,904 Mortgage loans on real estate 285,544 175,459 Investment real estate, at cost, less accumulated depreciation (1995-$640;1994-$378) 2,908 3,152 Policy loans 754,240 690,494 Other long-term investments 11,870 10,765 Short-term investments 10,946 7,978 ---------- ---------- Total investments 3,544,821 2,855,212 Cash 32,044 17,719 Accrued investment income 38,132 32,393 Reinsurance recoverable: Paid benefits 11,096 14,734 Unpaid benefits 13,581 9,919 Prepaid reinsurance premiums (Note 10) 1,614,959 1,360,991 Deferred policy acquisition costs (DPAC) 595,232 620,439 Property and equipment, at cost, less accumulated depreciation (1995-$19,556; 1994-$15,938) 40,418 42,648 Federal income tax recoverable (Note 11) 62,990 - Deferred federal income taxes (Note 11) - 62,694 Indebtedness of related parties 33,418 10,178 Other assets 64,314 72,912 Separate account asset (Note 8) 31,825 - ---------------------- Total assets $6,082,830 $5,099,839 ======================
See accompanying notes - ------------------------------------------------------------------------------- 66 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (CONTINUED) (DOLLARS IN THOUSANDS)
DECEMBER 31 1995 1994 ---------- ---------- LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits (Note 10): Life and annuity reserves $3,328,405 $2,827,307 Guaranteed investment contracts 1,520,926 1,303,815 Policyholders' funds 75,809 62,099 Advance premiums 231 1,332 Accrued dividends and dividends on deposit 19,886 21,558 Unpaid claims 79,821 53,158 Funds held under reinsurance treaties 32,793 58,315 ---------- ---------- Total future policy benefits 5,057,871 4,327,584 Accounts payable and accrued expenses 75,019 60,687 Indebtedness to related parties 16,248 112,742 Long-term debt to related parties (Note 12) 50,032 50,032 Other liabilities 60,443 47,402 Federal income taxes payable (Note 11) - 11,218 Deferred federal income taxes (Note 11) 44,746 - Separate account liability (Note 8) 31,825 - ---------- ---------- Total liabilities 5,336,184 4,609,665 Commitments and contingent liabilities (Notes 9, 10 and 14) Stockholder's equity (Note 13): Common stock, $20,000 par value: Authorized - 149 shares Issued and outstanding - 144 shares 2,880 2,880 Additional paid-in capital 297,422 150,792 Net unrealized gains 72,973 6,862 Retained earnings 373,371 329,640 ---------- ---------- Total stockholder's equity 746,646 490,174 ---------- ---------- Total liabilities and stockholder's equity $6,082,830 $5,099,839 ========== ==========
See accompanying notes - ------------------------------------------------------------------------------- 67 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1995 1994 1993 -------- --------- -------- Revenues: Traditional life insurance premiums $150,372 $ 144,838 $118,355 Universal life and investment product charges 191,869 152,771 124,206 Reinsurance premiums assumed 279,308 299,632 274,218 -------- --------- -------- 621,549 597,241 516,779 Reinsurance premiums ceded (96,082) (101,459) (92,918) -------- --------- -------- 525,467 495,782 423,861 Net investment income 256,065 209,605 195,269 Net realized gains (losses) on investments 6,564 (7,245) 18,733 Miscellaneous Income 1,941 6,312 2,120 -------- --------- -------- 790,037 704,454 639,983 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 217,136 231,018 225,021 Other benefits 88,326 72,298 55,177 Universal life and investment contracts: Interest credited to account balances 164,536 139,942 115,761 Death benefit incurred in excess of account balances 63,672 73,869 56,130 Increase in policy reserves and other funds 12,856 85,968 114,009 Reinsurance recoveries (74,305) (73,379) (70,613) Product conversions 74,291 - - -------- --------- -------- 546,512 529,716 495,485 Expenses: Commissions 50,914 16,564 37,530 Insurance operating expenses 52,414 50,309 36,805 Amortization of deferred policy acquisition costs 71,450 65,393 8,742 -------- --------- -------- 721,290 661,982 578,562 -------- --------- -------- Income before federal income taxes 68,747 42,473 61,421 Federal income taxes (Note 11) 24,296 14,921 21,605 -------- --------- -------- Net income before cumulative effect of accounting changes 44,451 27,552 39,816 Cumulative effect of accounting changes (net of tax): Accounting for income taxes (Note 11) - - 16,933 Employers accounting for OPEB (Note 7) - - (5,102) Employers accounting for postemployment benefits (Note 7) - (1,381) - -------- --------- -------- Net income $ 44,451 $ 26,171 $ 51,647 ======== ========= ========
See accompanying notes - ------------------------------------------------------------------------------- 68 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDER'S EQUITY (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1995 1994 1993 -------------------------------- Common stock: Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880 Additional paid-in capital: Balance at beginning of year $150,792 $ 150,792 $135,792 Capital contribution 146,630 - 15,000 -------- --------- -------- Balance at end of year $297,422 $ 150,792 $150,792 ======== ========= ======== Net unrealized gains (losses) on investments: Balance at beginning of year $ 6,862 $ (131) $ (505) Adjustment to beginning balance for change in accounting method, net of income taxes of $46,916 (Note 1) - 87,630 - Effect on DPAC of change in accounting method, net of income taxes of $10,117 - (18,790) Net change in unrealized gains (losses), net of tax 118,654 (106,911) 374 Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax (52,543) 45,064 - -------- --------- -------- Balance at end of year $ 72,973 $ 6,862 $ (131) ======== ========= ======== Retained earnings: Balance at beginning of year $329,640 $ 306,349 $257,582 Net income 44,451 26,171 51,647 Dividends paid to stockholder (720) (2,880) (2,880) -------- --------- -------- Balance at end of year $373,371 $ 329,640 $306,349 ======== ========= ======== Total stockholder's equity $746,646 $ 490,174 $459,890 ======== ========= ========
See accompanying notes - -------------------------------------------------------------------------------- 69 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1995 1994 1993 --------- --------- ----------- OPERATING ACTIVITIES Net income $ 44,451 $ 26,171 $ 51,647 Adjustments to reconcile net income to net cash provided by operating activities: Increase in future policy benefits 471,331 621,578 690,875 Net decrease (increase) in federal income taxes 33,232 (25,506) (36,930) Increase in accounts payable and accrued expenses 26,751 3,771 30,276 Increase in accrued investment income (5,739) (5,651) (9,194) Increase in reinsurance recoverable (24) (1,767) (13,630) Increase in prepaid reinsurance premiums (253,968) (397,463) (411,053) Net realized investment (gains) losses (6,564) 7,245 (18,733) Depreciation and amortization expense 4,036 3,500 3,780 Policy acquisition costs deferred (127,069) (127,305) (91,343) Amortization of deferred policy acquisition costs 71,450 65,393 8,742 Cumulative effect of accounting changes - 1,381 (11,831) Increase in accrual for postretirement benefits 623 851 - Other, net (9,784) (4,894) 6,375 --------- --------- ----------- Net cash provided by operating activities 248,726 167,304 198,981 INVESTING ACTIVITIES Securities available for sale: Sales: Fixed maturities 357,059 73l,460 Equity securities 4,730 148,176 - Maturities-fixed maturities 280,581 237,586 - Purchases: Fixed maturities (935,210) (1,202,024) - Equity securities (1,300) (130,856) - Securities held to maturity: Maturities-fixed maturities 14,156 1,665 - Purchases-fixed maturities (42,454) - Sale, maturity or repayment of investments: Fixed maturities - - 973,460 Equity securities - - l05,229 Mortgage loans on real estate 16,061 17,570 14,012 Investment real estate 215 1,534 636 Other long-term investments 1,064 - 1,871
- -------------------------------------------------------------------------------- 70 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED) (DOLLARS IN THOUSANDS)
YEAR ENDED DECEMBER 31 1995 1994 1993 --------- --------- ----------- INVESTING ACTIVITIES (CONTINUED) Purchase or issuance of investments: Fixed maturities $ $ $(1,311,286) - - Equity securities - - (142,906) Mortgage loans on real estate (136,218) (91,410) (44,543) Investment real estate 14 (156) - Policy loans, net (63,746) (72,017) (73,943) Other long-term investments (2,169) (399) (3,316) Short-term investments, net (9,154) 4,099 102,259 Additions to property and equipment (1,812) (2,280) (3,722) Disposal of property and equipment 79 (177) - Purchase of subsidiary - - (7,937) --------- --------- ----------- Net cash used by investing activities (475,650) (399,683) (390,186) FINANCING ACTIVITIES (Decrease) increase in indebtedness to related parties (16,987) 52,231 102,522 Cash contributions from parent - 15,000 - Receipts from interest sensitive products credited to policyholder account balances 387,904 250,396 225,967 Return of policyholder account balances on interest sensitive policies (128,948) (89,532) (119,743) Dividends paid to stockholder (720) (2,880) (2,880) --------- --------- ----------- Net cash provided by financing activities 241,249 225,215 205,866 --------- --------- ----------- Net increase (decrease) in cash 14,325 (7,164) 14,661 Cash at beginning of year 17,719 24,883 10,222 --------- --------- ----------- Cash at end of year $ 32,044 $ 17,719 $ 24,883 ========= ========= ===========
Noncash transactions: In 1995, the Company received a capital contribution of $124,630,000 in fixed maturities and equity securities. The Company's parent also contributed $22,000,000 in cash to additional paid-in capital. As of December 31, 1995, the cash representing the capital contribution had not been received, and the amount is presented as indebtedness of related parties in the accompanying consolidated balance sheet. The cash was received by the Company in January 1996. In 1993, the Company's parent contributed $15,000,000 to additional paid-in capital. As of December 31, 1993, the cash representing the capital contribution had not yet been received and the amount is presented as indebtedness of related parties. The cash was received by the Company in February 1994. See accompanying notes - ------------------------------------------------------------------------------- 71 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 1. SIGNIFICANT ACCOUNT 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, formerly the Urbaine Life Reinsurance Company (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc., formerly SLD 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, and universal 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 focuses on automatic reinsurance coverages provided to other insurance companies. 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. - -------------------------------------------------------------------------------- 72 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES Effective January 1, 1993 the Company adopted Financial Accounting Standards Board (FASB) Statement No. 106, Employers' Accounting for Postretirement Benefits Other Than Pensions. This statement requires that the projected future cost of providing postretirement benefits, such as health care and life insurance be recognized as an expense as employees render service rather than when benefits are paid. The effect of adopting the new rules decreased 1993 net income before cumulative effect of accounting change by $653,000 and decreased 1993 net income by $5,755,000. The effect on net income for 1993 includes the adjustment of $5,102,000 (net of tax of $2,747,000) to retroactively apply the new rules. Effective January 1, 1993, the Company adopted FASB Statement No. 109, Accounting for Income Taxes which requires the adoption of the liability method for computing deferred tax assets and liabilities. The cumulative effect of adopting FASB Statement 109 as of January 1, 1993 was to increase net income by $16,933,000. Effective January 1, 1994, the Company adopted FASB Statement No. 112, Employers' Accounting for Postemployment Benefits, in accounting for disability benefits. The cumulative effect as of January 1, 1994 of this change in accounting was to decrease net income by $1,381,000 (net of tax of $743,000). The effect of the change on 1994 income before the cumulative effect of the change was not material. Prior to January 1, 1994, the Company recognized the cost of providing these benefits on a cash basis. Under the new method of accounting, the Company accrues the benefits when it becomes probable that such benefit will be paid and when sufficient information exists to make reasonable estimates of the amounts to be paid. As required by the statement, prior year financial statements have not been restated to reflect the change in accounting methods. In May 1993, the Financial Accounting Standards Board issued FASB Statement No. 115, Accounting for Certain Investments in Debt and Equity Securities (FASB 115). The Company adopted the provisions of the new standard for investments held as of or acquired after January 1, 1994. In accordance with the statement, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect as of January 1, 1994 of adopting FASB 115 had no impact on income. The opening balance of stockholder's equity was increased by $68,840,000 (net of tax of $36,799,000) to reflect the net unrealized holding gains on securities classified as available-for-sale previously carried at amortized cost less an adjustment to deferred policy acquisition costs for the change in expected future gross profits. - ------------------------------------------------------------------------------- 73 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Because of the numerous questions that arose during the implementation of FASB 115, the Financial Accounting Standards Board issued A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities in November 1995. This Special Report provided interpretive guidance to the implementation of FASB 115 and provided companies with a one-time period until December 31, 1995 to reassess the appropriateness of the classifications of all securities held at the time and account for any resulting reclassifications at fair value. Reclassifications from the held-to-maturity category that result from this one-time reassessment do not call into question the intent of an enterprise to hold other debt securities to maturity in the future. As a result of this reassessment, the Company reclassified all held-to- maturity securities to the available-for-sale category effective December 26, 1995. The book value of these securities at the date of transfer was $98,818,000. At transfer, an unrealized gain of $4,082,000 (net of tax of $2,198,000) was recognized as a direct increase to stockholder's equity. Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, and Statement No. 118 which amends Statement No. 114. Under the amended statement, the 1995 allowance for credit losses related to loans that are identified for evaluation in accordance with Statement 114 is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. INVESTMENTS Investments are shown 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. Prior to the reassessment described above, debt securities were classified as held-to-maturity when the Company had the positive intent and ability to hold the securities to maturity. Held-to-maturity securities were stated at amortized cost. Debt securities not classified as held-to-maturity 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, net of tax and deferred acquisition cost adjustments, reported in a separate component of stockholder's equity. - -------------------------------------------------------------------------------- 74 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS (CONTINUED) The Company does not hold trading securities. 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. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Short-term investments are carried at cost, which approximates fair value. 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 (losses) 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. - -------------------------------------------------------------------------------- 75 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) DEFERRED POLICY ACQUISITION COSTS Commissions and other costs of acquiring traditional life insurance, 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 over the premium-paying period of the related policies using assumptions consistent with those used in computing policy benefit reserves. For universal life insurance and investment products, acquisition cost are being amortized generally in proportion to the present value (using the assumed crediting rate) of expected gross profits from surrender charges and investment, mortality, and expense margins. This amortization is adjusted retrospectively when estimates of current or future gross profits 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 stockholder's equity. FUTURE POLICY BENEFITS Benefit reserves, with the exception of reserves for universal life-type policies and investment products are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on the Company's and industry experience, modified as necessary to reflect anticipated trends to include provisions for possible unfavorable deviations. Reserve interest assumptions are those deemed appropriate at the time of policy issue, and range from 2% to 10%. Policy benefit claims are charged to expense in the year that the claims are incurred. Benefit reserves for universal life-type policies (including 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 4.60% to 8.10% during 1995, 6.15% to 8.10% during 1994, and 6.15% to 8.75% during 1993. Included in life and annuity reserves is an unearned revenue reserve that reflects the unamortized balance of excess first year policy service fees over renewal period policy service fees 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. - -------------------------------------------------------------------------------- 76 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) UNPAID 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. HOME OFFICE PROPERTY AND EQUIPMENT Home office property and equipment are carried at cost less accumulated depreciation. 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 $6,218,000 and $6,052,000 at December 31, 1995 and 1994, respectively. Participating business approximates ..5% of the Company's ordinary life insurance in force and 1.5% of premium income. Earnings for participating insurance are based on the actual earnings of the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $2,964,000, $3,683,000, and $3,028,000 were incurred in 1995, 1994, and 1993, 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. CASH FLOW INFORMATION Cash includes cash on hand and demand deposits. Included as a component of operating activities is interest paid of $4,861,000, $538,000, and $1,661,000 for 1995, 1994, and 1993, respectively. - ------------------------------------------------------------------------------- 77 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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. PENDING ACCOUNTING STANDARDS In March 1995, the FASB issued 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 accounting for long-lived assets that are expected to be disposed of. The Company will adopt Statement 121 in the first quarter of 1996 and, based on current circumstances, management does not believe the effect of adoption will be material. RECLASSIFICATIONS Certain amounts in the 1993 and 1994 financial statements have been reclassified to conform to the 1995 presentation. 2. 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. - -------------------------------------------------------------------------------- 78 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of the Company's financial instruments at December 31, 1995 and 1994 are summarized below (in thousands):
DECEMBER 31, 1995 DECEMBER 31, 1994 CARRYING FAIR CARRYING FAIR AMOUNT VALUE AMOUNT VALUE ---------------------- ---------------------- ASSETS Fixed maturities (Note 4) $2,470,944 $2,470,944 $1,955,460 $1,951,460 Equity securities (Note 4) 8,369 8,369 11,904 11,904 Commercial mortgages 276,552 304,442 165,992 163,215 Residential mortgages 8,992 9,172 9,467 9,467 Policy loans 754,240 754,240 690,494 690,494 Short-term investments 10,946 10,946 7,978 7,978 LIABILITIES Guaranteed investment contracts, net of reinsurance - - 32,779 32,029 Supplemental contracts without life contingencies 3,033 3,033 3,135 3,135 Other policyholder funds left on deposit 92,893 92,893 81,854 81,854 Individual and group annuities, net of reinsurance 49,020 48,457 50,701 49,931
The carrying values of all other financial instruments approximate their fair value. 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 using a current market rate applicable to the yield, credit quality, and maturity of the investments. The discount rate used as of December 31, 1995 and 1994 was 10%. The fair value of equity securities are based on quoted market prices. - -------------------------------------------------------------------------------- 79 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) MORTGAGE LOANS: Estimated market values for commercial real estate loans -------------- were generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31, and spreads required on new loans with similar characteristics. The amortizing features of all loans were incorporated in the valuation. Where data on option features was available, option values were determined using a binomial valuation method, and were incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these were discounted at a greater spread to reflect increased risk. The carrying value for residential loans approximates the fair value. All residential loans are valued at their outstanding principal balances, which approximates their fair values. POLICY LOANS: The carrying amounts reported in the balance sheet 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. GUARANTEED INVESTMENT CONTRACTS: The fair values of the Company's guaranteed ------------------------------- investment contracts are estimated using discounted cash flow calculations, based on interest rates currently being offered for similar contracts with maturities consistent with those remaining for the contracts being valued. 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 had synthetic guaranteed ----------------------------- investment contact sales in the amounts of $10,358,000 and $78,428,000 in 1995 and 1994, respectively to 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 $695,288,000 and $684,578,000 at December 31, 1995 and 1994, 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 86% 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. - ------------------------------------------------------------------------------- 80 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 2. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) LETTERS OF CREDIT - ----------------- The Company is the beneficiary of letters of credit totaling $71,615,000 which have a market value to the Company of $0 and two lines of credit totaling $161,411,000 which have a market value to the Company of $0. (see Note 15). 3. ACQUISITION Effective March 31, 1993, the Company completed the acquisition of 100% of the capital stock of First ING for a total cash consideration of $9,563,000 (including $354,000 of fees and miscellaneous expenses). The acquisition was accounted for using the purchase method of accounting. The fair market value of assets acquired totaled $19,108,000 (primarily investment securities), and liabilities assumed totaled $9,899,000. The purchase price equals the fair market value of net assets acquired; thus, no goodwill was generated from this transaction. The accompanying consolidated income statement for 1993 includes the results of First ING operations for the period from April 1, 1993, to December 31, 1993. On a pro forma basis, assuming the acquisition had occurred on January 1, 1993, revenues would have been $641,446,000 and net income would have been $50,927,000 for the year ended December 31, 1993. During 1994, Security Life contributed capital of $317,000 in creation of ING America Equities, Inc., a wholesale broker/dealer incorporated September 27, 1993 and approved for membership in the National Association of Securities Dealers on August 18, 1994. The business of ING Equities, Inc. consists only of distribution of variable life and annuity contracts. ING America Equities, Inc. does not hold customer funds or securities. 4. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1995 and 1994 (in thousands): - ------------------------------------------------------------------------------- 81 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1995 COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 99,780 $ 3,503 $ 154 $ 103,129 States, municipalities and political subdivisions 74,126 1,760 234 75,652 Public utilities securities 76,470 2,841 50 79,261 Debt securities issued by foreign governments 3,272 -0- -0- 3,272 Corporate securities 659,902 34,246 911 693,237 Mortgage-backed securities 1,230,943 123,306 18,690 1,335,559 Other asset-backed securities 169,847 10,946 2,174 178,619 Derivatives hedging fixed maturities (Note 5) 3,698 909 2,392 2,215 ---------- -------- ------- ---------- Total fixed maturities 2,318,038 177,511 24,605 2,470,944 Preferred stocks (nonredeemable) 6,196 275 443 6,028 Common stocks 2,397 13 69 2,341 ---------- -------- ------- ---------- Total $2,326,631 $177,799 $25,117 $2,479,313 ========== ======== ======= ==========
- -------------------------------------------------------------------------------- 82 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED)
