-----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, NCtTUnp8vlKiDfuNFTSER/1qejuOqZ6ORWIVQehoie1XNof5bC80JoKFr/kmvFny Evr5XEi+mO5S6dgQrDCcdA== 0000927356-98-000885.txt : 19980520 0000927356-98-000885.hdr.sgml : 19980520 ACCESSION NUMBER: 0000927356-98-000885 CONFORMED SUBMISSION TYPE: 497 PUBLIC DOCUMENT COUNT: 1 FILED AS OF DATE: 19980519 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SECURITY LIFE SEPARATE ACCOUNT L1 CENTRAL INDEX KEY: 0000917677 STANDARD INDUSTRIAL CLASSIFICATION: UNKNOWN SIC - 0000 [0000] IRS NUMBER: 840499703 STATE OF INCORPORATION: CO FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 497 SEC ACT: SEC FILE NUMBER: 033-74190 FILM NUMBER: 98628220 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 STREET 2: 1290 BROADWAY CITY: DENVER STATE: CO ZIP: 80203-5699 497 1 SECURITY FIRST OF DENVER - FIRSTLINE II FIRSTLINE II 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 FirstLine, 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 is designed to provide insurance coverage with flexibility in death benefits and premium payments. The Policy is funded by Security Life Separate Account L1 (the "Variable Account"). Twenty-three 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 Loan taken or transferred into the Policy. The Owner may utilize a maximum of 18 Divisions for investment over the lifetime of the Policy until current administrative systems are enhanced. The Divisions include the Divisions of the Variable Account and the Guaranteed Interest Division, but exclude the Loan Division. For example, if the Owner has allocated or transferred funds to 17 Divisions of the Variable Account and to the Guaranteed Interest Division (or to 18 Divisions of the Variable Account), those will be the only Divisions to which the Owner can subsequently allocate or transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the early years of the Policy so as to leave open the option to invest in other Divisions in the future. An Owner who has used 18 Variable Divisions will no longer have the Guaranteed Interest Division available for future use. 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 incurred prior to the date of the Insured's death, but not yet deducted. 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 Cash Surrender Value remains positive. The Policy is guaranteed not to lapse during the first three Policy years, regardless of its Net Cash Surrender Value 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 the sum of the applicable minimum monthly premiums for each Policy Month starting with the first Policy Month to and including the Policy Month which begins on the current Monthly Processing Date. 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. 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. THE FEATURES OF ANY POLICY ISSUED MAY VARY DEPENDING ON THE STATE IN WHICH THE CONTRACT IS ISSUED. 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. Date of Prospectus: May 1, 1998 Form V-55-98 The minimum monthly premium is equal to one twelfth of the Minimum Annual Premium. If the Guaranteed Minimum Death Benefit is effective, 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 a choice of two death benefit options: Option 1, a fixed benefit that equals the Stated Death Benefit, and Option 2, a benefit that equals the Stated Death Benefit plus the Account Value. 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. When applying for the Policy, the Owner irrevocably chooses 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. If the Guideline Premium/Cash Value Corridor Test is chosen, the premium payments will be limited. We will not allocate funds to the Policy until we receive the Initial 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, the Net Premiums may be allocated to one or more of the Divisions of the Variable Account and to the Guaranteed Interest Division. 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. A Policy may be returned according to the terms of the Right to Examine Policy Period (also called the Free Look Period). Net Premiums allocated to the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio of the Variable Account during the Delivery and Free Look Periods. The 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. A Surrender Charge may be incurred if the policy is surrendered, allowed to lapse, a Partial Withdrawal is taken or the Stated Death Benefit is reduced. 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 173888 Denver, CO 80217-3763 (800) 848-6362
PROSPECTUS DATED: May 1, 1998 ________________________________________________________________________________ FirstLine II 2 TABLE OF CONTENTS DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS ....................... 6 POLICY SUMMARY ............................................................ 9 GENERAL INFORMATION ....................................................... 9 DEATH BENEFITS ............................................................ 9 BENEFITS AT MATURITY ...................................................... 9 ADDITIONAL BENEFITS ....................................................... 9 PREMIUMS .................................................................. 9 ALLOCATION OF NET PREMIUMS ................................................ 9 MAXIMUM NUMBER OF INVESTMENT DIVISIONS .................................... 10 POLICY VALUES ............................................................. 10 DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT ............ 10 HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION ............... 10 TRANSFERS OF ACCOUNT VALUES ............................................... 10 DOLLAR COST AVERAGING ..................................................... 10 AUTOMATIC REBALANCING ..................................................... 10 LOANS ..................................................................... 11 PARTIAL WITHDRAWALS ....................................................... 11 SURRENDER ................................................................. 11 RIGHT TO EXCHANGE POLICY .................................................. 11 LAPSE ..................................................................... 11 REINSTATEMENT ............................................................. 11 CHARGES AND DEDUCTIONS .................................................... 11 PERSISTENCY REFUND ........................................................ 12 TAX CONSIDERATIONS ........................................................ 12 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION ......................... 13 SECURITY LIFE OF DENVER INSURANCE COMPANY ................................. 13 SECURITY LIFE SEPARATE ACCOUNT L1 ......................................... 13 MAXIMUM NUMBER OF INVESTMENT DIVISIONS .................................... 14 INVESTMENT OBJECTIVES OF THE PORTFOLIOS ................................... 14 THE GUARANTEED INTEREST DIVISION .......................................... 17 DETAILED INFORMATION ABOUT THE FIRSTLINE VARIABLE UNIVERSAL LIFE POLICY ... 17 APPLYING FOR A POLICY ..................................................... 17 TEMPORARY INSURANCE ....................................................... 18 PREMIUMS .................................................................. 18 Scheduled Premiums ................................................... 18 Unscheduled Premium Payments ......................................... 18 Minimum Annual Premium ............................................... 18 Special Continuation Period .......................................... 18 Premium Payments Affect the Coverage ................................. 19 Choice of Definitional Tests ......................................... 19 Choice of Guaranteed Minimum Death Benefit Provisions ................ 19 Modified Endowment Contracts ......................................... 19 ALLOCATION OF NET PREMIUMS ................................................ 19 DEATH BENEFITS ............................................................ 19 Death Benefit Options ................................................ 20 Changes in Death Benefit Option ...................................... 20 Changes in Death Benefit Amounts ..................................... 21 Guaranteed Minimum Death Benefit Provision ........................... 21 ________________________________________________________________________________ FirstLine II 3 Requirements to Maintain the Guarantee Period ........................ 22 ADDITIONAL BENEFITS ....................................................... 22 Accidental Death Benefit Rider ....................................... 22 Adjustable Term Insurance Rider ...................................... 22 Additional Insured Rider ............................................. 23 Children's Insurance Rider ........................................... 23 Right to Change Insured Rider ........................................ 23 Guaranteed Insurability Rider ........................................ 23 Waiver of Cost of Insurance Rider .................................... 23 Waiver of Specified Premium Rider .................................... 23 BENEFITS AT MATURITY ...................................................... 24 POLICY VALUES ............................................................. 24 Account Value ........................................................ 24 Cash Surrender Value ................................................. 24 Net Cash Surrender Value ............................................. 24 Net Account Value .................................................... 24 DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT ............ 24 HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION ............... 25 TRANSFERS OF ACCOUNT VALUES ............................................... 25 DOLLAR COST AVERAGING ..................................................... 26 AUTOMATIC REBALANCING ..................................................... 26 POLICY LOANS .............................................................. 27 PARTIAL WITHDRAWALS ....................................................... 28 SURRENDER ................................................................. 29 RIGHT TO EXCHANGE POLICY .................................................. 29 LAPSE ..................................................................... 29 If the Guaranteed Minimum Death Benefit Provision Is Not in Effect ... 29 If the Guaranteed Minimum Death Benefit Provision Is in Effect ....... 29 GRACE PERIOD .............................................................. 30 REINSTATEMENT ............................................................. 30 CHARGES, DEDUCTIONS AND REFUNDS ........................................... 30 DEDUCTIONS FROM PREMIUMS .................................................. 30 Tax Charges .......................................................... 30 Sales Charge ......................................................... 31 DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT ................................ 31 Mortality and Expense Risk Charge .................................... 31 MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE ................................. 31 Initial Policy Charge ................................................ 31 Monthly Administrative Charge ........................................ 31 Cost of Insurance Charges ............................................ 31 Charges for Additional Benefits ...................................... 32 Guaranteed Minimum Death Benefit Charge ....................................................... 32 Changes in Monthly Charges ........................................... 32 POLICY TRANSACTION FEES ................................................... 32 Partial Withdrawal ................................................... 32 Transfers ............................................................ 32 Allocation Changes ................................................... 32 Illustrations ........................................................ 32 PERSISTENCY REFUND ........................................................ 33 SURRENDER CHARGE .......................................................... 33 Administrative Surrender Charge ...................................... 34 Sales Surrender Charge ............................................... 34 Calculation of Surrender Charge ...................................... 35 CHARGES FROM PORTFOLIOS ................................................... 35 Portfolio Annual Expenses ............................................ 36 GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS ................... 38 ________________________________________________________________________________ FirstLine II 4 OTHER CHARGES ............................................................. 38 TAX CONSIDERATIONS ........................................................ 38 LIFE INSURANCE DEFINITION ................................................. 38 DIVERSIFICATION REQUIREMENTS .............................................. 39 MODIFIED ENDOWMENT CONTRACTS .............................................. 39 TAX TREATMENT OF PREMIUMS ................................................. 40 LOANS, LAPSES, SURRENDERS AND WITHDRAWALS ................................. 40 If the Policy Is Not a Modified Endowment Contract ................... 40 If the Policy Is a Modified Endowment Contract ....................... 40 ALTERNATIVE MINIMUM TAX ................................................... 41 SECTION 1035 EXCHANGES .................................................... 41 TAX-EXEMPT POLICY OWNERS .................................................. 41 CHANGES TO COMPLY WITH LAW ................................................ 41 OTHER ..................................................................... 41 ADDITIONAL INFORMATION ABOUT THE POLICY ................................... 42 VOTING PRIVILEGES ........................................................ 42 RIGHT TO CHANGE OPERATIONS ............................................... 42 REPORTS TO OWNERS ........................................................ 43 OTHER GENERAL POLICY PROVISIONS .......................................... 43 FREE LOOK PERIOD ......................................................... 43 THE POLICY ............................................................... 43 AGE ...................................................................... 43 OWNERSHIP ................................................................ 43 BENEFICIARY .............................................................. 44 COLLATERAL ASSIGNMENT .................................................... 44 INCONTESTABILIT .......................................................... 44 MISSTATEMENTS OF AGE OR SEX .............................................. 44 SUICIDE .................................................................. 44 PAYMENT .................................................................. 44 NOTIFICATION AND CLAIMS PROCEDURES ....................................... 45 TELEPHONE PRIVILEGES ..................................................... 45 NON-PARTICIPATING ........................................................ 45 DISTRIBUTION OF THE POLICIES ............................................. 45 SETTLEMENT PROVISIONS .................................................... 46 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS ............................................. 47 ADDITIONAL INFORMATION ................................................... 55 DIRECTORS AND OFFICERS ................................................... 55 STATE REGULATION ......................................................... 58 LEGAL MATTERS ............................................................ 58 LEGAL PROCEEDINGS ........................................................ 58 EXPERTS .................................................................. 58 REGISTRATION STATEMENT ................................................... 58 YEAR 2000 PREPAREDNESS ................................................... 58 FINANCIAL STATEMENTS ..................................................... 59 APPENDIX A ............................................................... 155 APPENDIX B ............................................................... 163 APPENDIX C ............................................................... 164 ________________________________________________________________________________ FirstLine II 5 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 total of the amounts allocated to the Divisions of the Variable Account and to the Guaranteed Interest Division, plus any amount set aside in the Loan Division to secure a Policy Loan. Accumulation Unit -- A unit of measurement used to calculate the Account Value in each Division of the Variable Account. Accumulation Unit Value -- The value of an Accumulation Unit 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 anticipated needs. The Adjustable Term Insurance Rider is not guaranteed under the Guaranteed Minimum Death Benefit. Age -- The Insured's Age at any time is his or her age on the birthday nearest the Policy Date plus the number of full Policy years since the Policy Date. Age 100 -- The Policy anniversary on which the Insured's Age is 100 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 3, which is available only on policies delivered on or before December 31, 1997, 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. The Base Death Benefit may be increased to maintain compliance with the Federal income tax law definition of life insurance. Beneficiary(ies)-- The person or persons designated to receive the Death Proceeds upon the death of the Insured. Cash Surrender Value -- The amount of the Account Value minus the Surrender Charge, if any. Customer Service Center -- Our administrative office at P.O. Box 173888, Denver, CO 80217-3888. Continuation of Coverage -- A Policy feature which permits the insurance coverage to continue in force beyond Policy Age 100. Death Proceeds -- The amount payable upon the death of the Insured. It equals the Base Death Benefit plus any Rider benefits, if applicable, minus outstanding Policy Loans and accrued loan interest, minus any Policy charges incurred prior to the date of the Insured's death, but not yet deducted. Delivery Period -- The period which begins on the date the Policy is issued and ends on the earlier of: (i) the date the Policy was delivered as long as we receive written notice signed by the Owner of the actual delivery date at our Customer Service Center before the date in (ii) or, (ii) the date the Policy is mailed from our Customer Service Center plus the deemed mailing time. The deemed mailing time is five days unless required otherwise by the state in which the policy is issued. Division(s) -- The Loan Division and the Divisions of the Variable Account which invest in shares of the Portfolios and the Guaranteed Interest Division. Free Look Period -- The period of time within which the Owner mayexamine 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. Guarantee Period -- The period during which the Stated Death Benefit is guaranteed under the Guaranteed Minimum Death Benefit provision. The two available Guarantee Periods are (i) to the Insured's 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 Guarantee Period Annual Premium has not been paid or on any Monthly Processing Date that the Net Account Value is not diversified according to our requirements. Guarantee Period Annual Premium -- The premium payment level required to maintain the Guarantee Period. ________________________________________________________________________________ FirstLine II 6 Guaranteed Interest Division -- Part of our General Account to which a portion of the Account Value may be allocated and which guarantees principal and interest. Guaranteed Minimum Death Benefit -- The optional 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 Cash Surrender Value, provided certain conditions are met. Initial Premium -- The premium which is required to be paid and received by our Customer Service Center for coverage to begin. Initial Premium is equal to the sum of scheduled modal premiums which fall due from the Policy effective date through the Investment Date. Insured -- The person on whose life this Policy is issued and upon whose death the Death Proceeds are payable. Investment Date -- The date we allocate funds to the Policy. We will allocate the Initial Net Premium to the Policy on the next Valuation Date following the date: (i) we have received the Initial Premium, and, (ii) we have approved the Policy for issue, and (iii) all issue requirements have been met and received in our Customer Service Center. Loan Division -- Part of our General Account in which funds are set aside to secure outstanding Policy Loans and accrued loan interest when due. Minimum Annual Premium -- This premium must be paid during the first three policy years to meet the requirements of the Special Continuation Period. Monthly Processing Date -- The date each month on which deductions from the Account Value are due. The first Monthly Processing Date will be the later of the Policy Date or the Investment Date. Subsequent Monthly Processing Dates will be the same date as the Policy Date unless this is not a Valuation Date, in which case the Monthly Processing Date is the next Valuation Date. NASD -- The National Association of Securities Dealers, Inc. Net Account Value -- The Account Value minus Policy Loans and accrued loan interest. Net Amount at Risk -- (For Base Death Benefit) 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. It is equal to the Cash Surrender Value minus Policy Loans and accrued loan interest. Net Premium -- Premium amounts paid minus 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 part of the Net Cash Surrender Value from the Policy. A Partial Withdrawal may cause a Surrender Charge to be incurred, and it may reduce the amount of Base Death Benefit and Target Death Benefit in force. Policy -- The basic Policy, applications, and any Riders or endorsements. 