DECEMBER 31, 1994 COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------- ---------- ---------- ---------- Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 175,092 $ 198 $ 5,843 $ 169,447 States, municipalities and political subdivisions 72,203 - 7,668 64,535 Public utilities securities 84,264 841 5,588 79,517 Debt securities issued by foreign governments 3,272 - 35 3,237 Corporate securities 433,016 3,913 22,445 414,484 Mortgage-backed securities 1,010,939 85,077 76,251 1,019,765 Other asset-backed securities 86,159 180 3,474 82,865 Derivatives hedging fixed maturities (Note 5) 6,221 4,637 2,539 8,319 ---------- ------- -------- ---------- Total fixed maturities 1,871,166 94,846 123,843 1,842,169 Preferred stocks (nonredeemable) 10,559 262 1,058 9,763 Common stocks 2,203 - 62 2,141 ---------- ------- -------- ---------- Total $1,883,928 $95,108 $124,963 $1,854,073 ========== ======= ======== ========== Held-to-maturity: States, municipalities and political subdivisions $ 500 $ - $ 33 $ 467 Public utilities securities 11,649 - 571 11,078 Corporate securities 100,641 457 4,107 96,991 Other asset-backed securities 501 4 - 505 ---------- ------- -------- ---------- Total $ 113,291 $ 461 $ 4,711 $ 109,041 ========== ======= ======== ==========
- ------------------------------------------------------------------------------- 83 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) Reconciliation of fixed maturities to the consolidated balance sheet at December 31 is as follows (in thousands):
1995 1994 ----------- ---------- Available for sale $2,470,944 $1,842,169 Held to Maturity -0- 113,291 ---------- ---------- Total fixed maturities $2,470,944 $1,955,460 ========== ==========
The amortized cost and fair value of investments in fixed maturities at December 31, 1995, 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 FAIR COST VALUE ----------- ---------- Available for sale: Due in one year or less $ 21,465 $ 21,723 Due after one year through five years 328,210 338,964 Due after five years through ten years 461,294 485,319 Due after ten years 106,279 110,760 ---------- ---------- 917,248 956,766 Mortgage-backed securities 1,230,943 1,335,559 Other asset-backed securities 169,847 178,619 ---------- ---------- Total available-for-sale $2,318,038 $2,470,944 ========== ==========
- ------------------------------------------------------------------------------- 84 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) Changes in unrealized gains (losses) on investments in available-for-sale securities for the year ended December 31, 1995 and 1994 are summarized as follows (in thousands):
DECEMBER 31, 1995 FIXED EQUITY TOTAL ---------------------------- Gross unrealized gains $177,511 $ 288 $177,799 Gross unrealized losses 24,605 512 25,117 -------- ----- -------- Net unrealized gains (losses) 152,906 (224) 152,682 Deferred income tax (expense) benefit (53,517) 77 (53,440) -------- ----- -------- Net unrealized gains (losses) after taxes 99,389 (147) 99,242 Less: Balance at beginning of year (18,854) (558) (19,412) -------- ----- -------- Change in net unrealized gains (losses) $118,243 $ 411 $118,654 ======== ===== ========
DECEMBER 31, 1994 FIXED EQUITY TOTAL ------------------------------ Gross unrealized gains $ 94,846 $ 262 $ 95,108 Gross unrealized losses 123,843 1,120 124,963 --------- ------ --------- Net unrealized losses (28,997) (858) (29,855) Deferred income tax benefit 10,143 300 10,443 --------- ------ --------- Net unrealized losses after taxes (18,854) (558) (19,412) Less: Balance at beginning of year - (131) (131) Adjustments for change in accounting method (net of tax of $46,916) 87,630 - 87,630 --------- ------ --------- Change in net unrealized losses $(106,484) $ (427) $(106,911) ========= ====== =========
- ------------------------------------------------------------------------------- 85 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) Changes in unrealized gains (losses) on securities for the year ended December 31, 1993 are summarized as follows (in thousands):
DECEMBER 31, 1993 FIXED EQUITY TOTAL ---------- -------- ---------- Gross unrealized gains $156,410 $1,735 $158,145 Gross unrealized losses 16,601 1,664 18,265 -------- ------ -------- Net unrealized gains 139,809 71 139,880 Deferred income tax expense (48,933) (202) (49,135) -------- ------ -------- Net unrealized gains (losses) after taxes 90,876 (131) 90,745 Less: Balance at beginning of year 64,755 (505) 64,250 -------- ------ -------- Change in net unrealized gains (losses) $ 26,121 $ 374 $ 26,495 ======== ====== ========
As part of its overall investment management strategy, the Company has entered into agreements to purchase $36,700,000 in mortgage loans as of December 31, 1995. These agreements were settled during 1996. The Company had no agreements to sell securities at December 31, 1995. Major categories of investment income for the years ended December 31 are summarized as follows (in thousands):
1995 1994 1993 -------- -------- -------- Fixed maturities $190,327 $153,777 $143,584 Mortgage loans on real estate 16,601 12,221 8,110 Policy loans 55,438 42,456 43,638 Other investments 4,360 5,654 6,000 -------- -------- -------- 266,726 214,108 201,332 Investment expenses (10,661) ( 4,503) (6,063) -------- -------- -------- Net investment income $256,065 $209,605 $195,269 ======== ======== ========
- ------------------------------------------------------------------------------- 86 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. INVESTMENTS (CONTINUED) Net realized gains (losses) on investments for the years ended December 31 are summarized as follows (in thousands):
1995 1994 1993 ------- ---------- --------- Fixed maturities $6,538 $( 3,847) $17,340 Equity securities 5 (1,761) (770) Real estate and other 21 (1,637) 2,163 ------ -------- ------- Net realized gains (losses) on investments $6,564 $ (7,245) $18,733 ====== ======== =======
During 1995 and 1994, debt and marketable equity securities available-for-sale were sold with fair value at the date of sale of $306,219,000 and $292,483,000 respectively. Gross gains of $9,691,000 and $6,125,000 and gross losses of $3,148,000 and $11,733,000 were realized on those sales in 1995 and 1994 respectively. Proceeds from sales of investments in fixed maturities during 1993 were $973,460,000. Gross gains of $11,374,000 and gross losses of $9,011,000 were realized on those sales in 1993. At December 31, 1995 and 1994, bonds with an amortized cost of $26,730,000 and $24,547,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. 5. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate 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, 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. 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. Option agreements owned are used to facilitate asset liability matching with respect to certain of the Company's Guaranteed Investment Contract (GIC) liabilities. These contracts give the Company the option of entering into swaps at specified dates in the future. 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 - ------------------------------------------------------------------------------- 87 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) 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 market 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 counterparty 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. The table below summarizes the Company's interest rate contracts at December 31, 1995 and 1994 (in thousands):
DECEMBER 31, 1995 NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET ----------- ---------- -------- -------- Interest rate contacts: Swaps $ 884,632 $ 448 $ 4,034 $ 4,034 Swaps-affiliates 864,632 (448) (3,453) (3,453) ---------- ------- ------- ------- Total swaps 1,749,264 -0- 581 581 Caps owned 400,000 3,580 1,308 1,308 Caps owned-affilaites 40,000 61 -0- -0- ---------- ------- ------- ------- Total caps owned 440,000 3,641 1,308 1,308 Floors owned 100,000 57 326 326 Floors owned-affiliates -0- -0- -0- -0- ---------- ------- ------- ------- Total floors owned 100,000 57 326 326 Options owned 152,000 2,848 2,255 2,255 Options owned-affiliates 152,000 (2,848) (2,255) (2,255) ---------- ------- ------- ------- Total options owned 304,000 -0- -0- -0- ---------- ------- ------- ------- $2,593,264 $ 3,698 $ 2,215 $ 2,215 ========== ======= ======= =======
- ------------------------------------------------------------------------------- 88 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
DECEMBER 31, 1994 NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET ---------- --------- --------- --------- Interest rate contacts: Swaps $ 571,700 $ $(22,387) $(22,387) - Swaps-affiliates 567,700 - 20,322 20,322 ---------- ------ -------- -------- Total swaps 1,139,400 - (2,065) (2,065) Caps owned 560,000 5,080 7,822 7,822 Caps owned-affiliates 165,000 1,034 2,552 2,552 ---------- ------ -------- -------- Total caps owned 725,000 6,114 10,374 10,374 Floors owned 120,000 107 10 10 Floors owned-affiliates - - - - ---------- ------ -------- -------- Total floors owned 120,000 107 10 10 ---------- ------ -------- -------- $1,984,400 $6,221 $ 8,319 $ 8,319 ========== ====== ======== ========
6. CONCENTRATIONS OF CREDIT RISK At December 31, 1995, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value of $5,003,000 and market value of $5,105,000. These holdings amounted to 2% of the Company's investments in bonds and less than 1% 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, 1995, the Company's commercial mortgages involved a concentration of properties located in Colorado (10%), Florida (21%), and Georgia (10%). The remaining commercial mortgages relate to properties located in 26 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 $8,202,000. - ------------------------------------------------------------------------------- 89 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. EMPLOYEES BENEFIT PLAN PENSION PLAN The Company has a qualified noncontributory defined benefit retirement plan as well as a non-qualified unfunded Supplemental Employees Retirement Plan (SERP) covering substantially all permanent employees. The benefits are based on final average earnings from the time of eligibility for the plan, subject to minimum benefits based on career earnings. The Company's funding policy for the qualified plan is to contribute amounts annually to the plan sufficient to meet the minimum funding requirements set forth in the Employees Retirement Income Security Act of 1974, plus additional amounts as may be determined to be appropriate. The funded status and the amounts recognized in the balance sheets for the defined benefit plan are as follows (in thousands):
DECEMBER 31 1995 1994 ----------------------------------------- QUALIFIED QUALIFIED PLAN SERP PLAN SERP ----------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $(13,318) $(5,637) $(13,375) $(1,552) Nonvested (9,370) - (857) - -------- ------- -------- ------- (22,688) (5,637) (14,232) (1,552) Effect of projected future compensation (5,355) (1,297) (7,337) (1,478) -------- ------- -------- ------- Projected benefit obligation (28,043) (6,934) (21,569) (3,030) Less plan assets at fair value 31,074 - 28,147 - -------- ------- -------- ------- Plan assets in excess of projected benefit obligation 3,031 (6,934) 6,578 (3,030) Unrecognized net asset (1,601) - (1,885) - Unrecognized prior service benefit cost (109) 267 (122) 297 Unrecognized net loss (gain) 998 4,507 (2,193) 1,310 -------- ------- -------- ------- Net pension asset (liability) $ 2,319 $(2,160) $ 2,378 $(1,423) ======== ======= ======== =======
- ------------------------------------------------------------------------------- 90 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. EMPLOYEES BENEFIT PLAN (CONTINUED) PENSION PLAN (CONTINUED) The net periodic pension cost for the defined benefit plans included the following components (in thousands):
1995 1994 1993 --------------------------------------------------------- QUALIFIED QUALIFIED QUALIFIED PLAN SERP Plan SERP Plan SERP --------------------------------------------------------- Service cost $ 1,147 $ 285 $1,369 $ 248 $1,303 $85 Interest cost 1,856 517 1,521 219 1,373 165 Return on plan assets (3,497) (1,900) - (7,618) - Net amortization and deferral 553 239 (659) 200 5,250 163 --------------------------------------------------------- Net periodic pension expense $ 59 $ 1,041 $ 331 $ 667 $ 308 $413 =========================================================
Assumptions used in accounting for the defined benefit plans as of December 31, 1995, 1994, and 1993 were as follows:
1995 1994 1993 --------------------------------------- Weighted-average discount rate 7.25% 8.00% 7.00% Rate of increase in compensation level 4.25% 6.00% 5.00% Expected long-term rate of return on assets 9.50% 8.50% 8.50%
Plan assets of the defined benefit plans at December 31, 1995 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans and money market funds. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution-individual account plan which is available to substantially all full-time home office employees to provide a savings program for additional retirement benefits, qualifying as a 401(k) plan. As a 401(k) plan, participants may make contributions to the plan through salary reductions up to a maximum of $9,240 in 1995 and 1994, and $8,994 in 1993. Such contributions are not currently taxable to the participants. Beginning in 1994, the Company matched 100% of the first 3% of participants' contributions, plus 50% of contributions which exceeded 3% of participants' compensation, subject to a maximum matching percentage of 4 1/2% of the individual's salary. Prior to 1994, the Company matched participant contributions up to 3% of the individual's salary, subject to a maximum matching contribution of $1,500 per year. Company matching contributions were $1,071,000 for 1995, $1,042,000 for 1994, and $570,000 for 1993. - ------------------------------------------------------------------------------- 91 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 401(K) PLAN (CONTINUED) Plan assets of the Savings Plan at December 31, 1995 are invested in a group deposit administration contract (the Contract) with the Company, various mutual 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 $23.9 million and $21.6 million at December 31, 1995 and 1994, respectively. POSTRETIREMENT BENEFITS In addition to providing pension and profit sharing plans, the Company provides certain health care and life insurance benefits for retired employees. Under the current plans, all employees become eligible for these benefits if they achieve a minimum of 120 months of service prior to retirement. The plans are contributory, with retiree contributions adjusted annually, and contain other cost-sharing features such as deductible amounts and coinsurance. The following table presents the amounts recognized in the Company's balance sheets (in thousands):
DECEMBER 31 --------------------------------------------------------------- 1995 1994 --------------------------------------------------------------- LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL --------- -------- ---------- -------- -------- ---------- Accumulated postretirement benefit obligation: Retirees $(1,234) $(1,140) $ (2,374) $(2,612) $(274) $(2,886) Fully eligible active plan participants (383) (364) (747) (492) (65) (557) Other active plan participants (1,913) (1,134) (3,047) (2,347) (197) (2,544) ------- ------- -------- ------- ----- ------- (3,530) (2,638) (6,168) (5,451) (536) (5,987) Plan assets at fair value - - - - - - ------- ------- -------- ------- ----- ------- Accumulated postretirement benefit obligation in excess of plan assets (3,530) (2,638) (6,168) (5,451) (536) (5,987) Unrecognized prior service cost 463 42 505 571 52 623 Unrecognized net gain (6,114) 1,449 (4,665) (3,982) (359) (4,341) ------- ------- -------- ------- ----- ------- Accrued postretirement benefit cost $(9,181) $(1,147) $(10,328) $(8,862) $(843) $(9,705) ======= ======= ======== ======= ===== =======
- ------------------------------------------------------------------------------- 92 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) POSTRETIREMENT BENEFITS (CONTINUED) Net periodic postretirement benefit cost for 1995, 1994, and 1993 included the following components (in thousands):
1995 1994 1993 ------------------------------------------------------------------------------------------------------ LIFE LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL PLAN PLAN TOTAL ------------------------------------------------------------------------------------------------------ Service cost $ 359 $175 $ 534 $436 $30 $ 466 $ 434 $22 $ 456 Interest cost 291 112 403 448 39 487 573 36 609 Net amortization and deferral (209) 65 (144) (93) (8) (101) - - - ------------------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $ 441 $352 $ 793 $791 $61 $ 852 $1,007 $58 $1,065 =======================================================================================================
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 11% graded to 5% over 18 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, 1995 by $582,200 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1995 by $122,500. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1995 and 8.5% at December 31, 1994. 8. SEPARATE ACCOUNTS Separate account assets and liabilities represent funds segregated by the Company for the benefit of certain policyholders who bear the investment risk. The separate account assets and liabilities are carried at fair value. Revenues and expenses on the separate account assets and related liabilities equal the benefits paid to the separate account policyholders and are excluded from the amounts reported in the Consolidated Statements of Income except for fees charged for administration services and mortality risk. - ------------------------------------------------------------------------------- 93 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. LEASES The Company is committed under various noncancellable long-term operating leases relating to electronic data processing equipment that provide for annual rentals as follows (in thousands):
1996 $ 4,064 1997 4,207 1998 3,343 1999 271 2000 247 ------- $12,132 =======
These leases expire between 1996 and 2000. Rental expense for all equipment leases was approximately $4,344,000, $5,620,000, and $4,798,000 for the years ended December 31, 1995, 1994, and 1993, respectively. 10. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1995, 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, expense reimbursements, and reserves related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contacts. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion reinsured. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from reinsurer insolvencies, the Company evaluates the financial condition of the reinsurer and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurer. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. In 1995, the Company ceded a block of GIC business issued in prior years to an affiliate. No gain or loss was recognized on the transaction. The Company does not hold any collateral under these agreements. - -------------------------------------------------------------------------------- 94 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. REINSURANCE (CONTINUED) These transactions are summarized as follows (in thousands):
-------------------------------------------------- 1995 1994 -------------------------------------------------- PREMIUMS RESERVES PREMIUMS RESERVES ---------- ------------ ---------- ------------ Direct (nonaffiliated) $ 556,571 $ 1,380,951 $ 660,030 $ 1,200,001 Assumed from Life Insurance Company of Georgia 25,000 128,137 47,450 103,553 Assumed from Southland Life Insurance Company 8,000 11,838 Ceded to Columbine Life Insurance Company (530,291) (1,328,950) (602,680) (1,163,910) Ceded to Life Insurance Company of Georgia (78.200) (191,976) (104,800) (106,865) ------------------------------------------------- Net $ (18,920) $ - $ - $ 32,779 ==================================================
Ceded GIC reserves totalling $1,521 million are classified as part of prepaid reinsurance premiums. GIC reserves are reflected at their gross value of $1,521 million. The Company has ceded blocks of insurance under reinsurance treaties to provide funds for financial and other purposes. These reinsurance transactions, generally known as "surplus relief 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. Surplus relief reinsurance has the effect of increasing current statutory surplus while reducing future statutory surplus as amounts are recaptured from reinsurers. During 1995, most of the agreements were recaptured as part of an overall capital restructuring plan. This capital restructuring also resulted in a capital contribution from the Company's parent, of $146,630,000 to replace the reduction in statutory surplus that resulted from the recapture. 11. 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 entered into a tax sharing agreement that provides for an allocation of taxes among life and nonlife members. Under the agreement, a life member may not receive the full benefit of a taxable loss in the year the loss is incurred. The agreement provides that a loss member will receive at least 50% of the loss utilized by other members, and that any remaining benefit will be fully repaid when the loss member could have used the loss if they filed a separate federal income tax return. The deferred payments or receipts for the use of losses are accounted for as a component of the Company's deferred tax liability. At December 31, 1995, there were no deferred benefits or liabilities recorded with respect to life member losses. - -------------------------------------------------------------------------------- 95 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. 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 1995 1994 ---------- ---------- Deferred tax liabilities: Deferred policy acquisition costs $(197,355) $(203,468) Unrealized gains/losses (53,440) 10,449 --------- --------- Total deferred tax liabilities $(250,795) $(193,019) --------- --------- Deferred tax assets: Benefit reserves and surplus relief $ 120,439 $ 172,760 Tax-basis deferred acquisition costs 48,945 41,183 Investment income 12,060 29,806 Unearned investment income 9,383 9,789 Nonqualified deferred compensation 8,785 6,326 Post retirement employee benefits 3,615 3,397 Other, net 2,822 (7,110) --------- --------- Total deferred tax assets $ 206,049 $ 256,151 Valuation allowances for deferred tax assets -0- (438) --------- --------- Net deferred tax assets 206,049 255,713 --------- --------- Net deferred tax (liabilities) assets $ (44,746) $ 62,694 ========= =========
Prior to 1995 a valuation allowance had been established by the Company to account for the fact that the full benefit of the deferred tax asset established by First ING for tax-basis deferred acquisition costs more than likely would not be fully realized. In 1995, a change in judgement about the realization of the deferred tax asset occurred and the valuation allowance was removed. - -------------------------------------------------------------------------------- 96 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. INCOME TAXES (CONTINUED) The components of federal income tax expense (benefit) consists of the following (in thousands):
DECEMBER 31 1995 1994 1993 --------- --------- --------- Current $(48,136) $ 44,121 $ 31,721 Deferred 72,870 (29,200) (10,339) Current year change in valuation allowance (438) - 223 -------- -------- -------- Federal income tax expense $ 24,296 $ 14,921 $ 21,605 ======== ======== ========
The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. The Company had net income tax payments of $25,875,000 during 1995, $41,278,000 during 1994, and $39,042,000 during 1993, 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 shareholder exceed amounts in the Shareholder'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. 12. LONG-TERM DEBT Long-term indebtedness to related parties for $50,000,000 represents the initial cash draw on a $100,000,000 commitment from ING America Insurance Holdings, Inc. on December 29, 1994. Additional draws may be made by the Company at its option through December 1, 2004. 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. - -------------------------------------------------------------------------------- 97 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. LONG-TERM DEBT (CONTINUED) 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 December 31, 1999 and continuing through December 31, 2003 with the option of prepaying any outstanding principal and accrued interest. On December 29, 1995 after receiving approval from the Colorado State Commissioner of Insurance a payment of $4,024,000 was made for accrued interest. Future minimum payments, assuming a current effective interest rate of 5.57%, are as follows (in thousand):
TOTAL YEAR PAYMENTS -------------------------------- -------- 1999 $14,000 2000 14,000 Subsequent years 42,002 ------- Total 70,002 Less imputed interest 20,002 ------- Present value of payments $50,000 =======