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. Policy Loan -- The total amount borrowed from the Policy, plus any Policy Loan interest capitalized when due, less any Policy Loan repayments. 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 smoking status of the Insured 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 the Policy which include the information specific to the Policy, such as the Insured's Age, the Policy Date, etc. Scheduled Premium -- The premium amount specified by the Owner on the application as the amount intended to be paid at fixed intervals over a specified period of time. Premiums may be paid on a monthly, quarterly, ________________________________________________________________________________ FirstLine II 7 semiannual, or annual basis. The Scheduled Premium need not be paid, and may be changed at any time. Also, within limits, the Owner may pay more or less than the Scheduled Premium. SEC -- The United States Securities and Exchange Commission. Segment -- The Stated Death Benefit on the Policy Date is the initial Segment, or Segment 1. Each increase in the Stated Death Benefit (other than an option change) is a new Segment. The first year for a Segment begins on the effective date of the Segment and ends one year later. Each subsequent year begins at the end of the prior Segment year. Each new Segment may be subject to a new Minimum Annual Premium, new sales charge, new surrender charges, new cost of insurance charges, and new incontestability and suicide exclusion periods. Special Continuation Period -- A three-year period, beginning with the Policy Date, during which payment of the Minimum Annual Premium will guarantee the Policy against lapse. Stated Death Benefit -- The sum of the Segments under the Policy. The Stated Death Benefit changes when there is an increase, a decrease, or when a transaction on the Policy causes it to change. Surrender Charge -- The charge made against the Account Value upon surrender, Policy lapse, a requested Stated Death Benefit reduction, or certain Partial Withdrawals. The Surrender Charge consists of the administrative Surrender Charge and the sales Surrender Charge. Target Death Benefit -- When an Adjustable Term Insurance Rider is added to the Policy, the Target Death Benefit and Stated Death Benefit are specified in the Policy application; the Adjustable Term Insurance Rider Death Benefit is the difference between the Target Death Benefit and the Base Death Benefit. 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 to comply with the Federal income tax law definition of life insurance and to keep the Target Death Benefit at the desired amount. The Target Death Benefit for each year is shown in the Schedule when an Adjustable Term Insurance Rider exists on the Policy. Target Premium -- The premium on which the maximum Sales Surrender Charge is calculated. Transaction Date -- 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, 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 the 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 or as may be required by law, 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 Valuation Date. Variable Account -- Security Life Separate Account L1 segregates 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. ________________________________________________________________________________ FirstLine II 8 POLICY SUMMARY This policy summary provides 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 vary from those described in this prospectus based on particular circumstances. The description of the Policy 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. As long as the Policy remains in force, we will pay a death benefit when the Insured dies. At the insured's Age 100 the Owner may surrender the Policy or allow Continuation of Coverage to become effective. If Continuation of Coverage is effective, we will deduct a one-time administrative fee and the Policy will remain in force. See Continuation of Coverage, page 24. 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 by Rider, reduced by the amount of any outstanding Policy Loan and any accrued loan interest. See Death Benefits, page 20. When we issue the Policy, the death benefit is equal to the Stated Death Benefit 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 group or sponsored arrangements or corporate purchasers. Generally, the Policy will remain in force only as long as the Net Cash Surrender Value is sufficient to pay the monthly deductions. However if the Special Continuation Period is in effect (during the first three policy years) and minimum premiums have been paid as specified in the section on Lapse (see Lapse, page 30) then the Policy and its Riders are guaranteed not to lapse, regardless of the Net Cash Surrender Value. The Stated Death Benefit of the Policy may remain in force after the Special Continuation Period even if the Net Cash Surrender Value is insufficient to pay all the monthly deductions if the Guaranteed Minimum Death Benefit provision is in effect and the requirements have been met. See Guaranteed Minimum Death Benefit Provision, page 20. Continuation of Coverage If the Insured is still living at Age 100 and the Continuation of Coverage feature is in effect, we will deduct a one-time administrative fee and the Policy will remain in force. See Continuation of Coverage, page 24. Additional Benefits A variety of additional benefits may be attached to the Policy by Rider. The charge for these benefits is deducted monthly from the Account Value. See Additional Benefits, page 23. Premiums The Policy is a flexible premium Policy, so the amount and frequency of the premiums may vary, within limits. There are no required premium payments other than those required to keep the Policy in force or payments required to maintain certain benefits as described below. The Initial Premium must be paid for us to issue the Policy. The Minimum Annual Premium must be paid in order to meet the requirements for the three-year Special Continuation Period. The Guarantee Period Annual Premium must be paid to maintain the Guaranteed Minimum Death Benefit. The Scheduled Premium is specified by the Owner at application. The Scheduled Premium may not be sufficient to maintain the Guarantee Period for the Guaranteed Minimum Death Benefit or to keep the Policy in force. 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 Coverage, page 19. Allocation of Net Premiums After certain premium-based charges are deducted from the premiums, the balance, Net Premium, is added to the Account Value based on the premium allocation instructions. Net Premiums may be allocated to one or more Divisions of the Variable Account, or to the Guaranteed Interest Division, or both. However, amounts can be allocated to no more than 18 Divisions over the life of the Policy. No allocations will be made prior to the Investment Date. After the Investment Date, amounts allocated to the Guaranteed Interest Division will be allocated to that Division upon receipt. ________________________________________________________________________________ FirstLine II 9 Amounts allocated to the Divisions of the Variable Account will be held in the Division investing in the Fidelity VIP Money Market Portfolio. At the end of the Delivery and Free Look Periods, the amounts allocated to the Guaranteed Interest Division will remain in that Division; and, the funds held in the Fidelity VIP Money Market Division will be reallocated to the other Divisions of the Variable Account according to the most recent premium allocation instructions. Thereafter, Net Premiums will be allocated upon receipt according to the most recent premium allocation instructions. Allocation percentages must be in whole numbers, with the sum equaling 100%. See Allocation of Net Premiums, page 20. Maximum Number of Investment Divisions The Owner may utilize a maximum of 18 Divisions for investment over the lifetime of the Policy until current administrative systems are enhanced. See Maximum Number of Investment Divisions, page 15. 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 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 Withdrawals and service fees will be deducted from the Account Value. The Cash Surrender Value of the Policy is equal to the Account Value less any Surrender Charge. The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of outstanding Policy Loans and accrued loan interest. The Net Account Value of the Policy is equal to the Account Value less the amount of outstanding Policy Loans and accrued loan interest. Determining the Value in the Divisions of the Variable Account The amounts 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 that Division. Each Division of the Variable Account will have different Accumulation Unit Values. See Determining the Value in the Divisions of the Variable Account, page 25. 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. Each Accumulation Unit Value 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 26. Transfers of Account Values After the Free Look Period, the Owner may make up to 12 transfers among Divisions of the Variable Account or to the Guaranteed Interest Division in each Policy year without charge. There will be a $25 charge for each transfer over 12 in a Policy year. Transfers resulting from Automatic Rebalancing or Dollar Cost Averaging are not included in the 12 transfers without a charge. The minimum amount we will transfer is $100 or the balance in the division if less than $100. Once during the first 30 days of each Policy year, transfers may be made from the Guaranteed Interest Division. Transfer amounts from the Guaranteed Interest Division to the Divisions of the Variable Account are limited. Transfers of the Account Value to the Guaranteed Interest Division are not limited to this 30-day period. See Transfers of Account Values, page 26. Dollar Cost Averaging Dollar Cost Averaging is available by electing this feature at application or by completing the appropriate form. We offer Dollar Cost Averaging to Owners who have at least $10,000 in the Divisions investing in either the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio. There is no charge for this feature. See Dollar Cost Averaging, page 27. Automatic Rebalancing Automatic Rebalancing is available by electing this feature at application or by completing the appropriate form. Automatic Rebalancing allows the Owner to match the Account Value allocations over time to the specified allocation percentages. We will charge a fee of $25 each time the automatic rebalancing allocation is changed in excess of five times per policy year; otherwise, there is no charge for this feature. See Automatic Rebalancing, page 27. ________________________________________________________________________________ FirstLine II 10 Loans Loans may be taken against the Policy's Cash Surrender Value. Unless otherwise required by state law, the loan must be at least $100. Loan interest accrues at an annual rate of 4.75%. The Loan Division earns a guaranteed rate of interest equal to 4% on an annual basis. See Policy Loans, page 28. Partial Withdrawals Part of the Net Cash Surrender Value may be withdrawn any time after the first Policy year, within limits. Only one Partial Withdrawal may be taken per Policy year. See Partial Withdrawals, page 29. Surrender The Owner may surrender the Policy 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 Policy Loans and accrued loan interest. We will compute the Net Cash Surrender Value as of the date we receive the request and the Policy at our Customer Service Center. All insurance coverage will end on that date. See Surrender, page 29. Right to Exchange Policy At any time during the first 24 months following the Policy Date, the Owner may exercise the right to exchange the Policy from one in which the Account Value is not guaranteed into a guaranteed Policy, unless required differently by state law. See Right to Exchange Policy, page 30. Lapse Insurance coverage will continue as long as the Net Cash Surrender Value of the Policy is sufficient to pay the deductions that are taken out of the Account Value each month. In addition, during the first three Policy years if the conditions of the Special Continuation Period have been met, the Policy and all attached Riders are guaranteed not to lapse, regardless of the Net Cash Surrender Value. Also, if the requirements to maintain the Guarantee Period for the Guaranteed Minimum Death Benefit provision have been met, the Stated Death Benefit portion of the Policy will remain in effect after the three-year Special Continuation Period regardless of the amount of the Net Account Value. However, if the requirements to maintain the Guarantee Period have not been met, the Guaranteed Minimum Death Benefit provision will lapse. See Lapse, page 30. Reinstatement A lapsed Policy and its Riders may be reinstated within five years of its lapse if it has not been surrendered and the Insured is still living. New evidence of insurability and payment of certain reinstatement premiums will be required. We also will reinstate any Policy Loans which existed when coverage ended, with accrued loan interest to the date of lapse. See Reinstatement, page 31. 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 is deducted to cover a portion of our expenses in issuing this Policy. This charge is based on the Insured's Age on the Policy Date or the date of an increase in coverage. Age of Insured Sales Charge Percentage -------------- ----------------------- 0-49 2.25% 50-59 3.25% 60-85 4.25% This deduction is only a portion of the total sales charge that will be assessed against the Account Value in the event of surrender during the first 14 Policy Years or 14 years following the addition of a new Segment. See Sales Surrender Charge, page 35. See Deductions from Premiums, page 31. 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 this charge to compensate us for mortality and expense risks under the Policies. See Daily Deductions from the Variable Account, page 32. ________________________________________________________________________________ FirstLine II 11 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 three policy years. (ii) Monthly Administrative Charge -- $3 per month plus $0.025 per thousand of Stated Death Benefit (or Target Death Benefit if greater). Currently the per thousand charge is limited to $30 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 the Base Death Benefit, any Adjustable Term Insurance Rider, as well as for multiple Segments. (iv) Charges for Additional Benefits -- The cost of any additional benefits added by Rider, other than the Adjustable Term Insurance Rider. See Monthly Deductions from the Account Value, page 32. 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 total Net Account Value immediately following the transaction for which the charge is made. See Policy Transaction Fees, page 33. (i) Partial Withdrawal fee -- $25. (ii) Transfer fee -- Twelve transfers per Policy year are permitted without fees; for each transfer thereafter, a $25 fee is charged. (iii) Allocation Change fee -- Five premium and five automatic rebalancing allocation changes are permitted each Policy year without fees; for each change thereafter, a $25 fee is charged. (iv) Illustrations -- One illustration per policy year is available without a fee, for each illustration thereafter, a $25 fee may be charged. (v) Continuation of Coverage-- a one-time $200 administrative fee will be charged at Age 100 to activate coverage. Surrender Charges: During the first 14 Policy years, or during the first 14 Policy years of each additional Segment, we assess a Surrender Charge if the Owner surrenders the Policy, reduces the Stated Death Benefit (other than by changing death benefit option), or lets the Policy lapse. A Surrender Charge may be assessed if a Partial Withdrawal is taken. The charge consists of the administrative Surrender Charge plus the sales Surrender Charge. The administrative Surrender Charge is a fixed dollar amount per thousand dollars of Stated Death Benefit and depends upon the Insured's Age at the Policy Date or the effective date of each additional Segment. The Sales Surrender Charge will never be more than 50% of one Base Standard Target Premium. See Surrender Charge, page 34. 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 36. Persistency Refund The Account Value will be credited with a Persistency Refund each Monthly Processing Date after the tenth Policy anniversary. See Persistency Refund, page 33. Tax Considerations Under current Federal income tax law, death benefits of life insurance policies generally are not subject to income tax. In order for this treatment to apply, the Policy must qualify as a life insurance contract. The tax code provides for two tests to qualify a contract as a life insurance policy. The Owner irrevocably selects which of these tests will apply to the Policy in the application. After the Policy Date, the Policy will reflect the test which was chosen. See Life Insurance Definition, page 39. 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 40. ________________________________________________________________________________ FirstLine II 12 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 1997, Security Life and its consolidated subsidiaries had over $120.2 billion of life insurance in force. Our total assets exceeded $8.5 billion and our shareholder's equity exceeded $870 million, on a generally accepted accounting principles basis as of December 31, 1997. 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 long-term and short-term contractual obligations. The General Account portfolio invests primarily in investment-grade bonds and low-risk loans. Security Life is a wholly owned indirect subsidiary of ING Groep, N.V. ("ING"), one of the world's three largest diversified financial services organizations. ING is headquartered in Amsterdam, Netherlands, and has consolidated assets exceeding $307.6 billion on a Dutch (modified U.S.) generally accepted accounting principles basis as of December 31, 1997. 