13. 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. The NAIC is currently in the process of codifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to be completed in 1997, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes to the accounting practices that insurance companies use to prepare their statutory financial statements. - -------------------------------------------------------------------------------- 98 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. 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 regardingUniversal 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, 1995 the Company met RBC requirements. Capital and surplus, determined in accordance with statutory accounting practices (SAP), was $333,686,000 and $308,933,000 at December 31, 1995 and 1994, respectively. Net income, determined in accordance with SAP, was $11,771,000, $9,383,000, and $23,813,000 for the years ended December 31, 1995, 1994, and 1993, 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 a 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, 1995. 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. 14. COMMITMENTS AND CONTINGENT LIABILITIES The Company is a party to pending or threatened lawsuits arising from the normal conduct of its business. Due to the climate in insurance and business litigation, suits against the Company sometimes include substantial additional claims consequential damages, punitive damages and other similar types of relief. While it is not possible to forecast the outcome of such litigation, it is the opinion of management that the disposition of such lawsuits will not have a materially adverse effect on the Company's financial position or interfere with its operations. - -------------------------------------------------------------------------------- 99 SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. FINANCING ARRANGEMENTS The Company has a $86,411,000 line of credit issued by the Company's parent to provide short-term liquidity. The amount of funds available under this line are reduced by any other indebtedness outstanding to the parent including long- term indebtedness (Note 12). The Company has an additional non-affiliated line of credit of $75,000,000 also to provide short-term liquidity which expires March 31, 1996. There were no outstanding borrowings under either of these agreements at December 31, 1995 or 1994. The average balance of short-term debt was $20.8 million during 1995. The weighted average interest rate paid on this debt during 1995 was 5.93%. The Company is the beneficiary of letters of credit totaling $71,615,000 that were established in accordance with the terms of reinsurance agreements. The letters of credit expired on December 31, 1995 and were renewed in 1996. The letters were unused during both 1995 and 1994. - -------------------------------------------------------------------------------- 100 Security Life of Denver Separate Account L1 Financial Statements Year ended December 31, 1995 CONTENTS PAGE Report of Independent Auditors................................... 102 Audited Financial Statements Statement of Net Assets.................................. 103 Statement of Operations.................................. 105 Statements of Changes in Net Assets...................... 108 Notes to Financial Statements............................ 111 - -------------------------------------------------------------------------------- 101 [LETTERHEAD OF ERNST & YOUNG LLP APPEARS HERE] Report of Independent Auditors Contractholders Security Life of Denver Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life of Denver Separate Account L1 (comprising, respectively, the Neuberger & Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Portfolios) ("Neuberger and Berman"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged All Cap Portfolios) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Portfolios) ("Fidelity Investments"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Industrial Income, High Yield and Utilities Portfolios) ("INVESCO") and Van Eck Worldwide Trust (comprising the Worldwide Balanced and Gold and Natural Resources Portfolios) ("Van Eck") Divisions) as of December 31, 1995, and the related statements of operations and changes in net assets for each of the two 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, 1995, by correspondence with the transfer agent. 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 of Denver Separate Account L1 at December 31, 1995, and the results of its operations and changes in its net assets for each of the two years in the period then ended, in conformity with generally accepted accounting principles. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Denver, Colorado April 1, 1996 - -------------------------------------------------------------------------------- 102 SECURITY LIFE SEPARATE ACCOUNT L1
STATEMENT OF NET ASSETS DIVISIONS ------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 NEUBERGER & BERMAN ALGER ----------------------------------------------------- ------------------------------------------ LIMITED GOVERN- AMERICAN AMERICAN AMERICAN MATURITY MENT SMALL MIDCAP AMERICAN LEVERAGED COMBINED BOND GROWTH INCOME PARTNERS CAPITAL GROWTH GROWTH ALLCAP ----------- ---------- -------- -------- -------- ---------- -------- -------- -------- ASSETS Investments in mutual funds at market value (combined cost $12,967,718) - Note C $13,154,445 $1,783,126 $763,600 $832,261 $965,737 $1,128,775 $275,639 $839,236 $37,332 ----------- ---------- -------- -------- -------- ---------- -------- -------- ------- TOTAL ASSETS 13,154,445 1,783,126 763,600 832,261 965,737 1,128,775 275,639 839,236 37,332 ----------- ---------- -------- -------- -------- ---------- -------- -------- ------- LIABILITIES Due to (from) Security Life of Denver (72,089) (382) 443 (208) (884) 760 552 1,224 372 Due to (from) other divisions 0 0 0 0 0 30 0 0 0 ----------- ---------- -------- -------- -------- ---------- -------- -------- ------- TOTAL LIABILITIES (72,089) (382) 443 (208) (884) 790 552 1,224 372 ----------- ---------- -------- -------- -------- ---------- -------- -------- ------- NET ASSETS $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960 =========== ========== ======== ======== ======== ========== ======== ======== ======= POLICYHOLDER RESERVES Reserves attributable to the policyholders - Note B $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960 ----------- ---------- -------- -------- -------- ---------- -------- -------- ------- TOTAL POLICYHOLDER RESERVES $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960 =========== ========== ======== ======== ======== ========== ======== ======== ======= Number of divisional units outstanding - Note G 162,009.578 60,162.107 77,187.706 73,535.288 80,027.266 19,692.860 69,805.233 2,494.731 Value per divisional unit $11.01 $12.69 $10.78 $13.14 $14.10 $13.97 $12.01 $14.82 =========== ========== ========== ========== ========== ========== ========== =========
See the accompanying notes to these financial statements. - ------------------------------------------------------------------------------- 103 SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF NET ASSETS (CONTINUED)
DIVISIONS ---------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 FIDELTITY INVESTMENTS INVESCO ---------------------------------------------------------------------------------------------------- INDUS- ASSET MONEY TOTAL TRIAL HIGH MANAGER GROWTH OVERSEAS MARKET INDEX 500 RETURN INCOME YIELD UTILITIES --------- ---------- -------- ---------- ---------- -------- --------- --------- --------- ASSETS Investments in mutual funds at market value $127,724 $1,348,847 $971,426 $1,801,755 $1,203,939 $153,331 $260,518 $545,523 $20,382 -------- ---------- -------- ---------- ---------- -------- -------- -------- ------- TOTAL ASSETS 127,724 1,348,847 971,426 1,801,755 1,203,939 153,331 260,518 545,523 20,382 -------- ---------- -------- ---------- ---------- -------- -------- -------- ------- LIABILITIES Due to(from) Security Life of Denver 233 2,690 688 (78,371) (83) (232) 830 18 33 Due to(from) other divisions 0 49 40 (198) 0 0 49 30 0 -------- ---------- -------- ---------- ---------- -------- -------- -------- ------- TOTAL LIABILITIES 233 2,739 728 (78,569) (83) (232) 879 48 33 -------- ---------- -------- ---------- ---------- -------- -------- -------- ------- NET ASSETS $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349 ======== ========== ======== ========== ========== ======== ======== ======== ======= POLICYHOLDER RESERVES Reserves attributable to the policyholders - Note B $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349 -------- ---------- -------- ---------- ---------- -------- -------- -------- ------- TOTAL POLICYHOLDER RESERVES $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349 ======== ========== ======== ========== ========== ======== ======== ======== ======= Number of divisional units outstanding - Note G 11,627.088 102,248.988 93,906.733 178,653.159 91,903.027 12,602.664 20,026.102 45,708.358 1,879.859 Value per divisional unit $10.96 $13.17 $10.34 $10.52 $13.10 $12.18 $12.97 $11.93 $10.82 ======== ========== ======== ========== ========== ======== ======== ======== ======= --------------------- VAN ECK --------------------- GOLD AND WORLDWIDE NATURAL BALANCED RESOURCES --------- ---------- ASSETS Investments in mutual funds at market value $76,996 $18,298 -------- ---------- TOTAL ASSETS 76,996 18,298 -------- ---------- LIABILITIES Due to(from) Security Life of Denver 184 44 Due to(from) other divisions 0 0 -------- ---------- TOTAL LIABILITIES 184 44 -------- ---------- NET ASSETS $76,812 $18,254 ======== ========== POLICYHOLDER RESERVES Reserves attributable to the policyholders - Note B $76,812 $18,254 -------- ---------- TOTAL POLICYHOLDER RESERVES $76,812 $18,254 ======== ========== Number of divisional units outstanding - Note G 7,739.274 1,765.913 Value per divisional unit $9.92 $10.34 ======== ==========
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 104 SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF OPERATIONS DECEMBER 31, 1995
DIVISIONS -------------------------------------------------------------------------------------------- NEUBERGER & BERMAN ALGER ------------------------------------------------- ----------------------------------------- LIMITED GOVERN- AMERICAN AMERICAN AMERICAN MATURITY MENT SMALL MIDCAP AMERICAN LEVERAGED COMBINED BOND GROWTH INCOME PARTNERS CAPITAL GROWTH GROWTH ALLCAP -------------------------------------------------- ----------------------------------------- INVESTMENT INCOME Dividends from mutual funds $134,683 $65 $34 $0 $5 $0 $3 $0 $0 Less: Valuation period deductions - Note B (37,280) (4,624) (1,717) (2,366) (2,570) (2,496) (551) (2,242) (142) -------- ------- ------ ------ ------ ------ ------- ------ ------- NET INVESTMENT INCOME 97,403 (4,559) (1,683) (2,366) (2,565) (2,496) (548) (2,242) (142) -------- ------- ------ ------ ------ ------ ------- ------- ------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 76,547 8,399 4,077 2,729 10,213 19,457 3,402 1,513 (7,229) Net unrealized gains (losses) on investments 186,727 54,564 (1,928) 33,629 58,164 (57,427) 3,400 (1,664) 1,120 -------- ------- ------ ------ ------ ------- ------- ------- ------- Net realized and unrealized gains (losses) on investments 263,274 62,963 2,149 36,358 68,377 (37,970) 6,802 (151) (6,109) -------- ------- ------ ------ ------ ------- ------- ------- ------- NET INCREASE(DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $360,677 $58,404 $466 $33,992 $65,812 ($40,466) $6,254 ($2,393) ($6,251) ======== ======= ====== ======= ======= ======== ====== ======= ========
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 105 SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF OPERATIONS (CONTINUED)
DIVISIONS ------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 FIDELITY INVESTMENTS INVESCO VAN ECK ------------------------------------------- ----------------------------------- --------------- GOLD AND INDUS- WORLD NATURAL ASSET MONEY INDEX TOTAL TRIAL HIGH WIDE RE- MANAGER GROWTH OVERSEAS MARKET 500 RETURN INCOME YIELD UTILITIES BALANCED SOURCES ------- ------ -------- ------- ------ ------ ------ ------- --------- -------- ------- INVESTMENT INCOME Dividends from mutual funds $0 $0 $0 $78,541 $0 $3,093 $9,220 $43,135 $127 $416 $44 Less: Valuation period deductions - Note B (257) (3,373) (2,080) (10,362) (2,406) (243) (567) (1,017) (36) (171) (60) ----- ------ ------ ------- ------ ------ ------ ------- ------- ---- --- NET INVESTMENT INCOME (257) (3,373) (2,080) 68,179 (2,406) 2,850 8,653 42,118 91 245 (16) ----- ------ ------ ------- ------ ------ ------ ------- ------- ---- --- REALIZED AND UNREALIZED GAINS LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 632 13,932 2,684 0 11,592 2,380 1,156 1,237 15 (5) 363 ----- ------ ------ ------- ------ ------ ------ ------- ------- ---- --- Net unrealized gains (losses) on investments 6,607 (11,822) 28,250 0 79,889 2,264 12,495 (22,224) 891 (62) 581 ----- ------- ------ ------- ------ ------ ------ ------- ------- ---- --- Net realized and unrealized gains (losses) on investments 7,239 2,110 30,934 0 91,481 4,644 13,651 (20,987) 906 (67) 944 ----- ------- ------ ------- ------ ------ ------ ------- ------- ---- --- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $6,982 ($1,263) $28,854 $68,179 $89,075 $7,494 $22,304 $21,131 $997 $178 $928 ====== ======= ======= ======= ======= ====== ======= ======= ======= ==== ====