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 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") was established on November 3, 1993, under the Insurance Law of the State of Colorado. It 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. In accordance with and under the provisions of Section 10-3-501(2) of the Colorado Revised Statutes, 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. This means that in the event Security Life were ever to become insolvent, the assets of the Variable Account are to be used first to pay Variable Account policy claims. Only if assets remain in the Variable Account after those claims have been satisfied can those assets be used to pay other Policy Owners and creditors of Security Life. The Variable Account may 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. If the assets in the Variable Account are insufficient to satisfy Variable Account Policy Owner claims, Section 10-3-541 provides that under certain circumstances the amount of those claims which are not satisfied are to be treated as Policy Owner claims against the general account assets of the insurance company. 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. 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. 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 ________________________________________________________________________________ FirstLine II 13 master feeder structure. See the prospectus for the Neuberger & Berman Advisers Management Trust for more details. The Portfolios as well as their investment policies 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 and variable life insurance contracts 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 Portfolio's prospectus. Maximum Number of Investment Divisions The Owner may utilize a maximum of 18 Divisions for investment over the lifetime of the Policy until current administrative systems are enhanced. The Divisions include the Divisions of the Variable Account and the Guaranteed Interest Division, but exclude the Loan Division. For example, if the Owner has allocated or transferred funds to 17 Divisions of the Variable Account and to the Guaranteed Interest Division (or to 18 Divisions of the Variable Account), those will be the only Divisions to which the Owner can subsequently allocate or transfer funds. Therefore, Owners may prefer to utilize fewer Divisions in the early years of the Policy so as to leave open the option to invest in other Divisions in the future. An Owner who has used 18 Variable Divisions will no longer have the Guaranteed Interest Division available for future use. 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 which must accompany this prospectus and should be read in conjunction with it. 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.L.C. as sub-adviser. Limited Maturity Bond Portfolio-- seeks the highest 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 by investing in a diversified portfolio of U.S. Government and Agency securities and investment grade debt securities issued by financial institutions, corporations and others. The Limited Maturity Bond Portfolio may invest up to 10% of its net assets, measured at the time of investment, in fixed income 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 four years although the series may invest in securities of any duration. Growth Portfolio-- seeks capital appreciation without regard to income and invests in small-, medium-, and large- capitalization securities believed to have maximum potential for long-term capital appreciation. The portfolio managers currently intend to focus primarily on the securities of medium-capitalization companies. The portfolio is managed using a growth-oriented investment approach. A growth-oriented approach seeks stocks of companies that are projected to grow at above-average rates. Partners Portfolio-- seeks capital growth through an 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 the company's track record through all points of the market cycle. Up to 15% of the series' net ________________________________________________________________________________ FirstLine II 14 assets, measured at the time of investment, may be invested in corporate debt securities rated below investment grade or comparable unrated securities. 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 to obtain long term capital appreciation. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in equity securities of companies that, at the time of purchase of the securities, have total market capitalization within the range of companies included in the Russell 2000 Growth Index ("Russell Index") or the S&P SmallCap 600 Index ("S&P Index"), updated quarterly. Both indexes are broad indexes of small capitalization stocks. As of December 31, 1997, the range of market capitalization of the companies in the Russell Index was $20 million to $2.97 billion; the range of market capitalization of the companies in the S&P Index at that date was $21 million to $2.934 billion. The combined range was $20 million to $2.97 billion. Alger American MidCap Growth Portfolio -- seeks long term capital appreciation. Except during temporary defensive periods, the Portfolio invests at least 65% of its total assets in equity securities 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, 1997, the range of market capitalization of these companies was $213 million to $13.737 billion. Alger American Growth Portfolio -- seeks to obtain long term capital appreciation. The Portfolio will invest its assets primarily in companies whose securities are traded on domestic stock exchanges or in the over-the-counter market. Except during temporary defensive periods, the Portfolio will invest at least 65% of its total assets in the securities of companies that, at the time of purchase of the securities, have a total market capitalization of $1 billion or greater. Alger American Leveraged AllCap Portfolio -- seeks long term capital appreciation. The Portfolio may purchase put and call options and sell (write) covered call and put options on securities and securities indexes to increase gain and to hedge against the risk of unfavorable price movements. It also may enter into futures contracts on securities indexes as well as purchase and sell call and put options on these futures. The Portfolio may also borrow money for the purchase of additional securities. The Portfolio may borrow money; but only from banks. It may not borrow in excess of one third of the market value of its assets, less liabilities other than such borrowing. Except during temporary defensive periods, the Portfolio will invest 85% of its net assets in equity securities of companies of any size. 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 Funds' business affairs, with the exception of the VIP II Index 500 Portfolio which is sub-advised by Bankers Trust Company. 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, money market 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 & Poor's Composite Index of 500 Stocks while keeping transaction costs and other expenses low. The Portfolio is designed as a long-term investment option. ________________________________________________________________________________ FirstLine II 15 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 the ten diversified investment Portfolios five of which are described below. INVESCO Funds Group, Inc., the Funds' investment adviser, is primarily responsible for providing the Portfolios with investment management and various administrative services and supervising the Fund's daily business affairs. INVESCO Distributors, Inc. ("IDI"), provides distribution services for the INVESCO Variable Investment Funds, Inc. 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 consideration in the selection of portfolio securities. The Portfolio normally invests at least 65% of its total assets in dividend-paying common stocks. Up to 10% of the Portfolio's total assets may be invested in equity securities that do not pay regular dividends. The remaining assets are invested in other income-producing securities, such as corporate bonds. The Portfolio also has the flexibility to invest in other types of securities. 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. The Fund pursues its investment objective through investment in a variety of long-term, intermediate-term, and short-term bonds. 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. INVESCO VIF Small Company Growth Fund -- seeks long term capital growth by investing in equity securities of companies with market capitalization of $1 billion or less at the time of purchase ("small-cap companies"). The balance of the Fund's assets may be invested in the equity securities of companies with market capitalizations in excess of $1 billion, debt securities and short term investments. Van Eck Worldwide Insurance Trust Van Eck Worldwide Insurance Trust is an open-end management investment company organized as a "business trust" under the laws of the Commonwealth of Massachusetts on January 7, 1987. Van Eck Associates Corporation serves as investment adviser and manager to the Worldwide Hard Assets Fund, Worldwide Real Estate Fund, Worldwide Emerging Markets Fund, and Worldwide Bond Fund. Van Eck Worldwide Hard Assets Fund -- seeks long term capital appreciation by investing globally, primarily in "Hard Assets Securities." Hard Assets are tangible, finite assets, such as real estate, energy, timber, and industrial and precious metals. Income is a secondary consideration. Van Eck Worldwide Real Estate Fund -- seeks to maximize total return by investing primarily in equity securities of domestic and foreign companies which are principally engaged in the real estate industry or which own significant real estate assets. Van Eck Worldwide Bond Fund -- seeks high total return through a flexible policy of investing globally, primarily in debt securities. Van Eck Worldwide Emerging Markets Fund -- seeks long term capital appreciation by investing primarily in equity securities in emerging markets around the world. AIM Variable Insurance Funds, Inc. AIM Variable Insurance Funds, Inc. is a registered, open-end, series, management investment company. AIM Advisors, Inc., ("AIM") manages each Fund's assets pursuant to a master investment advisory agreement dated February 28, 1997. AIM was organized in 1976 and is a wholly owned subsidiary of AIM Management Group, Inc., an indirect subsidiary of AMVESCAP PLC, (formerly INVESCO PLC). AIM VI Capital Appreciation Portfolio-- seeks to provide capital appreciation through investments in common stocks, with emphasis on medium-sized and smaller emerging growth companies. AIM will be particularly interested in companies that are likely to benefit from new or innovative products, services or processes that should enhance such companies' prospects for future growth in earnings. ________________________________________________________________________________ FirstLine II 16 AIM VI Government Securities Portfolio -- seeks to achieve a high level of current income consistent with reasonable concern for safety of principal by investing in debt securities issued, guaranteed of otherwise backed by the U.S. Government. The Guaranteed Interest Division All or a portion of the Net Premiums and transfers of the Net Account Value may be made to the Guaranteed Interest Division. The Guaranteed Interest Division is part of our General Account and 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, the General Account, the Guaranteed Interest Division and interests therein are generally not 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 the 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 in the Guaranteed Interest Division, and (iv) repaying a Policy Loan to release amounts from the Loan Division. From time to time, we declare the interest rate that will apply to all amounts in the Guaranteed Interest Division. These interest rates will never be less than the minimum guaranteed interest rate of 4% and will be in effect for at least 12 months. Interest is credited daily at an effective annual rate that equals the declared rate. The interest is credited as of each Valuation Date on 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 FIRSTLINE II VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard FirstLine II Variable Universal Life Policy. There may be differences in the Policy because of state requirements where the Policy is issued. Any such differences will be defined in the Policy. The illustrations beginning on page are intended to provide an idea of how the key financial elements of FirstLine II work. The illustrations show Premiums, Account Values, Cash Surrender Values and Death Benefits. Applying for a Policy A FirstLine II Policy may be purchased by submitting an application to us. On the Policy Date, the Insured must be no older than Age 85. Before issuing a Policy or applying Net Premium to the Variable Account or the Guaranteed Interest Division, we require satisfactory evidence of insurability. This evidence may include a medical examination, completion of all underwriting requirements, and satisfaction of issue requirements. The Investment Date is the date we allocate funds to the Policy. We will allocate the Initial Net Premium to the Policy on the next Valuation Date following the date: (i) we receive the Initial Premium, and, (ii) approve the Policy for issue, and (iii) all issue requirements have been met and received in our Customer Service Center. The Policy is generally available with a minimum Stated Death Benefit of $50,000; however, we may reduce this amount for group or sponsored arrangements or corporate purchasers. 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 is effective. The Policy Date is 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 from the Policy Date. ________________________________________________________________________________ FirstLine II 17 Temporary Insurance If a premium payment in an amount not less than the Scheduled Premium is received with the application and there has been no material misrepresentation in the application, temporary insurance equal to the applied-for face amount, up to a maximum amount as described in the binding limited life insurance coverage form, will be in force so long as the Insured meets all other requirements described in the binding limited life insurance coverage form. 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; (ii) five days after notice of termination is mailed to the Owner's address on the application; (iii) coverage starts under the Policy resulting from the application; (iv) a policy resulting from the application is refused by us; or (v) 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: (i) in the answers in the binding limited life insurance coverage form or in the application, (ii) a proposed Insured dies by suicide or intentional self-inflicted injury, or (iii) the premium check is not honored. Premiums The Owner may choose the amount and frequency of premium payments, within the limits described below. Scheduled Premiums Even though the premiums are flexible, the Schedule pages of the Policy will show a Scheduled Premium. The Owner may select the Scheduled Premium within our limits when applying for the Policy. The Scheduled Premium is the amount chosen to be paid over a specified period of time and may not be sufficient to keep the Policy in force. The Owner may receive premium reminder notices for the Scheduled Premium on a quarterly, semiannual, or annual basis. Alternatively, premiums other than the Initial Premium may be paid by Electronic Funds 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 can be changed at any time subject to the minimum and maximum limits we may set. If the Guaranteed Minimum Death Benefit is desired, the Scheduled Premium should not be less than the amount required to maintain the Guarantee Period. Unscheduled Premium Payments Generally, unscheduled premium payments may be made at any time. 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. Evidence of insurability may also be required if the net amount at risk is increased as a result of an unscheduled premium payment. We will return premium payments which exceed the "seven-pay" limit for the Policy 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 accept the excess premium payments. See Modified Endowment Contracts, page and Changes to Comply with Law, page 42. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment is considered a loan repayment, unless indicated otherwise. Applicable tax and sales charges which are deducted from any premium payment are not deducted from a loan repayment. Minimum Annual Premium The Minimum Annual Premium must be paid during the first three policy years to meet the requirements for the three-year Special Continuation Period. We determine the 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 group or sponsored arrangements or corporate purchasers. The Minimum Annual Premium is shown in the Schedule pages of the Policy. Special Continuation Period The Policy is guaranteed not to lapse, regardless of its Net Cash Surrender Value if, on each Monthly Processing Date during the first three Policy years, all premiums paid, less the sum of Partial Withdrawals and Policy Loans taken, including accrued loan interest, is greater than or equal to the sum of the applicable minimum monthly premiums for each Policy month, starting with the first Policy month through and including, the Policy month which begins on the current Monthly Processing Date. The minimum monthly premium is equal to one twelfth of the Minimum Annual Premium. See Lapse, page 30. If during the first three Policy years, any charges are not deducted so as to keep the Policy from lapsing under the Special Continuation Period, these charges are not permanently waived. ________________________________________________________________________________ FirstLine II 18 At the end of the Special Continuation Period, the aggregate amount of the charges previously not deducted will be due and will be deducted at the beginning of Policy year four. Premium Payments Affect the Coverage If premium payments are discontinued either temporarily or permanently, the Policy will continue in effect until the Net Cash Surrender Value can no longer cover the monthly deductions from the Account Value for the benefits selected. At that time, the Policy will lapse. See Lapse, page . If the Minimum Annual Premium requirements are satisfied, the Policy is guaranteed not to lapse during the first three Policy years, regardless of the Policy's Net Cash Surrender Value. See Special Continuation Period, page . Under the Guaranteed Minimum Death Benefit, the Stated Death Benefit portion of the Policy will remain in effect until the end of the Guarantee Period as long as the conditions of the guarantee are met. See Guaranteed Minimum Death Benefit Provision, page 22. Choice of Definitional Tests When applying for the Policy, the Owner will irrevocably choose which of the two tests for compliance with the Federal income tax law definition of life insurance 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 . If the Guideline Premium /Cash Value Corridor Test is chosen, the allowable premium payments relative to the Policy death benefit will be limited. Guaranteed Minimum Death Benefit Provision The Owner will have the opportunity to choose whether to place and keep the Guaranteed Minimum Death Benefit provision in effect. This provision 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. This provision requires a premium payment level (the Guarantee Period Annual Premium) which is higher than the Minimum Annual Premium. In addition, the Net Account Value must be diversified according to our requirements. See Guaranteed Minimum Death Benefit, page 22. Policy Owners should consider the Guaranteed Minimum Death Benefit Provision when setting the Scheduled Premium. Modified Endowment Contracts 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 40. If we determine that the Scheduled Premium chosen 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 The balance after certain premium-based charges are deducted from each premium is called the Net Premium. It is added to the Account Value according to the Owner's instructions. No allocation will be made prior to the Investment Date. On or after the Investment Date, Net Premium amounts allocated to the Guaranteed Interest Division will be allocated to that Division upon receipt. During the Delivery and Free Look Periods, Net Premiums allocated to the Divisions of the Variable Account will be allocated to the Division investing in the Fidelity VIP Money Market Portfolio. At the end of the Delivery and Free Look Periods, this portion of the Account Value will automatically be allocated according to the most recent premium allocation instructions. Thereafter, Net Premiums will be allocated upon receipt, according to the allocation instructions stated in the most recent instructions. Allocation percentages must be in whole numbers. The sum for all Divisions must equal 100%. The premium allocation may be changed five times per Policy year without charge. More than five Premium allocation changes in a Policy year, will be subject to a $25 charge for each additional change. The Owner may utilize a maximum of 18 Divisions for investment over the lifetime of the Policy until current administrative systems are enhanced. The Divisions include the Divisions of the Variable Account and the Guaranteed Interest Division, but exclude the Loan Division. See Maximum Number of Investment Divisions, page 15. Death Benefits FirstLine II 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, FirstLine II. ________________________________________________________________________________ FirstLine II 19 When the Policy is issued, an initial amount of insurance coverage is determined according to the application instructions. 