See the accompanying notes to these financial statements. - ------------------------------------------------------------------------------- 106 SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF OPERATIONS DECEMBER 31, 1994
DIVISIONS ---------------------------------- FIDELITY INVESTMENTS -------------------- COMBINED MONEY MARKET -------- -------------------- INVESTMENT INCOME Dividends from mutual funds $39 $39 Less: Valuation period deductions (5) (5) --- --- NET INVESTMENT INCOME 34 34 --- --- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS --- --- $34 $34 === ===
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 107
SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF CHANGES IN NET ASSETS DIVISIONS ------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 NEUBERGER & BERMAN ALGER ------------------------------------------------------------------------------------------------------- LIMITED AMERICAN AMERICAN MATURITY GOVERNMENT AMERICAN MIDCAP AMERICAN LEVERAGED COMBINED BOND GROWTH INCOME PARTNERS SMALL CAPITAL GROWTH GROWTH ALLCAP -------- -------- ------ ---------- -------- ------------- -------- -------- --------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income $97,403 ($4,559) ($1,683) ($2,366) ($2,565) ($2,496) ($548) ($2,242) ($142) Net realized gains (losses) on investments 76,547 8,399 4,077 2,729 10,213 19,457 3,402 1,513 (7,229) Net unrealized gains (losses) on investments 186,727 54,564 (1,928) 33,629 58,164 (57,427) 3,400 (1,664) 1,120 ----------- ----------- -------- -------- -------- ---------- -------- -------- ------- INCREASE(DECREASE) IN NET ASSETS FROM OPERATIONS 360,677 58,404 466 33,992 65,812 (40,466) 6,254 (2,393) (6,251) ----------- ----------- -------- -------- -------- ---------- -------- -------- ------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,329,581 4,133 13,771 12,086 9,562 224,681 18,375 9,493 3,155 Cost of insurance and administrative expenses (515,616) (25,947) (23,846) (15,635) (28,681) (24,235) (8,062) (38,073) (2,121) Net transfers among divisions (including the guaranteed interest division in the general account) 0 1,745,908 770,482 801,675 917,184 963,613 257,593 866,852 42,398 Other 19,851 1,010 2,284 351 2,744 4,392 927 2,133 (221) ----------- ----------- -------- -------- -------- ---------- -------- -------- ------- TOTAL INCREASE (DECREASE) FROM PRINCIPAL OPERATIONS 12,833,816 1,725,104 762,691 798,477 900,809 1,168,451 268,833 840,405 43,211 ----------- ----------- -------- -------- -------- ---------- -------- -------- ------- TOTAL INCREASE IN NET ASSETS 13,194,493 1,783,508 763,157 832,469 966,621 1,127,985 275,087 838,012 36,960 Net assets at beginning of year 32,041 0 0 0 0 0 0 0 0 NET ASSETS AT END OF YEAR $13,226,534 $1,783,508 $763,157 $832,469 $966,621 $1,127,985 $275,087 $838,012 $36,960 =========== ========== ======== ======== ======== ========== ======== ======== =======
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 108
SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF CHANGES IN NET ASSETS DIVISIONS (CONTINUED) ------------------------------------------------------------------------------------------------------- DECEMBER 31, 1995 FIDELITY INVESTMENTS INVESCO VAN ECK ----------------------------------------- ------------------------------------ ---------------------- Gold and Asset Money Index Total Industrial High Worldwide Natural Manager Growth Overseas Market 500 Return Income Yield Utilities Balance Resources ---------------------------------------- ------------------------------------- ---------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income ($257) ($3,373) ($2,080) $68,179 ($2,406) $2,850 $8,653 $42,118 $91 $245 ($16) Net realized gains (losses) on investments 632 13,932 2,684 0 11,592 2,380 1,156 1,237 15 (5) 363 Net unrealized gains (losses) on investments 6,607 (11,822) 28,250 0 79,889 2,264 12,495 (22,224) 891 (62) 581 ---------------------------------------- ------------------------------------- ----------------------- INCREASE (DECREASE) IN NET ASSETS FROM OPERATIONS 6,982 (1,263) 28,854 68,179 89,075 7,494 22,304 21,131 997 178 928 ---------------------------------------- ------------------------------------- ----------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 18,939 37,113 24,03 712,848,110 67,827 3,844 12,548 8,941 2,701 6,352 3,913 Cost of insurance and administrative expenses (5,716) (45,365) (17,969) (242,041) (16,704) (4,401) (5,390) (6,776) (1,290) (2,360) (1,004) Net transfers among divisions (including the guaranteed interest division in the general account) 107,141 1,355,450 935,792 (10,830,183) 1,063,282 145,676 230,040 522,094 17,934 72,661 14,408 Other 145 173 (16) 4,218 542 950 137 85 7 (19) 9 ---------------------------------------- ------------------------------------- ----------------------- TOTAL INCREASE (DECREASE) FROM PRINCIPAL OPERATIONS 120,509 1,347,371 941,844 1,780,104 1,114,947 146,069 237,335 524,344 19,352 76,634 17,326 ---------------------------------------- ------------------------------------- ----------------------- TOTAL INCREASE IN NET ASSETS 127,491 1,346,108 970,698 1,848,283 1,204,022 153,563 259,639 545,475 20,349 76,812 18,254 Net assets at beginning of year 0 0 0 32,041 0 0 0 0 0 0 0 ---------------------------------------- ------------------------------------- ----------------------- NET ASSETS AT END OF YEAR $127,491 $1,346,108 $970,698 $1,880,324 $1,204,022 $153,563 $259,639 $545,475 $20,349 $76,812 $18,254 ======================================== ===================================== =======================
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 109
SECURITY LIFE SEPARATE ACCOUNT L1 STATEMENT OF CHANGES IN NET ASSETS DECEMBER 31, 1994 DIVISIONS ---------------------------- INCREASE (DECREASE) IN NET ASSETS FIDELITY INVESTMENTS Combined Money Market OPERATIONS -------------- ------------- Net investment income $34 $34 -------------- ------------- INCREASE IN NET ASSETS FROM OPERATIONS 34 34 -------------- ------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 37,065 37,065 Cost of insurance and administrative expenses (5,058) (5,058) -------------- ------------- TOTAL INCREASE FROM PRINCIPAL TRANSACTIONS 32,007 32,007 -------------- ------------- TOTAL INCREASE IN NET ASSETS 32,041 32,041 Net assets at beginning of year 0 0 -------------- ------------- NET ASSETS AT END OF YEAR $32,041 $32,041 ============== =============
See the accompanying notes to these financial statements. - -------------------------------------------------------------------------------- 110 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A - ORGANIZATION The 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 was inactive prior to December 22, 1994, except for matters relating to its organization as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine Variable Universal Life (FirstLine) 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 chargeable with liabilities arising out of any other operations of the Company. The Separate Account currently consists of nineteen 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 Neuberger & Berman Limited Maturity Bond Portfolio Neuberger & Berman Growth Portfolio Neuberger & Berman Government Income Portfolio Neuberger & Berman Partners Portfolio - -------------------------------------------------------------------------------- 111 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE A - ORGANIZATION (CONTINUED) Fred Alger Management, Inc. Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company Fidelity Investments Growth Portfolio Fidelity Investments Overseas Portfolio Fidelity Investments Money Market Portfolio Fidelity Investments Asset Manager Portfolio Fidelity Investments Index 500 Portfolio INVESCO Funds Group, Inc. INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio Van Eck Investment Trust Van Eck Worldwide Balanced Portfolio Van Eck Gold and Natural Resources Portfolio The 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 product also provides the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division (GID). 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. - ------------------------------------------------------------------------------- 112 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 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 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. The accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: SECURITY VALUATION - The investment 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. SECURITY TRANSACTIONS AND RELATED INVESTMENT INCOME - The investment in shares of the Funds are accounted for on the date the order to buy or sell is executed (trade date). Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from security 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. - ------------------------------------------------------------------------------- 113 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) For FirstLine policies, 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 year ended December 31, 1995 were $37,280. 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. 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 & administrative charges. The cost of insurance and administrative charges were $515,616 for the year ended December 31, 1995. Distributions made by the Funds are reinvested in the Funds. - -------------------------------------------------------------------------------- 114 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE C - INVESTMENTS (CONTINUED) The following is a summary of fund shares owned as of December 31, 1995.
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - ------------------------------------- ------------- ------ ---------- ----------- Neuberger & Berman: Limited Maturity Bond 121,218.627 $14.71 $1,783,126 $ 1,728,562 Growth 29,533.890 25.86 763,600 765,528 Government Income 76,144.619 10.93 832,261 798,632 Partners 72,995.960 13.23 965,737 907,573 Fred Alger Management, Inc.: American Small Capital 28,641.801 39.41 1,128,775 1,186,202 American MidCap Growth 14,179.178 19.44 275,639 272,239 American Growth 26,933.111 31.16 839,236 840,900 American Leveraged AllCap 2,141.851 17.43 37,332 36,212 Fidelity Management & Research Co.: Asset Manager 8,089.073 15.79 127,724 121,117 Growth 46,193.461 29.20 1,348,847 1,360,669 Overseas 56,983.877 17.05 971,426 943,176 Money Market 1,801,734.580 1.00 1,801,755 1,801,755 Index 500 15,901.893 75.71 1,203,939 1,124,050 INVESCO Funds Group, Inc.: Total Return 12,631.624 12.14 153,331 151,067 Industrial Income 20,710.894 12.58 260,518 248,023 High Yield 49,413.305 11.04 545,523 567,747 Utilities 1,880.274 10.84 20,382 19,491 Van Eck Investment Trust: Worldwide Balanced 7,703.509 9.99 76,996 77,058 Gold & Natural Resources 1,268.856 14.42 18,298 17,717 ----------- ----------- Totals $13,154,445 $12,967,718 =========== ===========
- -------------------------------------------------------------------------------- 115 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE C - INVESTMENTS (CONTINUED) For the year ended December 31, 1995, the aggregate cost of purchases (plus reinvested dividends) and the proceeds from sales of investments were $26,098,897 and $13,239,772, respectively. NOTE D - OTHER POLICY DEDUCTIONS The FirstLine product provides 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 Policies allow the policyholders to borrow against their policies by using it as collateral for a loan. At the time they borrow against their policy an amount equal to the loan amount is transferred from the Separate Account divisions to a Loan Division 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. - ------------------------------------------------------------------------------- 116 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE G - SUMMARY OF CHANGES IN UNITS The following schedule summarizes the change in divisional units for the year ended December 31, 1995:
DIVISIONAL UNITS ------------------------------------------------------------------ INCREASE OUTSTANDING INCREASE (DECREASE) (DECREASE) AT FOR FOR FOR COI OUTSTANDING BEGINNING PAYMENTS DIVISIONAL AND ADMIN. AT END DIVISION OF YEAR RECEIVED TRANSFERS CHARGES OF YEAR - --------------------------- ----------- -------- ------------- ----------- ----------- Neuberger & Berman: Limited Maturity Bond 0.000 382.961 164,031.781 (2,405.164) 162,009.578 Growth 0.000 1,107.568 60,922.448 (1,867.909) 60,162.107 Government Income 0.000 1,154.992 77,524.888 (1,492.174) 77,187.706 Partners 0.000 777.847 75,027.133 (2,269.692) 73,535.288 Fred Alger Management, Inc.: American Small Capital 0.000 15,032.912 66,694.332 (1,699.978) 80,027.266 American MidCap Growth 0.000 1,336.898 18,942.171 (586.209) 19,692.860 American Growth 0.000 795.728 72,142.081 (3,132.576) 69,805.233 American Leveraged AllCap 0.000 217.078 2,424.066 (146.413) 2,494.731 Fidelity Management & Research Co.: Asset Manager 0.000 1,811.445 10,363.454 (547.811) 11,627.088 Growth 0.000 2,796.390 102,856.769 (3,404.171) 102,248.988 Overseas 0.000 2,389.778 93,305.776 (1,788.821) 93,906.733 Money Market 3,200.637 1,244,243.280 (1,045,323.517) (23,467.241) 178,653.159 Index 500 0.000 5,636.625 87,615.828 (1,349.426) 91,903.027 INVESCO Funds Group, Inc.: Total Return 0.000 329.342 12,652.423 (379.101) 12,602.664 Industrial Income 0.000 1,040.189 19,427.874 (441.961) 20,026.102 High Yield 0.000 766.963 45,527.967 (586.572) 45,708.358 Utilities 0.000 261.166 1,744.166 (125.473) 1,879.859 Van Eck Investment Trust: Worldwide Balanced 0.000 639.571 7,336.953 (237.250) 7,739.274 Gold & Natural Resources 0.000 384.059 1,482.141 (100.287) 1,765.913