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. 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 23. As described below, the Base Death Benefit may vary from the Stated Death Benefit. This may result from choice of death benefit option, increases to comply with the Federal income tax law definition of life insurance, changes in the death benefit option, partial withdrawals, requested increases and decreases, or when a transaction on the Policy causes the Base Death Benefit to change. As 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 as of the date of the Insured's death, reduced by any outstanding Policy Loans and accrued loan interest (and, if in the grace period or three-year Special Continuation Period, further reduced by any unpaid charges incurred prior to the date of the Insured's death). The Death Proceeds will include any amount provided by Rider on the Insured. Death Benefit Options The Owner may choose from two death benefit options (Option 1 or Option 2). 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 21. Under Option 1, the Base Death Benefit is the greater of: (a) the Stated Death Benefit on the date of the Insured's death; or (b) the Account Value on the date of the Insured's death multiplied by the appropriate factor from the Definition of Life Insurance Factors shown in Appendix A or B. Under Option 2, the Base Death Benefit is the greater of: (a) the Stated Death Benefit plus the Account Value on the date of the Insured's death; or (b) the Account Value on the date of the Insured's death multiplied by the appropriate factor from the Definition of Life Insurance Factors shown in Appendix A or B. 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 prefer to have any favorable investment experience reflected in increased insurance coverage should choose Option 2. 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 Age and possibly sex at any point in time as well as by the test for compliance chosen in the original Policy application. See Life Insurance Definition, page 39. If necessary, we will adjust the Policy to continue to qualify as life insurance under the applicable provisions of the Federal income tax laws in existence at the time the Policy was issued. Changes in Death Benefit Option A change in the Death Benefit Option may be requested at least 30 days prior to a Policy anniversary. A change in the death benefit option will be effective 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 policy Schedule page which should be attached to the Policy. We may ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. 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, 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 any change if it would reduce the Stated Death Benefit below the minimum we require to issue this Policy. After the 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. ________________________________________________________________________________ FirstLine II 20 For purposes of a death benefit option change, the Account Value will be allocated to each Segment in the same proportion that the Segment bears to the Stated Death Benefit. See Changes In Death Benefit Amounts, page 22. We do not charge a Surrender Charge for any decrease in Stated Death Benefit, nor is there an adjustment to the Target Premium. See Surrender Charge, page 34. 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. In addition, there will be no change to the amount of term insurance if an Adjustable Term Insurance Rider has been added. See Cost of Insurance Charges, page 32. If the Continuation of Coverage feature is in effect, Death Benefit Option 2 will not be available after Age 100. Changes in Death Benefit Amounts While the Policy is in force, increases in its Target or Stated Death Benefit may be made prior to the Policy anniversary on which the Insured is Age 86. The Stated Death Benefit may be decreased if the request occurs after the first Policy anniversary. An increase or a decrease in the death benefit of the Policy may be requested by the Owner. This request will be effective as of the next monthly processing date after the request is received at our Customer Service Center unless there are underwriting or other requirements. Any change in coverage may not be for an amount less than $1,000. 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, the guideline annual premium and the new Surrender Charge. This notice should be attached to the Policy. We may ask that the Policy be returned to our Customer Service Center so that we can note the change in the Schedule. In some cases, we may not approve a change requested because it would disqualify the Policy as life insurance under applicable Federal 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 39. Decreases in the death benefit generally may not decrease the Stated Death Benefit below $50,000; or the minimum we require to issue the Policy. There may be tax consequences to the decrease, See Life Insurance Definition, page and Modified Endowment Contracts, page 40. Requested reductions in the death benefit or an option change that causes a reduction, will first be applied to reduce the Target Death Benefit. The Stated Death Benefit will be decreased only after Adjustable Term Insurance Rider coverage has been reduced to zero. If more than one Segment exists, any subsequent reduction in Stated Death Benefit will be allocated among Segments in the same proportion that each Segment bears to the total Stated Death Benefit prior to the reduction unless required differently by state law. Satisfactory evidence that the Insured is still insurable must be provided when the death benefit is increased. Unless indicated otherwise, 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. The Target Death Benefit may be changed only once each Policy year. A requested increase in the Stated Death Benefit will create a new Segment. Increases in Stated Death Benefit resulting from death benefit option changes do not create new Segments, rather, they merely increase the size of the existing Segment(s). As discussed below, once created, a new Segment can never be entirely eliminated unless required differently by state law. If an increase creates a new Segment, premiums paid after the increase will be allocated to the original and new Segments in the same proportion that the guideline annual premiums defined by the Federal 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 Segment in the same proportion that the Segment bears to the total Stated Death Benefit. If a reduction decreases the Stated Death Benefit during the Surrender Charge period, the Surrender Charge on the remaining Stated Death Benefit will be reduced; however, we will deduct an amount equal to the reduction in the Surrender Charge from the Account Value. See Surrender Charge, page 34. Guaranteed Minimum Death Benefit Generally, the length of time the Policy remains in force depends on the Net Cash Surrender 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 Cash Surrender 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 ________________________________________________________________________________ FirstLine II 21 and, as a result, the length of time the Policy remains in force without the payment of additional premiums. A Guaranteed Minimum Death Benefit provision is available, 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. This provision has a Guarantee Period of 10 Policy years or to the Insured's Age 65, whichever is later. It protects the Stated Death Benefit of the Policy for a limited number of Policy years. The Guarantee Period Annual Premium depends on the Stated Death Benefit of the Policy, the Insured's Age, sex, and Premium Class, the death benefit option chosen, and additional Rider coverage. Adding additional benefits to the Policy will increase the Guarantee Period Annual Premium above this level. The Guaranteed Minimum Death Benefit provision does not apply to the Adjustable Term Insurance Rider or to any other Riders. Therefore, if the Net Cash Surrender 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 provision; any attached Riders will lapse. See Lapse, page 30. The Guaranteed Minimum Death Benefit provision is not available in some states. Requirements to Maintain the Guarantee Period The Guaranteed Minimum Death Benefit provision requires a premium payment level, the Guarantee Period Annual Premium, that is higher than the Minimum Annual Premium and the Net Account Value must meet certain diversification requirements. 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) actual premiums paid, minus (ii) the amount of any Partial Withdrawals plus any Policy Loans and accrued loan interest, equals or exceeds (iii) the sum of the Guarantee Period Monthly Premiums for each Policy Month starting with the first Policy Month through and including the Policy Month that begins on the current Monthly Processing Date, 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 lapse. The Guarantee Period Annual Premium will be listed in the Schedule of the Policy. If the policy benefits are increased, the Guarantee Period Annual Premium will increase. The Guarantee Period Monthly Premium is one-twelfth of the Guarantee Period Annual Premium. The Guarantee Period will lapse if the Net Account Value on any Monthly Processing Date is not diversified according to the following rules: i) No more than 35% of the Net Account Value may be invested in any one division, and ii) The Net Account Value must be invested in at least five Divisions. These diversification requirements will be satisfied if the Automatic Rebalancing Feature has been elected and conditions i) and ii) above are met. The Policy will also be deemed to satisfy the requirements for diversification if Dollar Cost Averaging is elected and the resulting transfers are directed into at least four other Divisions with no more than 35% of any transfer directed to any one Division. See Dollar Cost Averaging, page 27, and Automatic Rebalancing, page 27. If the lapse of the Guaranteed Minimum Death Benefit is not corrected, this feature will be terminated. Once terminated, the Guaranteed Minimum Death Benefit provision cannot be reinstated. There is no charge for the Guaranteed Minimum Death Benefit. Additional Benefits The Policy may include additional benefits, which are also 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 by the Owner at any time. See Modified Endowment Contracts, page , 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 your Registered Representative for a complete list of the Riders available. Certain Riders may not be available for all Policies. 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 the Owner's projected needs in the future. The Target Death Benefit may be set to vary as often as each Policy year. The Target Death Benefit will be listed in the Schedule. ________________________________________________________________________________ FirstLine II 22 Subject to our rules, the Target Death Benefit Schedule may be changed after issue. See Changes In Death Benefit Amounts, page 22. If at any time a scheduled change is canceled or the Owner asks for an unscheduled decrease to the Target Death Benefit, we may deny any future scheduled increases to the Target Death Benefit. 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 selected 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 compliance with the Federal income tax law definition of life insurance test you have chosen. For example, assume the Base Death Benefit increases due to compliance with the Federal income tax law definition of life insurance. 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 Federal income tax law definition of life insurance requirements. 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, 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 Withdrawals, page 29. We generally restrict the amount of the Target Death Benefit to an amount not more than ten times 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 $1,000,000. 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 . Since there is no defined premium related to the Adjustable Term Insurance Rider, there are no sales or Surrender Charges associated with this coverage; therefore, any increase in the Target Death Benefit which does not increase the Stated Death Benefit will not increase the total Surrender Charge for the Policy; any decrease in the Adjustable Term Insurance Rider coverage will not cause a Surrender Charge to be incurred. Additional Insured Rider This Rider provides for death benefits upon the death of immediate family members other than 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 is five times the Stated Death Benefit of the Policy. 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 a change of Insured occurs, the cost of insurance charges in the future may change but the Account Value will remain unchanged as of the change date. There is no charge for this Rider. Waiver of 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, the 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 premium amount will be credited monthly to the Policy. In the application the amount of premium is selected, within limits, that will be credited. If this Rider is added to your Policy, the Waiver of Cost of Insurance Rider may not also be added. ________________________________________________________________________________ FirstLine II 23 Benefits at Maturity If the insured is still living at Age 100 and the Owner does not desire to use the Continuation of Coverage feature, the Policy Owner may choose to surrender the Policy for the Net Account Value. Some portion of this payment may be taxable. Consult with your tax adviser for advice. The Net Account Value is the Account Value reduced by any outstanding Policy Loan and accrued loan interest. The Policy will then end. Continuation of Coverage If the Insured is still living at Age 100 and the Continuation of Coverage feature is in effect, the Net Account Value (except amounts in the loan division) will be transferred into the Guaranteed Interest Division. A one-time administrative fee will be assessed against the Policy to cover future expenses. The insurance coverage under the Policy will continue in force until the time of the Insured's death unless the Policy lapses or is surrendered, but no further cost of insurance charges will be assessed. See Continuation of Coverage Administrative Fee, page 33. At Age 100, all Riders except the Adjustable Term Rider terminate. The coverage provided under the Rider converts to base coverage and the Stated Death Benefit is redefined. If there is no Rider coverage, the Stated Death Benefit is unchanged. Any Policy with Death Benefit Option 2 will be converted to Death Benefit Option 1 at Age 100 when the Continuation of Coverage feature become effective. See Changes in Death Benefit Option, page 20. The Net Account Value may not be transferred into the Variable Divisions after Age 100. Thus related investment features such as Dollar Cost Averaging and Automatic Rebalancing are discontinued. If there is an outstanding loan on the Policy, loan interest will continue to accrue. If no payments are made, it is possible that the loan interest may reduce the account value and cause the Policy to lapse. To avoid this event, you may make loan or loan interest payments after Age 100. However, no additional premium payments will be accepted. During the Continuation of Coverage period (after Age 100) you may take policy loans or partial withdrawals. If a persistency refund is being paid on the Guaranteed Interest Division, policies in the Continuation of Coverage period will be credited with the persistency refund as well. See Persistency Refund, page 33. To discontinue the coverage once the Continuation of Coverage feature is in effect, you may surrender the policy. All normal surrender charges and consequences will apply. See Surrender, page 29, and Surrender Charge, page 33. The availability of this feature is subject to state approval. Where approved, it is an automatic feature and no election is required. Policy Values Account Value The Account Value is the total amount in the Guaranteed Interest Division, the various Divisions of the Variable Account, and the Loan Division. The Account Value therefore reflects all premiums paid, charges made, Policy 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 less any Surrender Charge. Net Cash Surrender Value The Net Cash Surrender Value of the Policy is equal to the Cash Surrender Value less the amount of outstanding Policy Loans and accrued loan interest. Net Account Value The Net Account Value of the Policy is equal to the Account Value less the amount of outstanding Policy Loans and any 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. Each Division of the Variable Account will have different Accumulation Unit Values. Accumulation Units of a Division are purchased whenever premiums are allocated or amounts are transferred 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 ________________________________________________________________________________ FirstLine II 24 Accumulation Units for the monthly deductions from the Account Value, Policy transaction charges and Surrender 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 Division's 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 25. 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, 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 or Surrender Charges are made as of the effective date of the transaction. 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 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 the resulting 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 new 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 result is the Accumulation Experience Factor for the Valuation Period. Transfers of Account Values After the Free Look Period ends, up to 12 transfers among the 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, 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 $100. 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 we may place certain restrictions on transfers made by third-party agents acting on behalf of multiple Owners or made pursuant to ________________________________________________________________________________ FirstLine II 25 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 their ability to provide maximum investment return to all Owners. Transfers from the Guaranteed Interest Division may be made only during the first 30 days of each Policy year. 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 that Policy year, (ii) the sum of the amounts transferred and withdrawn from the Guaranteed Interest Division in the prior Policy year or, (iii) $100. Transfers of the Account Value to the Guaranteed Interest Division are not limited. The Owner may utilize a maximum of 18 Divisions for investment over the lifetime of the Policy until current administrative systems are enhanced. See Maximum Number of Investment Divisions, page 15. If telephone privileges have been elected, transfers may be made by telephoning our Customer Service Center. See Telephone Privileges, page 46. Dollar Cost Averaging We offer a feature called Dollar Cost Averaging to Owners who have at least $10,000 of Account Value invested in the Division investing in either the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio. The main objective of Dollar Cost Averaging is to protect Policy values from short-term price fluctuations. Since the same dollar amount is transferred to other Divisions each period, more units are purchased in a Division if the value per unit is low, and fewer units are purchased if the value per unit 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. However, participation in Dollar Cost Averaging does not assure a profit nor does it protect against a loss in a declining market. With Dollar Cost Averaging, a designated dollar amount of or percentage of Account Value of the Division investing in either the Fidelity VIP Money Market Portfolio or the Neuberger Berman AMT Limited Maturity Bond Portfolio will be transferred automatically each period from the selected Division to one or more other Divisions of the Variable Account. Dollar Cost Averaging transfers may not be made to or from the Guaranteed Interest Division. Any transfers that are a result of the Dollar Cost Averaging feature are not counted toward the limit of 12 transfers that can be made each Policy year without a transfer charge. There is no charge for this feature. Dollar Cost Averaging allocations may be designated in dollar amounts or as whole percentages. The minimum percentage that may be transferred to any one Division is 1% of the total amount transferred to all selected Divisions. The transfer amount under Dollar Cost Averaging may be no less than $100. The first Dollar Cost Averaging date must be at least five days after our receipt of the request for Dollar Cost Averaging. In no event will Dollar Cost Averaging begin before the end of the Delivery and Free Look Periods. Dollar Cost Averaging may occur monthly, quarterly, semi-annually, or annually on a date requested by the Owner. Unless specified otherwise, Dollar Cost Averaging will take place monthly, on the Monthly Processing Date. If on any Dollar Cost Averaging 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. Changes to the Dollar Cost Averaging program may be made once each Policy year or Dollar Cost Averaging may be canceled completely by sending satisfactory notice to our Customer Service Center at least five days before the next Dollar Cost Averaging date. If telephone privileges are in effect, changes to the Dollar Cost Averaging program can be made by telephoning our Customer Service Center. See Telephone Privileges, page 46. A date for Dollar Cost Averaging to terminate may be specified by the Owner. Termination may also occur when the balance remaining in the Division investing in either the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio reaches a specified dollar amount. A Dollar Cost Averaging Program and an Automatic Rebalancing Program may run at the same time. 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. The Automatic Rebalancing feature may be elected with the application or at any subsequent time by completing the ________________________________________________________________________________ FirstLine II 26 appropriate form. Automatic Rebalancing matches Account Value allocations over time to the allocation percentages set by the Owner. During the operation of Automatic Rebalancing, transfers among the Divisions may occur monthly, quarterly, semi-annually, or annually on a date specified by the Owner. Unless specified otherwise, Automatic Rebalancing will take place on the last Valuation Date of each calendar quarter. Automatic Rebalancing allocations may be specified for all or some of the Divisions in which the Account Value is invested. If this feature is elected we will transfer amounts among the Divisions so that, after the transfers, the ratio of the Account Value in each Division to the total Account Value of all the Divisions included in Automatic Rebalancing matches the Automatic Rebalancing allocation percentage for that Division. This will rebalance the amounts in Divisions that do not match the set allocation, which could result, for example, from Divisions which outperform the other Divisions for that time period. If Automatic Rebalancing is elected with the Policy application, the first transfer will occur on the date specified by the Owner following the end of the Delivery and Free Look Periods. If this feature is elected after the Policy Date, the first transfer will be processed as of the date requested by the Owner or, if no date is specified, the last Valuation Date of the calendar quarter after we receive notification at our Customer Service Center and the Delivery and Free Look Periods have ended. 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 with the maximum transfer amount and time limitations on transfers from the Guaranteed Interest Division, as described in Transfers of Account Values on page . If we receive an Automatic Rebalancing request which is in conflict with these provisions, we will ask for revised instructions. The Owner may terminate the Automatic Rebalancing feature at any time, as long as we receive notice of the termination at least five days prior to the next Automatic Rebalancing. If the Guarantee Period is in effect and the Automatic Rebalancing feature is terminated, diversification of the Net Account Value still must be maintained for the Guarantee Period to continue. If the Automatic Rebalancing feature is active, the Guarantee Period is in effect, and a request is received for an allocation which does not meet the diversification requirements to maintain the Guarantee Period, we will notify the Owner that the allocation must be changed. See Guaranteed Minimum Death Benefit, page 22. Any transfers that are a result 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. We will charge a $25 fee each time the rebalancing allocation is changed more than five times per Policy year; otherwise, there is no charge for this feature. An Automatic Rebalancing program may be run simultaneously with a Dollar Cost Averaging program. 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. Unless otherwise required by state law, any new Policy Loan must be at least $100. The maximum amount which can be borrowed as of any Valuation Date equals the Net Cash Surrender Value less monthly deductions to the next Policy anniversary. Maximum loan amount may be different if required by state law. Requests for a Policy Loan may be made by contacting our Customer Service Center. We may impose requirements relating to Policy Loans as necessitated by our administrative system. For example, we may require that loan requests specify a dollar amount rather than a percentage to be taken from a specific Division. Loan interest charges on a Policy Loan accrue daily at a compound annual interest rate of 4.75%. 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. If an additional loan is requested, the amount requested will be added to the outstanding Policy Loan so only one loan is outstanding at any time. Repayment of all or part of the Policy Loan may be made 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, sufficient units of the Variable Account Divisions are redeemed to cover the amount of the loan 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 unless otherwise specified by the Owner. ________________________________________________________________________________ FirstLine II 27 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 at an annual rate of 4%. The amount of interest credited to the Loan Division for the Policy year will be transferred from the Loan Division on Policy anniversaries. 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 in the same proportion as the current premium allocation 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 set aside in the Loan Division where it earns a guaranteed rate of interest. Premiums may not be allocated to or amounts transferred 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 and the Cash Surrender Value paid on surrender. It also may 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 Cash Surrender Value minus Policy Loans and accrued loan interest is insufficient to cover the monthly deductions. If telephone privileges have been elected, 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 46. Loans may have adverse Tax Consequences. See Modified Endowment Contracts, page 40. Partial Withdrawals A Partial Withdrawal may be requested on any Monthly Processing Date after the first Policy anniversary by contacting our Customer Service Center. Only one Partial Withdrawal per Policy year is allowed. We may impose requirements relating to Policy Loans as necessitated by our administrative system. For Example, we may require that loan requests specify a dollar amount rather than a percentage to be taken from a specific division. The minimum Partial Withdrawal is $100. The maximum Partial Withdrawal is the amount which will leave $500 as the Net Cash Surrender Value. If a withdrawal of more than this maximum is requested, we will require a full surrender of this Policy. When a Partial Withdrawal is taken, the amount of the withdrawal plus a service fee is deducted from the Account Value. In addition, a Surrender Charge will be deducted from the Account Value if the Partial Withdrawal causes a reduction in the Stated Death Benefit. See Surrender Charge, page 34. The Stated Death Benefit is not reduced by a Partial Withdrawal taken when: (i) 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 39) and (ii) 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 15 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 does reduce 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. 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. See Group or Sponsored Arrangements or Corporate Purchasers, page 39. A Partial Withdrawal may also reduce the Target Death Benefit. 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 after we receive the request. If telephone privileges have been elected Partial Withdrawals may be requested 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 46. ________________________________________________________________________________ FirstLine II 28 Partial Withdrawals may have adverse tax consequences. See Modified Endowment Contracts, page 40. Surrender The Policy may be surrendered for its Net Cash Surrender Value at any time while the Insured is living. This may be done by sending a written request and the Policy to our Customer Service Center. The Net Cash Surrender Value of the Policy equals the Cash Surrender Value minus Policy Loans and accrued loan interest. Costs and expenses which have been deducted from the net Account Value on the Monthly Processing Date preceding the surrender will not be added or pro-rated at surrender. During the first 14 Policy years a Surrender Charge is also deducted from the Cash Surrender Value. A new 14-year Surrender Charge period will apply to each additional Segment of the Policy which is created upon a requested increase in the Stated Death Benefit. See Surrender Charge, page 34. 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. All insurance coverage 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 40. Right to Exchange Policy During the first 24 months following the Policy Date, the Owner has the right to exchange the Policy from one in which the investment experience is not guaranteed for a guaranteed Policy, unless required differently by state law. This is accomplished by transferring 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. When this right is exercised, we will not allow allocation of future premium payments or transfers to the Divisions of the Variable Account. 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 apply to the transfer to exercise this exchange privilege. See The Guaranteed Interest Division, page 17. Lapse Insurance coverage will continue as long as the Net Cash Surrender Value of the Policy is sufficient to pay all the deductions each month. The Policy is guaranteed not to lapse, regardless of its Net Cash Surrender Value, 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 the sum of the applicable minimum monthly premiums for each Policy month starting with the first Policy Month through and including the Policy Month which begins on the current Monthly Processing Date. The minimum monthly premium is equal to one twelfth of the Minimum Annual Premium. If the Guaranteed Minimum Death Benefit 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 Cash Surrender 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 30. If we do not receive full payment of the requested amount 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 the Guaranteed Interest Division. We will deduct amounts owed to us, including any applicable Surrender Charge, and 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 subject to reductions for Policy Loans, accrued loan interest and any monthly deductions due. If the Guaranteed Minimum Death Benefit Is in Effect After the Special Continuation Period, if the Guaranteed Minimum Death Benefit is in effect, the Stated Death Benefit of the Policy will not lapse during the Guarantee Period even if the Net Cash Surrender Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date. See Guaranteed Minimum Death Benefit Provision, page 22. 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 benefits will lapse if the Net Cash Surrender Value is not sufficient to cover all the deductions from the Account Value on any Monthly Processing Date (unless the Policy is in the three-year Special Continuation Period). ________________________________________________________________________________ FirstLine II 29 While the Guaranteed Minimum Death Benefit applies, unless the Policy is in the three-year Special Continuation Period, the Account Value may be reduced by monthly deductions, but not below zero. Any monthly deductions during the Guarantee Period which would reduce the Account Value below zero will be waived permanently. The Guaranteed Minimum Death Benefit will be terminated if the Policy does not meet the monthly premium or diversification tests as explained in Requirements to Maintain the Guarantee Period, page . If the Guaranteed Minimum Death Benefit is terminated, the normal test for lapse will resume. 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 Net Cash Surrender Value is zero or less; (ii) The Guarantee Period has expired or been terminated; and (iii) The three-year Special Continuation Period has expired or the required premium has not been paid. 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 it to make the overdue deductions. Any balance remaining will be applied to the Account Value in the same manner as other premium payments. Reinstatement If the Policy Owner fails to pay sufficient premiums prior to the end of the Grace Period, the Policy and its Riders other than the Guaranteed Minimum Death Benefit may be reinstated within five years after the Grace Period. Unless otherwise required by state law, we will reinstate the Policy and any Riders if: (i) The Policy has not been surrendered for its Net Cash Surrender Value; (ii) Satisfactory evidence is provided 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; and (iii) We receive a premium payment sufficient to keep the Policy and its Riders in force from the beginning to the end of the grace period and for two months following the date of the reinstatement, unless required differently by state law. The reinstatement will be effective as of the Monthly Processing Date following our approval of the reinstatement application. Upon reinstatement of the Policy, the Surrender Charges will be reinstated for the amount and duration remaining at the time the Policy lapsed. We also will 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 loan is outstanding (see Policy Loans, page ), payment received before Age 100 is considered a premium. Certain expenses are deducted from premium payments. The Net Premium is then added to the Account Value. The expenses which are deducted from the premium include the tax and the sales charges. Tax Charges Nearly 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 resulting from the receipt of premium payments, under Internal Revenue Code Section 848. Except as limited by state law, 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. ________________________________________________________________________________ FirstLine II 30 Sales Charge A percentage of each premium is deducted to compensate us for a portion of the cost of selling the Policy. The percentage deducted is determined by the Insured's Age on the Policy Date or the date of an increase in coverage: Age of Insured Sales Charge Percentage -------------- ----------------------- 0 - 49 2.25% 50 - 59 3.25% 60 - 85 4.25% These deductions from premiums are a part of the total sales charge that will be assessed against the Account Value if the Policy is surrendered during the first 14 Policy years or the first 14 Policy years following an increase to the Stated Death Benefit. See Surrender Charge, page 34. For a Policy with multiple Segments, premiums paid are allocated to the Segments in the same proportion as 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. The sales charge covers the costs of distribution, of preparing our sales literature, 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, any Surrender Charges we may collect, 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 or corporate purchasers. Daily Deductions from the Variable Account Mortality and Expense Risk Charge Each day a charge is deducted for the 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 and, therefore, the cost of insurance charges specified in the Policy will be insufficient to meet our actual claims. 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 or sales Surrender Charge. This charge is not assessed against the amount of the 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 0.6% per year for each Segment that has been in force for at least ten Policy years, which effectively reduces the charge for mortality and expense risks. See Persistency Refund, page 33. 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 three Policy years. This charge covers such costs 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 $3 per month plus a charge of $0.025 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), and is guaranteed never to exceed this amount. The per thousand charge currently is limited to $30 per month. This charge is designed to cover ongoing costs such as premium billing and collections, claim processing, Policy transactions, record keeping, 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. Cost of Insurance Charges The cost of insurance charges compensate us for the anticipated cost of paying the amount of the Death Proceeds that exceeds the Account Value upon the death of the Insured. 