- -------------------------------------------------------------------------------- 117 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 The following schedule summarizes the change in divisional units for year ended December 31, 1994:
DIVISIONAL UNITS ------------------------------------------------------------- INCREASE OUTSTANDING INCREASE (DECREASE) (DECREASE) AT FOR FOR FOR COI OUTSTANDING BEGINNING PAYMENTS DIVISIONAL AND ADMIN AT END DIVISION OF YEAR RECEIVED TRANSFERS CHARGES OF YEAR - --------------- ------------- --------- ---------- ---------- ------------ Fidelity Management & Research Co.: Money Market 0.000 3,706.444 0.000 (505.807) 3,200.637
- ------------------------------------------------------------------------------- 118 SECURITY LIFE SEPARATE ACCOUNT L1 NOTES TO THE FINANCIAL STATEMENTS DECEMBER 31, 1995 NOTE H - NET ASSETS Net assets at December 31, 1995 consisted of the following:
ACCUMULATED NET NET REALIZED UNREALIZED ACCUMULATED GAINS GAINS PRINCIPAL INVESTMENT (LOSSES) ON (LOSSES) ON DIVISION TRANSACTIONS INCOME INVESTMENTS INVESTMENTS NET ASSETS -------- ---------- ------------- ----------- ------------ ------------- Neuberger & Berman: Limited Maturity Bond $1,725,104 ($4,559) $ 8,399 $ 54,564 $1,783,508 Growth 762,691 (1,683) 4,077 (1,928) 763,157 Government Income 798,477 (2,366) 2,729 33,629 832,469 Partners 900,809 (2,565) 10,213 58,164 966,621 Fred Alger Management, Inc.: American Small Capital 1,168,451 (2,496) 19,457 (57,427) 1,127,985 American MidCap Growth 268,833 (548) 3,402 3,400 275,087 American Growth 840,405 (2,242) 1,513 (1,664) 838,012 American Leveraged AllCap 43,211 (142) (7,229) 1,120 36,960 Fidelity Management & Research Co.: Asset Manager 120,509 (257) 632 6,607 127,491 Growth 1,347,371 (3,373) 13,932 (11,822) 1,346,108 Overseas 941,844 (2,080) 2,684 28,250 970,698 Money Market 1,812,111 68,213 0 0 1,880,324 Index 500 1,114,947 (2,406) 11,592 79,889 1,204,022 INVESCO Funds Group, Inc.: Total Return 146,069 2,850 2,380 2,264 153,563 Industrial Income 237,335 8,653 1,156 12,495 259,639 High Yield 524,344 42,118 1,237 (22,224) 545,475 Utilities 19,352 91 15 891 20,349 Van Eck Investment Trust: Worldwide Balanced 76,634 245 (5) (62) 76,812 Gold & Natural Resources 17,326 (16) 363 581 18,254 ----------- ------- ------- -------- ----------- Totals $12,865,823 $97,437 $76,547 $186,727 $13,226,534 =========== ======= ======= ======== ===========
- ------------------------------------------------------------------------------- 119 APPENDIX A Factors for the Cash Value Accumulation Test For a Life Insurance Policy MALE NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 120 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy MALE SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 121 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy FEMALE NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 14.687 25 6.861 50 3.013 75 1.493 1 14.680 26 6.638 51 2.920 76 1.461 2 14.279 27 6.421 52 2.831 77 1.430 3 13.873 28 6.211 53 2.745 78 1.401 4 13.471 29 6.007 54 2.662 79 1.373 5 13.073 30 5.809 55 2.583 80 1.347 6 12.682 31 5.618 56 2.507 81 1.322 7 12.294 32 5.432 57 2.433 82 1.299 8 11.915 33 5.252 58 2.362 83 1.278 9 11.541 34 5.078 59 2.293 84 1.257 10 11.175 35 4.910 60 2.226 85 1.239 11 10.817 36 4.747 61 2.162 86 1.221 12 10.469 37 4.590 62 2.100 87 1.205 13 10.132 38 4.439 63 2.040 88 1.190 14 9.807 39 4.294 64 1.983 89 1.176 15 9.494 40 4.154 65 1.928 90 1.163 16 9.192 41 4.019 66 1.876 91 1.150 17 8.899 42 3.890 67 1.826 92 1.137 18 8.617 43 3.765 68 1.778 93 1.125 19 8.344 44 3.645 69 1.732 94 1.112 20 8.078 45 3.530 70 1.688 95 1.098 21 7.821 46 3.419 71 1.645 96 1.084 22 7.571 47 3.312 72 1.604 97 1.069 23 7.327 48 3.208 73 1.565 98 1.054 24 7.091 49 3.109 74 1.528 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 122 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy FEMALE SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 13.162 25 6.032 50 2.728 75 1.451 1 13.099 26 5.836 51 2.651 76 1.423 2 12.723 27 5.647 52 2.578 77 1.396 3 12.346 28 5.463 53 2.507 78 1.371 4 11.974 29 5.285 54 2.438 79 1.347 5 11.608 30 5.113 55 2.373 80 1.325 6 11.248 31 4.946 56 2.310 81 1.303 7 10.894 32 4.785 57 2.249 82 1.283 8 10.547 33 4.629 58 2.190 83 1.263 9 10.207 34 4.478 59 2.132 84 1.246 10 9.874 35 4.332 60 2.076 85 1.229 11 9.550 36 4.192 61 2.022 86 1.214 12 9.234 37 4.056 62 1.969 87 1.199 13 8.930 38 3.926 63 1.919 88 1.186 14 8.636 39 3.801 64 1.870 89 1.173 15 8.352 40 3.682 65 1.824 90 1.161 16 8.085 41 3.568 66 1.780 91 1.149 17 7.826 42 3.459 67 1.738 92 1.137 18 7.577 43 3.354 68 1.697 93 1.125 19 7.336 44 3.254 69 1.658 94 1.112 20 7.102 45 3.158 70 1.620 95 1.098 21 6.876 46 3.065 71 1.583 96 1.084 22 6.655 47 2.976 72 1.547 97 1.069 23 6.441 48 2.890 73 1.513 98 1.054 24 6.234 49 2.808 74 1.481 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 123 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 124 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 125 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 NONSMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.943 25 6.234 50 2.733 75 1.418 1 13.032 26 6.037 51 2.649 76 1.392 2 12.683 27 5.845 52 2.568 77 1.368 3 12.327 28 5.657 53 2.490 78 1.345 4 11.975 29 5.473 54 2.415 79 1.323 5 11.626 30 5.294 55 2.343 80 1.303 6 11.278 31 5.120 56 2.275 81 1.283 7 10.934 32 4.950 57 2.209 82 1.265 8 10.593 33 4.786 58 2.146 83 1.247 9 10.256 34 4.627 59 2.085 84 1.231 10 9.926 35 4.474 60 2.027 85 1.216 11 9.604 36 4.325 61 1.972 86 1.202 12 9.292 37 4.182 62 1.918 87 1.190 13 8.994 38 4.043 63 1.868 88 1.178 14 8.710 39 3.910 64 1.819 89 1.166 15 8.443 40 3.782 65 1.773 90 1.155 16 8.188 41 3.658 66 1.729 91 1.144 17 7.945 42 3.539 67 1.687 92 1.133 18 7.712 43 3.424 68 1.647 93 1.122 19 7.487 44 3.314 69 1.609 94 1.110 20 7.267 45 3.208 70 1.573 95 1.097 21 7.053 46 3.106 71 1.538 96 1.084 22 6.843 47 3.007 72 1.506 97 1.069 23 6.637 48 2.912 73 1.475 98 1.054 24 6.433 49 2.821 74 1.445 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 126 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 SMOKER
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.942 25 5.143 50 2.347 75 1.361 1 10.931 26 4.984 51 2.282 76 1.341 2 10.616 27 4.828 52 2.221 77 1.323 3 10.298 28 4.675 53 2.162 78 1.306 4 9.985 29 4.526 54 2.105 79 1.289 5 9.677 30 4.380 55 2.052 80 1.274 6 9.373 31 4.239 56 2.000 81 1.259 7 9.072 32 4.102 57 1.951 82 1.244 8 8.777 33 3.969 58 1.904 83 1.230 9 8.487 34 3.841 59 1.859 84 1.217 10 8.203 35 3.717 60 1.816 85 1.205 11 7.927 36 3.597 61 1.774 86 1.194 12 7.660 37 3.481 62 1.735 87 1.183 13 7.405 38 3.371 63 1.697 88 1.173 14 7.161 39 3.264 64 1.660 89 1.163 15 6.930 40 3.162 65 1.626 90 1.153 16 6.721 41 3.064 66 1.594 91 1.143 17 6.523 42 2.970 67 1.563 92 1.133 18 6.334 43 2.880 68 1.534 93 1.122 19 6.152 44 2.794 69 1.505 94 1.110 20 5.975 45 2.711 70 1.478 95 1.097 21 5.803 46 2.632 71 1.452 96 1.084 22 5.634 47 2.556 72 1.427 97 1.069 23 5.468 48 2.484 73 1.404 98 1.054 24 5.305 49 2.414 74 1.382 99 1.040 100 1.000
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 127 APPENDIX B TABLES OF DEATH BENEFITS BASED ON PERCENTAGE OF ACCOUNT VALUE For Policies Tested under the Guideline Premium/Cash Value Corridor Test
Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 2.50 25 2.50 50 1.85 75 1.05 1 2.50 26 2.50 51 1.78 76 1.05 2 2.50 27 2.50 52 1.71 77 1.05 3 2.50 28 2.50 53 1.64 78 1.05 4 2.50 29 2.50 54 1.57 79 1.05 5 2.50 30 2.50 55 1.50 80 1.05 6 2.50 31 2.50 56 1.46 81 1.05 7 2.50 32 2.50 57 1.42 82 1.05 8 2.50 33 2.50 58 1.38 83 1.05 9 2.50 34 2.50 59 1.34 84 1.05 10 2.50 35 2.50 60 1.30 85 1.05 11 2.50 36 2.50 61 1.28 86 1.05 12 2.50 37 2.50 62 1.26 87 1.05 13 2.50 38 2.50 63 1.24 88 1.05 14 2.50 39 2.50 64 1.22 89 1.05 15 2.50 40 2.50 65 1.20 90 1.05 16 2.50 41 2.43 66 1.19 91 1.04 17 2.50 42 2.36 67 1.18 92 1.03 18 2.50 43 2.29 68 1.17 93 1.02 19 2.50 44 2.22 69 1.16 94 1.01 20 2.50 45 2.15 70 1.15 95 1.00 21 2.50 46 2.09 71 1.13 96 1.00 22 2.50 47 2.03 72 1.11 97 1.00 23 2.50 48 1.97 73 1.09 98 1.00 24 2.50 49 1.91 74 1.07 99 1.00 100 1.00
THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- Strategic Advantage 128 APPENDIX C PERFORMANCE INFORMATION The following hypothetical illustrations demonstrate how the actual investment experience of each Division of the Variable Account affects the Cash Surrender Value, Account Value and Death Benefit of a Policy. These hypothetical illustrations are based on the actual historical return of each Portfolio as if a Policy had been issued on the date indicated. Past performance is no indication of future performance. Each Portfolio's Annual Total Return 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. No hypothetical illustrations are return is shown for the Alger American Leveraged AllCap Portfolio or the Van Eck Balanced Fund because these Portfolios have been Portfolios in existence for less than one full fiscal year. The illustrations are based on the payment of a $5,750 annual premium, paid at the beginning of each year, for a hypothetical fully-underwritten Policy with a $300,000 face amount, the Cash Value Accumulation Test, death benefit Option 1, issued to a standard, nonsmoker male, Age 45. In each case, it is assumed that all premiums are allocated to the Division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of Premium Payments and the use of other Policy features, such as Policy Loans, would affect individual Policy benefits. The amounts shown for the Cash Surrender Values, Account Values and Death Benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the Variable Account for mortality and expense risks, and each Portfolio's charges and expenses. See CHARGES, DEDUCTIONS AND REFUNDS, page 34. This prospectus also contains illustrations based on assumed rates of return. See ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES AND SURRENDER VALUES, AND ACCUMULATED PREMIUMS, page 50. - -------------------------------------------------------------------------------- Strategic Advantage 129 HYPOTHETICAL ILLUSTRATIONS
Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $ 5,750 - -------------------------------------------------------------------------------- NEUBERGER & BERMAN AMT LIMITED MATURITY BOND PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/86 13.83% 5,210 4,922 300,000 12/31/87 2.89% 9,353 9,209 300,000 12/31/88 7.17% 13,980 13,980 300,000 12/31/89 10.77% 19,627 19,627 300,000 12/31/90 8.32% 25,252 25,252 300,000 12/31/91 11.34% 32,636 32,636 300,000 12/31/92 5.18% 38,515 38,515 300,000 12/31/93 6.63% 45,241 45,241 300,000 12/31/94 (0.15)% 48,944 48,944 300,000 12/31/95 10.94% 58,463 58,463 300,000 NEUBERGER & BERMAN AMT GOVERNMENT INCOME PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 11.76 5,111 4,823 300,000 NEUBERGER & BERMAN AMT GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/86 14.94% 5,259 4,971 300,000 12/31/87 (4.89)% 8,669 8,525 300,000 12/31/88 25.97% 15,675 15,675 300,000 12/31/89 29.47% 25,235 25,235 300,000 12/31/90 (8.19)% 26,440 26,440 300,000 12/31/91 29.73% 39,662 39,662 300,000 12/31/92 9.54% 47,804 47,804 300,000 12/31/93 6.79% 55,196 55,196 300,000 12/31/94 (4.99)% 55,969 55,969 300,000 12/31/95 31.73% 78,787 78,787 300,000
The assumptions underlying these values are described in Performance Information, page 129. * 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. - -------------------------------------------------------------------------------- Strategic Advantage 130 HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $ 5,750 - -------------------------------------------------------------------------------- NEUBERGER & BERMAN AMT PARTNERS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 6,260 5,972 300,000 ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 7,568 7,280 300,000 12/31/90 8.71% 12,451 12,307 300,000 12/31/91 57.54% 25,695 25,695 300,000 12/31/92 3.55% 30,392 30,392 300,000 12/31/93 13.28% 38,585 38,585 300,000 12/31/94 (4.38)% 40,650 40,650 300,000 12/31/95 44.31% 64,597 64,597 300,000 ALGER AMERICAN MIDCAP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 4,495 4,207 300,000 12/31/95 44.45% 12,244 12,100 300,000 ALGER AMERICAN GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 4,758 4,470 300,000 12/31/91 40.39% 12,256 12,112 300,000 12/31/92 12.38% 17,936 17,936 300,000 12/31/93 22.47% 26,593 26,593 300,000 12/31/94 1.45% 30,651 30,651 300,000 12/31/95 36.37% 47,446 47,446 300,000