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 ________________________________________________________________________________ FirstLine II 31 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 and Rider 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, and the Net Amount at Risk for the Adjustable Term Insurance Rider will 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 makeup of the death benefit, and with the 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. Unisex rates are used where appropriate under applicable law, including the state of Montana and Policies purchased by employers and employee organizations in connection with employment-related insurance or benefit programs. Net Amount at Risk is allocated to Segments in the same proportion that each Segment bears to the total 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 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. These rates are based on the 1980 Commissioner's Standard Ordinary Mortality Tables. We may offer Policies on a guaranteed issue basis under 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, with minimal evidence of insurability. Policies issued on a guaranteed issue basis may present different mortality costs to us compared to underwritten Policies. We may charge different cost of insurance rates for guaranteed issue Policies. The cost of insurance charges may depend on the issue Age of the Insured, the size of the group, and the total premium to be paid by the group. Under most guaranteed issue Policies, the overall charges for insurance will be higher than under a comparable underwritten Policy issued in the preferred nonsmoker, standard nonsmoker, or standard smoker class. This means that an Insured may be able to obtain individual underwritten insurance coverage at a lower overall cost. There are no cost of insurance charges after Age 100. Charges for Additional Benefits The cost of 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. See Additional Benefits, page 23. Changes in Monthly Charges Any changes in the cost of insurance charges or charges for additional benefits will be made by class of Insured and will be based on changes in future expectations about such things as 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 Net Account Value immediately after the transaction. Partial Withdrawal A service fee of $25 will be charged against the Account Value for each Partial Withdrawal. In addition, a Surrender Charge may be deducted from the Account Value. See Partial Withdrawals, page 29. Transfers We charge a fee of $25 for each additional transfer beyond the first 12 in a Policy year. All transfers included in one transfer request count as a single transfer when we calculate the fee. There will not be a transfer fee if transferring the Account Value into the Guaranteed Interest Division pursuant to the Exchange Right provided by this Policy. See Transfers of Account Values, page 26, and Right to Exchange Policy, page 12. Allocation Changes We charge a $25 fee each time the premium or Automatic Rebalancing allocation is changed more than five times each per Policy year. Illustrations We reserve the right to charge a fee, not to exceed $25, for each Policy illustration in excess of one per Policy year. ________________________________________________________________________________ FirstLine II 32 Continuation of Coverage Administrative Fee At Age 100, if the continuation of Coverage feature is in effect, a one-time administrative charge of $200 will be assessed to cover the costs expected to be incurred to maintain and service the Policy for the remainder of the Insured's lifetime. This charge is in lieu of the normal monthly administrative charge. It is designed to reimburse us for expenses and we do not expect to gain from it. Persistency Refund Long-term Owners of FirstLine II will receive a persistency refund where permitted by state law. Each month the Policy or a Segment remains in force after its tenth Policy anniversary, we will credit the Account Value with a refund equivalent to 0.6% of the Account Value on an annual basis for that Segment (0.05% monthly). However, the persistency refund is not guaranteed to be paid on the Guaranteed Interest Division. The Account Value will be allocated to each 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 = .0005 Persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable Divisions $10,000.00 $10,005.00 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 = $6,000 Account Value in the Loan Division = $4,000 Monthly persistency refund Rate = .0005 Persistency refund = 10,000 x .0005 = $5.00 Before After Persistency Persistency Refund Refund ------ ------ Variable Divisions $6,000.00 $6,005.00 Loan Division $4,000.00 $4,000.00 If a persistency refund is being paid on the Guaranteed Interest Division, policies in the Continuation of Coverage period will be credited with the persistency refund. Surrender Charge We assess a Surrender Charge against the Account Value upon surrender, reduction in Stated Death Benefit or lapse in the first 14 Policy years, or the 14 Policy years following an addition of a new Segment. The Surrender Charge is designed to recover our expenses from issuing and distributing Policies. The Surrender Charge consists of two parts: an administrative Surrender Charge and a sales Surrender Charge. During the first 14 years of the Policy or within 14 years of adding a Segment, if the Owner requests a decrease to the Stated Death Benefit of the Policy or takes a Partial Withdrawal which decreases the Stated Death Benefit, we will deduct a portion of the Surrender Charge from the Account Value. The amount of the Surrender Charge which will be deducted from the Account Value is the Surrender Charge in effect before the reduction minus the Surrender Charge in effect after the reduction. A decrease to the Stated Death Benefit as a result of a change to the death benefit option does not result in a Surrender Charge deduction from the Account Value and future Surrender Charges will not be reduced. An increase to the Stated Death Benefit as a result of a change to the death benefit option does not result in an increase in the maximum sales Surrender Charge. All other increases in Stated Death Benefit will increase the maximum sales and administrative Surrender Charges. If the maximum Surrender Charge is changed, we will send a new Schedule showing the new maximum Surrender Charge. Maximum Surrender Charges apply only if the Policy is surrendered or lapses (after paying enough premiums to reach the maximum Surrender Charge). ________________________________________________________________________________ FirstLine II 33 The amount of the administrative Surrender Charge and the sales Surrender Charge stays level for the first seven Policy years following the effective date of a coverage segment, then decreases at the beginning of each subsequent Policy year by 12.5% of the amount in effect at the end of the seventh Policy year until it reaches zero at the beginning of the 15th year or the year in which the Insured reaches Age 98, whichever is earlier. Administrative Surrender Charge The administrative Surrender Charge is a dollar amount for each $1,000 of Stated Death Benefit. This dollar amount is based on the Insured's Age at the Policy Date or the time that a new Stated Death Benefit coverage segment is added: Administrative Surrender Charge Per Insured's Age Thousand of Stated Death Benefit - ------------- -------------------------------- 0 - 39 $2.50 40 - 49 $3.50 50 - 59 $4.50 60 - 69 $5.50 70 and above $6.50 For example, the administrative Surrender Charge will be $350 for a Policy with a Stated Death Benefit of $100,000 if the Insured is 40 on the Policy Date. During the first 14 Policy years or within 14 Policy years of adding a Segment, if a decrease to the Stated Death Benefit is requested or a Partial Withdrawal is taken which causes the Stated Death Benefit to decrease, the administrative Surrender Charge will decrease in the same proportion that the Stated Death Benefit decreases. The amount by which the administrative Surrender Charge decreases will be deducted from the Account Value. The administrative Surrender Charge is designed to cover part of the administrative expenses such as application processing, establishment of Policy records and insurance underwriting costs. It also includes costs associated with the development and operation of our systems for administering the policies. We do not expect to profit from the administrative Surrender Charge. Sales Surrender Charge The sales Surrender Charge is calculated for each Segment by allocating premiums paid to Segments in the same proportion that the guideline annual premium for each Segment (as defined by the Federal income tax laws) bears to the sum of the guideline annual premiums for all Segments. The sales Surrender Charge is 25% of paid premiums up to the Target Premium for the Segment without any substandard ratings (Base Standard Target Premium) plus 5% of premiums paid in the first seven Policy years following the effective date of a coverage Segment in excess of the Base Standard Target Premium for the Segment. The sales Surrender Charge will not exceed 50% of the Base Standard Target Premium. Target Premiums are not based on the Scheduled Premium. Target Premiums are actuarially determined based on the Age and sex of the Insured. The Target Premium for the Policy and any Segments added since the Policy Date will be listed in the Schedule. The maximum sales Surrender Charge for the Stated Death Benefit will be shown in the Schedule attached to the Policy. Upon a decrease in the Stated Death Benefit (other than due to a change in the death benefit option) the Target Premium for each Segment will be reduced in the same proportion that the Stated Death Benefit is reduced. If the new Target Premium for each Segment is greater than or equal to the paid premiums which are allocated to the Segment, the maximum sales Surrender Charge in the future will be reduced, but a sales Surrender Charge will not be deducted from the Account Value. If the new Target Premium for each Segment is less than the sum of the paid premiums which are allocated to the Segment, the maximum sales Surrender Charge in the future will be reduced and a sales Surrender Charge will be deducted from the Account Value. The new sales Surrender Charge will be recalculated as if the new Target Premium was always in effect for the Segment. A deduction equal to the difference between the sales Surrender Charge prior to the decrease less the sales Surrender Charge after the decrease will be taken from the Account Value. If a decrease to the Stated Death Benefit, or a Partial Withdrawal which causes the Stated Death Benefit to be reduced, is requested more than seven years following the Policy Date or the date a Segment is added, the maximum sales Surrender Charge in the future will be reduced in the same proportion that the Stated Death Benefit is reduced. The amount of the sales Surrender Charge in a Policy year is not related to our actual sales expenses in that year. To the extent sales expenses are not covered by the sales Surrender Charge, we will cover them from other funds. ________________________________________________________________________________ FirstLine II 34 Calculation of Surrender Charge Examples: If the Stated Death Benefit is $100,000 for an Insured Age 45 on the Policy Date and the Target Premium on this Policy is $1,500, the actual Surrender Charge assuming that a $1,000 premium is paid each Policy year is shown in the table below:
Policy Year Administrative Surrender Sales Surrender Charge Actual Surrender Charge Charge 1 $350.00 $250.00 $ 600.00 2 350.00 400.00 750.00 3 350.00 450.00 800.00 4 350.00 500.00 850.00 5 350.00 550.00 900.00 6 350.00 600.00 950.00 7 350.00 650.00 1000.00 8 306.25 568.75 875.00 9 262.50 487.50 750.00 10 218.75 406.25 625.00 11 175.00 325.00 500.00 12 131.25 243.75 375.00 13 87.50 162.50 250.00 14 43.75 81.25 125.00 15 0.00 0.00 0.00
If the Stated Death Benefit is reduced on the third Policy anniversary to $90,000, the Target Premium will be reduced proportionately and will equal $1,350 (90% of $1,500). A sales Surrender Charge in the amount of $30 (the difference between the sales Surrender Charge immediately prior to the decrease and the sales Surrender Charge calculated assuming the new Target Premium was always in effect for the Policy) and an administrative Surrender Charge in the amount of $35 ($350 - $315 where $315 is equal to 90% of the original administrative Surrender Charge of $350) will be deducted from the Account Value. The resulting actual Surrender Charge for each Policy year is shown below:
Policy Year Administrative Surrender Sales Surrender Charge Actual Surrender Charge Charge 1 $350.00 $250.00 $ 600.00 2 350.00 400.00 750.00 3 350.00 450.00 800.00 4 315.00 470.00 785.00 5 315.00 520.00 835.00 6 315.00 570.00 885.00 7 315.00 620.00 935.00 8 275.63 542.50 818.13 9 236.25 465.00 701.25 10 196.88 387.50 584.38 11 157.50 310.00 467.50 12 118.13 232.50 350.63 13 78.75 155.00 233.75 14 39.38 77.50 116.88 15 0.00 0.00 0.00
Charges From Portfolios The Variable Account purchases shares of the Portfolios at net asset value. The 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. ________________________________________________________________________________ FirstLine II 35 Portfolio Annual Expenses (As a Percentage of Portfolio Average Net Assets) /1/
Investment Total Portfolio Portfolio Management Fees Other Expenses Expenses --------- --------------- -------------- -------- AIM Variable Insurance Funds, Inc. AIM VI - Capital Appreciation 0.63% 0.05% 0.68% AIM VI - Government Securities 0.50% 0.37% 0.87% The Alger American Fund Alger American Growth Portfolio 0.75% 0.04% 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.15% 1.00%/3/ Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% Fidelity Variable Insurance Products Fund VIP Growth Portfolio 0.60% 0.09% 0.69%/4/ VIP Money Market Portfolio 0.21% 0.10% 0.31% VIP Overseas Portfolio 0.75% 0.17% 0.92%/4/ Fidelity Variable Insurance Products Fund II VIP II Asset Manager Portfolio 0.55% 0.10% 0.65%/4/ VIP II Index 500 Portfolio 0.24% 0.04% 0.28%/5/ INVESCO Variable Investment Funds, Inc. INVESCO VIF - High Yield Portfolio 0.60% 0.23% 0.83% /6, 9/ INVESCO VIF - Industrial Income Portfolio 0.75% 0.16% 0.91% /6, 8/ INVESCO VIF - Small Company Growth Fund 0.75% 0.25% 1.00% /6, 11/ INVESCO VIF - Total Return Portfolio 0.75% 0.17% 0.92% /6, 7/ INVESCO VIF - Utilities Portfolio 0.60% 0.39% 0.99% /6, 10/ Neuberger & Berman Advisers Management Trust /2/ Growth Portfolio 0.83% 0.07% 0.90% Limited Maturity Bond Portfolio 0.65% 0.12% 0.77% Partners Portfolio 0.80% 0.06% 0.86% Van Eck Worldwide Insurance Trust Worldwide Bond Fund 1.00% 0.12% 1.12% Worldwide Emerging Markets Fund 0.80% 0.00% 0.80% /14/ Worldwide Hard Assets Fund 1.00% 0.17% 1.17% /12/ Worldwide Real Estate Fund 0.00% 0.00% 0.00% /13/
_______________________________________________________________________________ FirstLine II 36 /1/ The preceding Portfolio expense information was provided to us by the Portfolios, and we have not independently verified such information. These Portfolio expenses are not direct charges against Division assets or reduction from Contract values; rather these Portfolio expenses are taken into consideration in computing each underlying Portfolio's net asset value, which 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. The figures reported under "Investment Management and Administration Fees" include the aggregate of the administration fees paid by the Portfolio and the management fees paid by its corresponding Series. Similarly, the "Other Expenses" includes all other expenses of the Portfolio and its corresponding series. See "Expenses" in the Trust's Prospectus. Expenses may reflect expense reimbursement. NBMI has voluntarily undertaken to limit the Portfolios' compensation of NBMI and excluding taxes, interest, extraordinary expense, brokerage commissions and transaction costs, that exceed 1% of the Portfolios' average daily net asset value. These expense reimbursement policies are subject to termination upon 60 days written notice to the Portfolios. /3/ The Alger American Leverage AllCap Portfolio's "Other Expenses" includes 0.04% of interest expense. /4/ A portion of the brokerage commissions that certain funds pay was used to reduce fund expenses. In addition, certain funds have entered into arrangements with their custodian whereby credits realized, as a result of uninvested cash balances were used to reduce custodian expenses. Including these reductions, the total operating expenses presented in the table would have been 0.67% for Growth Portfolio, 0.90% for Overseas Portfolio, and 0.64% for Asset Manager Portfolio. /5/ FMR agreed to reimburse a portion of Index 500 Portfolio's expenses during the period. Without this reimbursement, the funds' management fee, other expenses and total expenses would have been 0.27%, 0.13% and 0.40% respectively. /6/ The Portfolios' 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. /7/ Various expenses of the Portfolio were voluntarily absorbed by IFG for the years ended December 31, 1997, 1996 and 1995. If such expenses had not been voluntarily absorbed, the ratio of expenses to average net assets would have been 1.10%, 1.30% and 2.51%, respectively, and the ratio of net investment income to average net assets would have been 2.89%, 3.08% and 2.41%, respectively. /8/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the years ended December 31, 1997, 1996 and 1995. If such expenses had not been voluntarily absorbed, the ratio of expenses to average net assets would have been 0.97%, 1.19%, and 2.31%, respectively, and the ratio of net investment income to average net assets would have been 2.12%, 2.63% and 2.22%, respectively. /9/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the years ended December 31, 1997, 1996 and 1995. If such expenses had not been voluntarily absorbed, the ratio of expenses to average net assets would have been 0.94%, 1.32% and 2.71%, respectively, and the ratio of net investment income to average net assets would have been 8.56%, 8.74% and 7.05%, respectively. /10/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the years ended December 31, 1997, 1996 and 1995. If such expenses had not been voluntarily absorbed, the ratio of expenses to average net assets would have been 2.07%, 5.36% and 57.13%, respectively, and the ratio of net investment income to average net assets would have been 1.84%, (1.28%) and (52.86%) respectively. /11/ Various expenses of the Portfolios were voluntarily absorbed by IFG for the years ended December 31, 1997. If such expenses had not been voluntarily absorbed, the ratio of expenses to average net assets would have been 35.99% and the ratio of net investment income to average net assets would have been (34.86%). /12/ Various expenses of the Portfolio were voluntarily absorbed by the Portfolio's investment manager. Absent such reimbursement, "Investment Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have been 1.0%, 0.18%, and 1.18%, respectively. /13/ Various expenses of the Portfolio were voluntarily absorbed by the Portfolio's investment manager. Absent such reimbursement, "Investment Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have been 1.0%, 3.92%, and 4.92%, respectively. /14/ Various expenses of the Portfolio were voluntarily absorbed by the Portfolio's investment manager. Absent such reimbursement, "Investment Management Fees," "Other Expenses" and "Total Portfolio Expenses" would have been 1.0%, 0.34%, and 1.34%, respectively. ________________________________________________________________________________ FirstLine II 37 Group or Sponsored Arrangements or Corporate Purchasers This Policy is available for purchase by individuals, corporations or other institutions. For group or sponsored arrangements (including home office employees of Security Life) and for corporate purchases or special exchange programs which Security Life may offer from time to time, we may reduce or eliminate the Surrender Charge, the length of time a Surrender Charge applies, the administrative charge, the minimum Stated Death Benefit, the maximum Target Death Benefit, the Minimum Annual Premium, the Target Premium, the sales charges, cost of insurance charges, or other charges normally assessed to reflect the expected economies resulting from a group or sponsored arrangement or a corporate purchaser. We also may allow Partial Withdrawals to be taken without a Surrender 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 Surrender 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 reserve the right to charge 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 entire death benefit of a life insurance contract is excludable from gross income of the beneficiary under Section 101(a)(l) of the Code. However, there are exceptions to this general rule such as transfers for value and distributions from a policy owned by a qualified plan. 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, multiplied by the Account Value. See Appendix A, page 155, 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 ________________________________________________________________________________ FirstLine II 38 Guideline Premium/Cash Value Corridor Test will ultimately be less than the amount of death benefit required under the Cash Value Accumulation Test. See Appendix B, page 158, 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 will 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. In addition, as long as the Policy remains in force, increases in Account Value as a result of interest or investment experience will not be subject to Federal income tax unless and until there is a distribution from the Policy, such as a Partial Withdrawal or loan. 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 24. The IRS has not given an official opinion on policies that continue coverage past age 100. There are no clear guidelines on how to keep these benefits within the definition of life insurance. However, we believe our approach is appropriate and in keeping with the spirit of the current law. See Continuation of Coverage, page 24. 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 47. The Federal government has in the past and may in the future consider new legislation or regulations that, if enacted, could change the Federal income tax treatment of life insurance policy income, exchanges, transfers, 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 policy owner), 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 Owners 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 exceed 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 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 ________________________________________________________________________________ FirstLine II 39 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 adviser to determine whether a policy transaction will cause the Policy to be treated as a Modified Endowment Contract. To the extent possible, to keep the Policy from being treated as a "modified endowment contract" for Federal tax purposes, the provisions of the Policy shall be interpreted to prevent the Policy from being subject to such treatment. We reserve the right to amend the Policy to reflect any clarifications that may be needed or are appropriate, including any rider, to achieve this objective. 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 tax 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. Consult your tax adviser for advice on the availability of deductions. Loans, Lapses, 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 Partial Withdrawal may or may not be taxable depending on the Owner's 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 the Policy will be subject to Federal income tax and, unless one of the above exceptions applies, the 10% penalty tax. ________________________________________________________________________________ FirstLine II 40 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. Section 1035 Exchanges Section 1035 of the Internal Revenue Code generally provides that no gain or loss shall be recognized on the exchange of one life insurance policy for another life insurance policy or for an endowment or annuity contract. We accept 1035 exchanges with outstanding loans. Special rules and procedures apply to Section 1035 transactions. Prospective owners wishing to take advantage of Section 1035 should consult their tax adviser. 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 adviser 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 also may 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 qualified plans, non-qualified 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 adviser 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 particular jurisdiction and the circumstances of each Owner and Beneficiary. ________________________________________________________________________________ FirstLine II 41 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 15. Security Life is the legal owner of the shares held in the Variable Account and, as such, has the right to vote on certain matters. Among other things, we may vote on any matters described in the Fund's 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 Policy. We will vote those shares at meetings of Portfolio shareholders according to their instructions. We also will 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 Federal 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 Owner's assets have been invested. We determine the number of Portfolio shares in each Division that are attributable to the Policy by dividing the amount in 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 instructions may be given will be determined as of the record date set by the Portfolio's 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, Owners will be entitled to one vote for every $100 of value they have 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. Right to Change Operations Subject to state limitations, the Company may from time to time, change the investment objective of, or 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 ________________________________________________________________________________ FirstLine II 42 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. (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 change will be made until it becomes effective with the SEC, or without any necessary approval of the applicable state insurance departments. Owners will be notified of any changes. If Owners then wish to transfer the amount they have 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, they may also change how their Net Premiums and deductions are allocated. Reports to Owners At the end of each Policy year we will send 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. 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 deductions, and any loans or withdrawals in that year. We also will send semi-annual reports with financial information on the Portfolios, including a list of the investments held by each Portfolio. Confirmation notices will be sent 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 when issued, the Policy 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 10 days after it is received, or as otherwise specified by state law. If the Policy is canceled under this provision, we will refund an amount equal to the full amount of any premiums paid or as otherwise specified by state law. Insurance coverage ends when the request is sent. 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 between us. A copy of any application as well as a new Schedule will be attached or furnished 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. All changes or amendments to this Policy made by us must be signed by a president or an officer of the Company and by our secretary or assistant secretary. No other person is authorized to change the terms or conditions of this policy. 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. 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 ________________________________________________________________________________ FirstLine II 43 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 Owner signs the notice. The change will not affect any payment made or action taken by us before recording the change at our Customer Service Center. A change in ownership may cause recognition of taxable income on gain, if any, to the old Owner. 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, the Owner or Owner's estate will be paid the Death Proceeds. The Beneficiary designation will be on file with us or at a location designated by us. The Owner may name a new Beneficiary 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 The Owner may assign this Policy 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, unless the Beneficiary was designated as an irrevocable Beneficiary prior to the assignment. It is the Owner's 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. o 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 or the date specified by state law. o 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. o We will not contest the statements in the application for any coverage change that creates a new Segment or 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 the new Segment or increase. We have the right to rescind this policy if we issued or reinstated the Policy based on a statement in an application, including a reinstatement application, that was false or misleading. 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 Insured's death or as otherwise required by state law. 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 outstanding Policy Loans and accrued loan interest and minus any Partial Withdrawals, unless otherwise required by law. If the Insured has been changed and the new Insured dies by suicide within two years of the change date, the death benefit will be limited to the Net Cash Surrender 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 Partial Withdrawals since the change date. If the Insured commits suicide, while sane or insane, within two years of the effective date of a new Segment or of an increase in any other benefit, we will make a limited payment to the beneficiary for the new Segment or other increase. The payment will equal the cost of insurance and any applicable monthly expense charges deducted for such increase. 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 also will execute a transfer among Divisions of the Variable Account as of the Valuation Date on or next following receipt of the 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 ________________________________________________________________________________ FirstLine II 44 periods indicated in this prospectus. See Transfers of Account Values, page 26. We may, however, postpone the processing of any such transactions at any of the following times: o When the NYSE is closed for trading; o When trading on the NYSE is restricted by the SEC; o 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 o 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 date of death of the Insured. The Death Proceeds will not be affected by changes in the values of the Divisions of the Variable Account subsequent to the date of death of the Insured. We will pay interest at the rate declared by us or at any higher rate required by law from the date of death of the Insured 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 the 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 by the Owner. 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. In the event of an Insured's death while the Policy is in force please let us or the Registered Representative know as soon as possible. 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 authorization forms 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, changes in Dollar Cost Averaging and Automatic Rebalancing, or requests for Partial Withdrawals or a Policy Loan 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. Non-participating The Policy does not participate in Security Life's surplus earnings. Distribution of the Policies The principal underwriter (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, including VESTAX Securities Corporation, a subsidiary of ING America Insurance Holdings, Inc., and Locust Street Securities, Inc., an affiliate of Security Life of Denver Insurance Company, 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 with which we enter into selling agreements 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 95% of the first Target Premium paid and 4% of premiums paid in excess of the first Target Premium. For Policy years two through ten, the distribution allowance may equal an amount up to 4% of premiums paid in excess of the ________________________________________________________________________________ FirstLine II 45 first Target Premium, and for subsequent Policy years 2% of premiums paid. Broker-dealers may also receive annual renewal compensation of up to 0.10% of the Net Account Value beginning in the tenth Policy year or after the Owner pays more than the guideline single premium determined in accordance with the Federal income tax law definition of life insurance, whichever is earlier. Compensation arrangements may vary among broker-dealers and depend on particular circumstances. In addition, we also may pay override payments, expense allowances, bonuses, special marketing fees, 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 and Surrender Charges we might collect). Settlement Provisions During the Insured's lifetime, the Owner may elect that the Beneficiary receive the Death Proceeds other than in one sum. If an election has not been made, the Beneficiary may do so within 60 days after the Insured's death. The Owner may 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 be subject to our rules at the time of selection. Currently, these alternate payment options are available only 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 payee's lifetime, or if longer, for a period of 5, 10, 15, or 20 years as elected. The installment dollar amounts will be equal except for any excess interest. The amount of the first monthly payout for each $1,000 of Account Value applied is shown in Settlement Option Table II in the Policy. This option is available only for ages shown in this Table. Option III: Hold at Interest: Amounts may be left on deposit with us to be paid upon the death of the payee or at any earlier date elected. Interest on any unpaid balance will be at the rate declared by us or at any higher rate required by law. Interest may be accumulated or paid in 1, 2, 4 or 12 installments per year, as elected. Money may not be left on deposit for more than 30 years. Option IV: Payouts of a Designated Amount: Payouts will be made until proceeds, together with interest, which will be at the rate declared by us or at any higher rate required by law, are exhausted. Payouts will be made in 1, 2, 4, or 12 equal installments per year, as elected. Option V: Other: The Owner may ask us to apply the money under any option that we make available at the time the benefit is paid. The Beneficiary or 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 (the right 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. ________________________________________________________________________________ FirstLine II 46 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, 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 - --- --- ------ ------ ---- ------- ------- ------- ---- Nonsmoker Male 45 Preferred 1 CVAT 200,000 $3,750 200,000 50 Nonsmoker Male 45 Preferred 1 CVAT 100,000 $3,750 200,000 52 Nonsmoker Male 45 Preferred 1 GP 200,000 $3,750 200,000 54 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. 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 sections 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, administrative charges and Surrender Charges. The difference between the Account Value and the Cash Surrender Value in the first 14 years is the Surrender Charge. The tables illustrate cost of insurance and expense charges at both our current rates (which are described under Monthly Deductions from the Account Value, page 32) 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 Division's 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 persistency refund equivalent to 0.6% 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 .6635% of the aggregate average daily net assets of the Portfolios. This hypothetical rate is a simple average of the maximum investment advisory fee applicable to the Divisions of the Variable Account. Other expenses of the Portfolios are assumed at the rate of .1274% of the average daily net assets of the Portfolio, which is an average of all the Portfolios' other expenses, including interest expenses. This amounts to .7909% 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. ________________________________________________________________________________ FirstLine II 47 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 (1.54)%, on 6% it would be 4.42%, and on 12% it would be 10.37%. 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 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 an initial Stated Death Benefit, death benefit option and Scheduled Premiums chosen and consistent with the Policy form. If the Owner purchases a Policy, 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. ________________________________________________________________________________ FirstLine II 48 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $200000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $3750.00 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 YEAR PREMIUMS ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 3750 3937 2361 874 200000 2710 1223 200000 2535 1048 200000 2 3750 8072 4625 2950 200000 5639 3964 200000 5121 3446 200000 3 3750 12413 6789 4927 200000 8808 6945 200000 7756 5894 200000 4 3750 16971 8972 6922 200000 12368 10318 200000 10564 8514 200000 5 3750 21757 11045 8845 200000 16228 14028 200000 13424 11224 200000 6 3750 26783 13008 10808 200000 20421 18221 200000 16335 14135 200000 7 3750 32059 14845 12645 200000 24971 22771 200000 19286 17086 200000 8 3750 37600 16548 14623 200000 29911 27986 200000 22270 20345 200000 9 3750 43417 18103 16453 200000 35275 33625 200000 25277 23627 200000 10 3750 49525 19497 18122 200000 41104 39729 200000 28295 26920 200000 15 3750 84966 24463 24463 200000 81821 81821 200000 44686 44686 200000 20 3750 130197 23527 23527 200000 149167 149167 258357 61268 61268 200000 25 3750 187925 12224 12224 200000 251683 251683 390109 76070 76070 200000 30 3750 261603 - - 200000 403000 403000 566618 85663 85663 200000 AGE 65 3750 140644 22271 22271 200000 166499 166499 281716 64433 64433 200000
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. ________________________________________________________________________________ FirstLine II 49 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $200000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $3750.00 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 3750 3937 2814 1326 200000 3191 1704 200000 3002 1515 200000 2 3750 8072 5537 3862 200000 6665 4990 200000 6089 4414 200000 3 3750 12413 8170 6307 200000 10450 8588 200000 9264 7401 200000 4 3750 16971 10834 8784 200000 14709 12659 200000 12655 10605 200000 5 3750 21757 13412 11212 200000 19369 17169 200000 16152 13952 200000 6 3750 26783 15901 13701 200000 24472 22272 200000 19759 17559 200000 7 3750 32059 18295 16095 200000 30058 27858 200000 23471 21271 200000 8 3750 37600 20587 18662 200000 36176 34251 200000 27290 25365 200000 9 3750 43417 22772 21122 200000 42880 41230 200000 31214 29564 200000 10 3750 49525 24845 23470 200000 50234 48859 200000 35244 33869 200000 15 3750 84966 34522 34522 200000 102832 102832 201756 58973 58973 200000 20 3750 130197 41460 41460 200000 189518 189518 328245 88030 88030 200000 25 3750 187925 44607 44607 200000 328336 328336 508921 124573 124573 200000 30 3750 261603 41472 41472 200000 548553 548553 771265 170306 170306 239451 AGE 65 3750 140644 42464 42464 200000 212359 212359 359311 94663 94663 200000