The assumptions underlying these values are described in Performance Information, page 129. * 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. - -------------------------------------------------------------------------------- Strategic Advantage 131 HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $ 5,750 - -------------------------------------------------------------------------------- FIDELITY VIP GROWTH PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/87 3.66% 4,736 4,448 300,000 12/31/88 15.58% 10,002 9,858 300,000 12/31/89 31.51% 18,137 18,137 300,000 12/31/90 (11.73)% 19,175 19,175 300,000 12/31/91 45.51% 33,494 33,494 300,000 12/31/92 9.32% 41,010 41,010 300,000 12/31/93 19.37% 53,751 53,751 300,000 12/31/94 (0.02)% 57,563 57,563 300,000 12/31/95 35.36% 83,220 83,220 300,000 FIDELITY VIP OVERSEAS PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 8.13% 4,943 4,655 300,000 12/31/89 26.28% 11,220 11,076 300,000 12/31/90 (1.67)% 14,608 14,608 300,000 12/31/91 8.00% 19,797 19,797 300,000 12/31/92 (10.72)% 20,858 20,858 300,000 12/31/93 37.35% 34,391 34,391 300,000 12/31/94 1.72% 39,007 39,007 300,000 12/31/95 9.68% 47,091 47,091 300,000 FIDELITY VIP MONEY MARKET PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/86 6.70% 4,876 4,588 300,000 12/31/87 6.44% 9,334 9,190 300,000 12/31/88 7.39% 13,989 13,989 300,000 12/31/89 9.12% 19,335 19,335 300,000 12/31/90 8.04% 24,871 24,871 300,000 12/31/91 6.09% 30,667 30,667 300,000 12/31/92 3.90% 36,001 36,001 300,000 12/31/93 3.23% 41,192 41,192 300,000 12/31/94 4.25% 46,922 46,922 300,000 12/31/95 5.87% 53,624 53,624 300,000
The assumptions underlying these values are described in Performance Information, page 129. * 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. - -------------------------------------------------------------------------------- Strategic Advantage 132 HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $ 5,750 - -------------------------------------------------------------------------------- FIDELITY VIP II ASSET MANAGER PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 6.72% 4,877 4,589 300,000 12/31/91 22.56% 10,799 10,655 300,000 12/31/92 11.71% 16,205 16,205 300,000 12/31/93 21.23% 24,227 24,227 300,000 12/31/94 (6.09)% 26,115 26,115 300,000 12/31/95 16.96% 35,319 35,319 300,000 FIDELITY VIP II INDEX 500 PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/93 9.74% 5,017 4,729 300,000 12/31/94 1.04% 8,986 8,842 300,000 12/31/95 37.19% 17,559 17,559 300,000 INVESCO VIF TOTAL RETURN PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 22.79% 5,623 5,335 300,000 INVESCO VIF INDUSTRIAL INCOME PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 5,924 5,636 300,000 INVESCO VIF HIGH YIELD PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 5,482 5,194 300,000
The assumptions underlying these values are described in Performance Information, page 129. * 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. - -------------------------------------------------------------------------------- Strategic Advantage 133 HYPOTHETICAL ILLUSTRATION (Continued)
Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $300,000 Annual Premium $ 5,750 - -------------------------------------------------------------------------------- INVESCO VIF UTILITIES PORTFOLIO Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 4,987 4,699 300,000 VAN ECK GOLD AND NATURAL RESOURCES FUND Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 4/30/91 (5.67)% 4,304 4,016 300,000 4/30/92 (5.62)% 7,704 7,560 300,000 4/30/93 29.19% 14,850 14,850 300,000 4/30/94 23.96% 23,114 23,114 300,000 4/30/95 3.43% 27,678 27,678 300,000
The assumptions underlying these values are described in Performance Information, page 129. * These Annual Total Return figures reflect the Portfolio's management fees and other operation 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. - -------------------------------------------------------------------------------- Strategic Advantage 134 PART II UNDERTAKING TO FILE REPORTS Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). UNDERTAKING REGARDING INDEMNIFICATION Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S- 6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). CONTENTS OF REGISTRATION STATEMENT This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table The prospectus. Financial data schedules. The undertaking to file reports. The undertaking regarding indemnification. The signatures. Written consents of the following persons: Shirley A. Knarr (See Exhibits 6.(a)) Ernst & Young LLP (See Exhibit 7) II-1 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. 2/ (b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts 3/, and Compensation Schedule. 1/ (c) Commission Schedule for Policies 1/ (4) Not Applicable (5) (a) Specimen Variable Universal Life Insurance Policy (Form No. 1197 (VUL)). 1/ (b) Adjustable Term Insurance Rider (Form NO. R- 1500). 1/ (6) (a) Security Life of Denver's Restated Articles of Incorporation. 1/ (b-g) Amendments to Articles of Incorporation through June 12, 1987. 4/ (h) Security Life of Denver's By-laws. 1/ (7) Not Applicable (8) (a) Participation Agreements 3/ and Addendum to Sales Agreement. 1/ (b) Amendments to Participation Agreements. 1/ (c) Service Agreement. 1/ (d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 2/ (e) Amendment to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 5/ (9) Not Applicable II-2 (a) Specimen Flexible Premium Variable Life Insurance Application (Form No. Q-115).1/ (b) Specimen Flexible Premium Variable Life Insurance Guaranteed Issue Application (Form No. Q-115695).1/ 2. Included as Exhibit 1.A(5) above. 3. (a) Opinion and Consent of Eugene L. Copeland as to securities being registered.1/ 4. Not Applicable 5. Not Applicable 6. (a) Opinion and Consent of Shirley A. Knarr. (b) Opinion and Consent of Shirley A. Knarr regarding DAC tax charge.1/ 7. Consent of Ernst & Young LLP 8. Notice of Withdrawal Right for Policies. 1/ 9. Representations, Description and Undertaking pursuant to Rule 6e-3(T)(b)(13)(iii)(F) under the Investment Company Act of 1940. 6/ 10. Powers of Attorney. 1/ 11. Financial Data Schedule - ------------ 1/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 4, 1995 (File No. 33-88148). 2/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form N-4 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on February 21, 1995 (File No. 33-72564). 3/ Incorporated herein by reference to Pre-Effective Amendment No. 2 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 25, 1994 (File No. 33-74190) II-3 4/ Incorporated herein by reference to the Form N-4 Registration Statement of Security Life of Denver and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on December 3, 1993 (File No. 33-72564). 5/ Incorporated herein by reference to Post-Effective Amendment No. 2 to the Form N-4 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account A1, filed with the Securities and Exchange Commission on April 28, 1995 (File No. 33-78444). 6/ Incorporated herein by reference to Pre-Effective Amendment No. 1 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on August 31, 1994 (File No. 33-74190). 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, certify that they meet the requirements of Securities Act Rule 485(b) for effectiveness of Post-Effective Amendment No. 1 to the Registration Statement, and have duly caused this Post-Effective Amendment No. 1 to the Registration Statement to be signed on their behalf by the undersigned, thereunto 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 23rd day of April, 1996. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/: Stephen M. Christopher ---------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/: Eugene L. Copeland - ------------------------ Eugene L. Copeland SECURITY LIFE SEPARATE ACCOUNT L1 (Registrant) By: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/: Stephen M. Christopher ---------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/: Eugene L. Copeland - ------------------------ Eugene L. Copeland II-5 Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 1 to the Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/: Robert J. St. Jacques - --------------------------- Robert J. St. Jacques Chief Executive Officer /s/: Stephen M. Christopher - ---------------------------- Stephen M. Christopher President and Chief Operating Officer PRINCIPAL FINANCIAL OFFICER AND PRINCIPAL ACCOUNTING OFFICER: /s/: Michael W. Cunningham - --------------------------- Michael W. Cunningham Acting Chief Financial Officer and Acting Principal Accounting Officer DIRECTORS: /s/: R. Glenn Hilliard (Chairman)* - ----------------------------------- R. Glenn Hilliard /s/: Robert J. St. Jacques* - ----------------------------- Robert J. St. Jacques /s/: Thomas F. Conroy* - ------------------------ Thomas F. Conroy II-6 /s/: Michael W. Cunningham* - ----------------------------- Michael W. Cunningham /s/: Linda B. Emory* - ---------------------- Linda B. Emory /s/: Stephen M. Christopher* - ------------------------------ Stephen M. Christopher * By: Edward K. Campbell ------------------ Edward K. Campbell Attorney-in-fact April 23, 1996 II-7 EXHIBIT INDEX Security Life Separate Account L1 (File No. 33-88148) Exhibit Number Description - -------------- ----------- 6.(a) Opinion and Consent of Shirley A. Knarr 23 Consent of Ernst & Young LLP 27 Financial Data Schedule EX-6 2 OPINION AND CONSENT OF SHIRLEY A. KNARR April 17, 1996 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Post-Effective Amendment No. 1; SEC File No. 33-88148 Gentlemen: In my capacity as Variable Products Portfolio Manager and Actuarial Officer of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: * The preparation of Post-Effective Amendment No. 1 to the Registration Statement on Form S-6 (File No. 33-88148) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the "Strategic Advantage" variable universal life insurance policy; and * The preparation of the policy forms for the variable universal life insurance policy described in Post-Effective Amendment No. 1 (the "Policy"). It is my professional opinion that: 1. The total dollar amount of sales load under the Policy is no higher than would be permitted by Rule 6e-3(T)(b)(13)(i)(A) under the Investment Company Act of 1940. 2. The total sales load applicable to the original Stated Death Benefit and the total sales load applicable to any coverage increases in the Stated Death Benefit on premiums received within two years of issue or increase will never exceed the sum of the following: (a) 30% of the first guideline annual premium as defined in Rule 6e-3(T)(c)(8)(i), plus (b) 10% of the second guideline annual premiums, plus (c) 9% of any premium in excess of the first two guideline annual premiums. Therefore, a refund of excess sales load will never be necessary. Security Life of Denver Insurance Company April 17, 1996 Page Two 3. The illustrations of death benefits, account value, cash surrender value and total premiums paid plus interest at 5% shown in the Prospectus, based on the assumptions stated in the illustration, are consistent with the provisions of the Policy. The rate structure of the Policy has 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 life insurance test, premium class and premium amounts. Insureds of other premium classes may have higher cost of insurance charges. 4. All other numerical examples shown in the Prospectus are consistent with the Policy 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 Post-Effective Amendment No. 1 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/: SHIRLEY A. KNARR Shirley A. Knarr, FSA, MAAA EX-23 3 CONSENT OF ERNST & YOUNG LLP Consent of Independent Auditors We consent to the reference to our firm under the caption "Experts" and to the use of our reports dated April 1, 1996 (with respect to Security Life Separate Account L1) and April 5, 1996 (with respect to Security Life of Denver Insurance Company), in Post-Effective Amendment No. 1 to the Registration Statement (Form S-6 No. 33-88148) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 dated May 1, 1996. /s/ ERNST & YOUNG LLP ERNST & YOUNG LLP Denver, Colorado April 23, 1996 EX-27 4 FINANCIAL DATA SCHEDULE
6 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM SECURITY LIFE SEPARATE ACCOUNT L1 FINANCIAL STATEMENTS AT 12/31/95 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 12,967,718 13,154,445 0 0 0 13,154,445 0 0 13,154,445 0 0 0 0 0 0 0 0 0 0 13,226,534 134,683 0 0 37,280 97,403 76,547 186,727 360,677 0 0 0 0 0 0 0 13,194,493 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0 0
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