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. ________________________________________________________________________________ FirstLine II 50 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $100000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $100000 ANNUAL PREMIUM: $3750.00 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 YEAR PREMIUMS ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 3750 3937 2360 1522 200000 2708 1871 200000 2534 1696 200000 2 3750 8072 4622 3597 200000 5636 4611 200000 5118 4093 200000 3 3750 12413 6785 5685 200000 8802 7702 200000 7751 6651 200000 4 3750 16971 8965 7865 200000 12359 11259 200000 10557 9457 200000 5 3750 21757 11037 9935 200000 16217 15117 200000 13414 12314 200000 6 3750 26783 12997 11897 200000 20406 19306 200000 16322 15222 200000 7 3750 32059 14832 13732 200000 24952 23852 200000 19270 18170 200000 8 3750 37600 16532 15570 200000 29887 28924 200000 22251 21288 200000 9 3750 43417 18085 17260 200000 35245 34420 200000 25254 24429 200000 10 3750 49525 19476 18788 200000 41068 40380 200000 28267 27580 200000 15 3750 84966 24420 24420 200000 81735 81735 200000 44625 44625 200000 20 3750 130197 23450 23450 200000 149019 149019 258101 61144 61144 200000 25 3750 187925 12086 12086 200000 251456 251456 389756 75834 75834 200000 30 3750 261603 - - 200000 402656 402656 566135 85198 85198 200000 AGE 65 3750 140644 22184 22184 200000 166337 166337 281443 64292 64292 200000
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. ________________________________________________________________________________ FirstLine II 51 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $100000 DEATH BENEFIT OPTION 1 INITIAL ADJUSTABLE TERM RIDER: $100000 ANNUAL PREMIUM: $3750.00 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 YEAR PREMIUMS ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 3750 3937 2988 2151 200000 3377 2540 200000 3183 2345 200000 2 3750 8072 5890 4865 200000 7063 6038 200000 6465 5440 200000 3 3750 12413 8705 7605 200000 11089 9989 200000 9850 8750 200000 4 3750 16971 11561 10461 200000 15628 14528 200000 13473 12373 200000 5 3750 21757 14340 13242 200000 20613 19513 200000 17229 16129 200000 6 3750 26783 17050 15950 200000 26093 24993 200000 21124 20024 200000 7 3750 32059 19683 18583 200000 32124 31024 200000 25163 24063 200000 8 3750 37600 22241 21278 200000 38764 37802 200000 29353 28391 200000 9 3750 43417 24717 23892 200000 46073 45248 200000 33698 32873 200000 10 3750 49525 27109 26422 200000 54081 53394 200000 38202 37515 200000 15 3750 84966 38701 38701 200000 110426 110426 216655 64903 64903 200000 20 3750 130197 47887 47887 200000 201811 201811 349537 97346 97346 200000 25 3750 187925 54089 54089 200000 348144 348144 539623 137622 137622 213314 30 3750 261603 55738 55738 200000 580265 580265 815852 186192 186192 261785 AGE 65 3750 140644 49408 49408 200000 225889 225889 382205 104711 104711 200000
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. ________________________________________________________________________________ FirstLine II 52 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $200000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $3750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING GUARANTEED CHARGES Assuming Hypothetical Gross Investment Return of:
--------0.00%------- --------12.00%-------- --------6.00%-------- PREMIUM CASH CASH CASH YEAR PREMIUMS ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR DEATH ACCOUNT SURR DEATH AT 5% VALUE VALUE BENEFIT VALUE VALUE BENEFIT VALUE VALUE BENEFIT 1 3750 3937 2361 874 200000 2710 1223 200000 2535 1048 200000 2 3750 8072 4625 2950 200000 5639 3964 200000 5121 3446 200000 3 3750 12413 6789 4927 200000 8808 6945 200000 7756 5894 200000 4 3750 16971 8972 6922 200000 12368 10318 200000 10564 8514 200000 5 3750 21757 11045 88445 200000 16228 14028 200000 13424 11224 200000 6 3750 26783 13008 10808 200000 20421 18221 200000 16335 14135 200000 7 3750 32059 14845 12645 200000 24971 22771 200000 19286 17086 200000 8 3750 37600 16548 14623 200000 29911 27986 200000 22270 20345 200000 9 3750 43417 18103 16453 200000 35275 33625 200000 25277 23627 200000 10 3750 49525 19497 18122 200000 41104 39729 200000 28295 26920 200000 15 3750 84966 24463 24463 200000 81821 81821 200000 44686 44686 200000 20 3750 130197 23527 23527 200000 151109 151109 200000 61268 61268 200000 25 3750 187925 12224 12224 200000 271400 271400 314824 76070 76070 200000 30 3750 261603 - - 200000 470291 470291 503212 85663 85663 200000 AGE 65 3750 140644 22271 22271 200000 170571 170571 204685 64433 64433 200000
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. ________________________________________________________________________________ FirstLine II 53 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: PREFERRED SECURITY LIFE FIRSTLINE II VARIABLE UNIVERSAL LIFE STATED DEATH BENEFIT: $200000 DEATH BENEFIT OPTION 1 ANNUAL PREMIUM: $3750.00 GUIDELINE PREMIUM TEST SUMMARY PAGE ASSUMING CURRENT CHARGES Assuming Hypothetical Gross Investment Return of:
-------0.00%------- --------12.00%-------- --------6.00%-------- PREMIUM CASH CASH DEATH ACCOUNT CASH DEATH ACCUMULATED ACCOUNT SURR DEATH ACCOUNT SURR BENEFIT VALUE SURR BENEFIT YEAR PREMIUMS AT 5% VALUE VALUE BENEFIT VALUE VALUE VALUE 1 3750 3937 2814 1326 200000 3191 1704 200000 3002 1515 200000 2 3750 8072 5537 3862 200000 6665 4990 200000 6089 4414 200000 3 3750 12413 8170 6307 200000 10450 8588 200000 9264 7401 200000 4 3750 16971 10834 8784 200000 14709 12659 200000 12655 10605 200000 5 3750 21757 13412 11212 200000 19369 17169 200000 16152 13952 200000 6 3750 26783 15901 13701 200000 24472 22272 200000 19759 17559 200000 7 3750 32059 18295 16095 200000 30058 27858 200000 23471 21271 200000 8 3750 37600 20587 18662 200000 36176 34251 200000 27290 25365 200000 9 3750 43417 22772 21122 200000 42880 41230 200000 31214 29564 200000 10 3750 49525 24845 23470 200000 50234 48859 200000 35244 33869 200000 15 3750 84966 34522 34522 200000 102832 102832 200000 58973 58973 200000 20 3750 130197 41460 41460 200000 193224 193224 235733 88030 88030 200000 25 3750 187925 44607 44607 200000 345356 345356 400613 124573 124573 200000 30 3750 261603 41472 41472 200000 599558 599558 641527 172672 172672 200000 AGE 65 3750 140644 42464 42464 200000 217810 217810 261372 94663 94663 200000
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. _______________________________________________________________________________ FirstLine II 54 ADDITIONAL INFORMATION Directors and Officers Set forth below is information regarding the directors and principal officers of Security Life of Denver Insurance Company. Security Life's address, and the business address of each person named, except as noted with one or two asterisks (*/**), is Security Life Center, 1290 Broadway, Denver, Colorado 80203-5699. The business address of each person denoted with one asterisk (*) is ING North America Insurance Corporation, 5780 Powers Ferry Road, Atlanta, Georgia 30327-4390. The business address of each person denoted with two asterisks (**) is Security Life of Denver Insurance Company, 9140 Arrowpoint Blvd., Suite 400, Charlotte, North Carolina 28273. Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Fred S. Hubbell Chairman and Chief Executive Officer 909 Locust St. Des Moines, IA 50309 Stephen M. Christopher Director, President and Chief Operating Officer Thomas F. Conroy Director, President Security Life Reinsurance Michael W. Cunningham* Director, Executive Vice President Linda B. Emory* Director, Vice President and Appointed Actuary Catherine T. Fitzgerald* Executive Vice President James L. Livingston, Jr. Executive Vice President, Operations Jeffrey R. Messner Executive Vice President and Chief Marketing Officer Jess A. Skriletz President, ING Institutional Markets John R. Barmeyer Senior Vice President and Chief Legal Officer Wayne D. Bidelman Senior Vice President, New Business Development Eugene L. Copeland Senior Vice President and General Counsel, Security Life Reinsurance and ING Institutional Markets Michael Fisher Senior Vice President, Litigation Carol D. Hard Senior Vice President, Variable Philip R. Kruse Senior Vice President, Sales & Marketing Charles LeDoyen** Senior Vice President, Structured Settlements ________________________________________________________________________________ FirstLine II 55 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- Timothy P. McCarthy Senior Vice President, Marketing Services Jeffery W. Seel* Senior Vice President and Chief Investment Officer Lawrence D. Taylor Senior Vice President and Chief Actuary Louis N. Trapolino Senior Vice President, Distribution William D. Tyler Senior Vice President and Chief Information Officer William H. Alexander Vice President and Medical Director Katherine Anderson Vice President, Chief Product Actuary, Security Life Reinsurance Carole A. Baumbusch Vice President, Reinsurance Operations Evelyn A. Bentz Vice President, M Financial Sales Thomas Kirby Brown Vice President, Operations, ING Institutional Markets Daniel S. Clements Vice President and Chief Underwriter Linda Elliott Vice President, Information Technology Larry D. Erb Vice President, Information Technology Martha K. Evans Vice President, Variable Operations Deborah B. Holden Vice President, Human Resources Brian Holland Vice President, Sales and International Risk Management Kenneth Kiefer** Vice President, Operations, Structured Settlements Richard D. King Vice President and Medical Director Greg McGreevey Vice President, Marketing, ING Institutional Markets C. Lynn McPherson* Vice President, Medical Risk Solutions Sue A. Miskie Vice President, Corporate Services Donna T. Mosely Vice President, Valuation ________________________________________________________________________________ FirstLine II 56 Name and Principal Business and Address Position and Offices with Security Life of Denver - -------------------- ------------------------------------------------- David S. Pendergrass* Vice President and Treasury Officer Steve Pryde Vice President, Administration Christiaan M. Rutten Vice President, Structured Reinsurance Casey J. Scott Vice President, Sales Operations Alan C. Singer Vice President, Customer Relations and Regulatory Compliance Mark A. Smith Vice President, Insurance Services Jerome M. Strop Vice President, Strategic Marketing Gary W. Waggoner Vice President, General Counsel and Corporate Secretary William Wojciechowski Vice President, Business Consulting and Financial Markets Stephen J. Yarina Vice President, Treasurer and Chief Financial Officer Relda A. Fleshman Deputy General Counsel Eric Banta Assistant Secretary Roger O. Beebe Actuarial Officer John B. Dickinson Actuarial Officer Shirley A. Knarr Actuarial Officer Glen E. Stark Actuarial Officer William J. Wagner Actuarial Officer Marsha K. Crest Agency Administration Officer Amy L. Winsor Tax and Finance Officer ________________________________________________________________________________ FirstLine II 57 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, of our operations and finances to the Insurance Departments of the various jurisdictions in which we do business to determine solvency and compliance with state insurance laws and regulations. We are also subject to various Federal securities laws and regulations. Legal Matters The legal matters in connection with the Policy described in this prospectus have been passed on by the General Counsel of Security Life and Mayer, Brown & Platt. 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, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, and the financial statements of the Separate Account L1 at December 31, 1997, and for each of the three years in the period ended December 31, 1997, appearing in this prospectus and registration statement have been audited by Ernst & Young LLP, independent auditors, as set forth in their reports thereon appearing elsewhere herein, and are included in reliance upon such reports given upon the authority of such firm as experts in accounting and auditing. Actuarial matters in this prospectus have been examined by Lawrence D. Taylor, F.S.A., M.A.A.A., who is the Senior Vice President and Chief Actuary of Security Life. His opinion on actuarial matters is filed as an exhibit to the Registration Statement we filed with the SEC. Registration Statement We have filed a Registration Statement relating to the Variable Account and the variable life insurance policy described in this prospectus with the SEC. The Registration Statement, which is required by the Securities Act of 1933, includes additional information that is not required in this prospectus under the rules and regulations of the SEC. The additional information may be obtained from the SEC's principal office in Washington, DC. You will have to pay a fee for the material. Year 2000 Preparedness Security Life is aware of potential computer system challenges associated with the year 2000. We plan to upgrade our current variable life administration system by early 1999. It is expected that this upgrade will make our system year 2000 compatible. We do not anticipate delays or problems in processing or administering variable life products in the year 2000 or beyond. ________________________________________________________________________________ FirstLine II 58 FINANCIAL STATEMENTS The consolidated financial statements of Security Life of Denver Insurance Company and Subsidiaries ("Security Life and Subsidiaries") at December 31, 1997 and 1996, and for each of the three years in the period ended December 31, 1997, are prepared in accordance with generally accepted accounting principles and start on page 61. The financial statements included for the Security Life Separate Account L1 at December 31, 1997 and for each of the three years in the period ended December 31, 1997, are prepared in accordance with generally accepted accounting principles and represent those Divisions that had commenced operations by that date. The consolidated financial statements of Security Life and Subsidiaries, as well as the financial statements included for the Security Life Separate Account L1, referred to above have been audited by Ernst & Young LLP. The consolidated financial statements of Security Life and Subsidiaries should be distinguished from the financial statements of the Security Life Separate Account L1 and should be considered only as bearing upon the ability of Security Life and Subsidiaries to meet its obligations under the Policies. They should not be considered as bearing upon the investment experience of the Divisions of Security Life Separate Account L1. The most current financial statements are those as of the end of the most recent fiscal year. The Company does not prepare financial statements more often than annually and believes that any incremental benefit to prospective policy holders that may result from preparing and delivering more current financial statements, though unaudited, does not justify the additional cost that would be incurred. In addition, the Company represents that there have been no significant adverse changes in the financial condition or operations of the Company between the end of the most current fiscal year and the date of this prospectus. ________________________________________________________________________________ FirstLine II 59 Consolidated Financial Statements SECURITY LIFE OF DENVER INSURANCE COMPANY AND SUBSIDIARIES Years ended December 31, 1997, 1996 and 1995 with Report of Independent Auditors Security Life Separate Account L1 Financial Statements Year ended December 31, 1997
CONTENTS Report of Independent Auditors......................................... 102 Financial Statements Statement of Net Assets................................................ 103 Statements of Operations............................................... 109 Statements of Changes in Net Assets.................................... 127 Notes to Financial Statements.......................................... 145
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, 1997 and 1996, 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, 1997. 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, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles. Denver, Colorado April 10, 1998 /s/ ERNST & YOUNG LLP Security Life of Denver Insurance Company and Subsidiaries Consolidated Balance Sheets (Dollars in Thousands)
DECEMBER 31 1997 1996 ------------------------------------ Assets Investments (Note 2): Fixed maturities, at fair value (amortized cost: 1997--$3,007,012; 1996--$2,765,488) $3,152,355 $2,875,084 Equity securities, at fair value (cost: 1997--$6,754; 1996--$4,899) 8,019 5,345 Mortgage loans on real estate 576,620 452,795 Investment real estate, at cost, less accumulated depreciation (1997--$667; 1996--$628) 1,767 1,769 Policy loans 875,405 795,311 Other long-term investments 14,307 11,063 ---------------------------------- Total investments 4,628,473 4,141,367 Cash and cash equivalents 77,765 20,840 Accrued investment income 49,726 45,426 Reinsurance recoverable: Paid benefits 11,170 10,188 Unpaid benefits 14,988 19,703 Prepaid reinsurance premiums (Note 8) 2,721,515 1,951,012 Deferred policy acquisition costs (DPAC) 682,905 673,560 Property and equipment, at cost, less accumulated depreciation (1997--$22,925; 1996--$21,407) 37,943 38,848 Federal income tax recoverable (Note 9) 5,722 - Indebtedness of related parties 2,443 5,383 Other assets 87,298 109,751 Separate account assets (Note 6) 263,035 124,986 ------------------------------------ Total assets $8,582,983 $7,141,064 ====================================
DECEMBER 31 1997 1996 ------------------------------------ LIABILITIES AND STOCKHOLDER'S EQUITY Liabilities: Future policy benefits: Life and annuity reserves $4,305,229 $3,834,140 Guaranteed investment contracts 2,634,654 1,911,201 Policyholders' funds 82,291 81,273 Advance premiums 365 236 Accrued dividends and dividends on deposit 21,129 20,338 Unpaid claims 103,525 88,074 Funds held under reinsurance treaties - 18,967 ------------------------------------ Total future policy benefits 7,147,193 5,954,229 Accounts payable and accrued expenses 99,335 85,858 Indebtedness to related parties 7,704 5,427 Long-term debt to related parties (Note 10) 75,000 75,000 Accrued interest on long-term debt to related parties (Note 10) 5,128 3,700 Other liabilities 61,424 53,311 Federal income taxes payable (Note 9) - 11,883 Deferred federal income taxes (Note 9) 53,829 48,541 Separate account liabilities (Note 6) 263,035 124,986 ------------------------------------ Total liabilities 7,712,648 6,362,935 Commitments and contingent liabilities (Notes 8 and 13) Stockholder's equity (Note 11): Common stock, $20,000 par value: Authorized 149 shares Issued and outstanding 144 shares 2,880 2,880 Additional paid-in capital 315,722 302,722 Net unrealized gains on investments 50,938 58,718 Retained earnings 500,795 413,809 ------------------------------------ Total stockholder's equity 870,335 778,129 ------------------------------------ Total liabilities and stockholder's equity $8,582,983 $7,141,064 ====================================
See accompanying notes. Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Income (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 -------------------------------------------------------- Revenues: Traditional life insurance premiums $ 122,429 $ 118,200 $ 124,619 Universal life and investment product charges 217,108 202,081 202,908 Reinsurance premiums assumed 446,434 339,335 326,315 -------------------------------------------------------- 785,971 659,616 653,842 Reinsurance premiums ceded (124,815) (117,880) (117,061) -------------------------------------------------------- 661,156 541,736 536,781 Net investment income 340,898 312,121 256,065 Net realized gains on investments 28,645 4,770 6,564 Miscellaneous income 6,743 526 1,941 -------------------------------------------------------- 1,037,442 859,153 801,351 Benefits and expenses: Benefits: Traditional life insurance: Death benefits 299,305 235,828 217,136 Other benefits 79,849 71,939 88,326 Universal life and investment contracts: Interest credited to account balances 217,614 186,908 164,536 Death benefits incurred in excess of account balances 73,260 54,004 63,672 Increase in policy reserves and other funds 72,685 121,946 23,895 Reinsurance recoveries (98,376) (80,276) (74,305) Product conversions 7,014 16,379 74,291 -------------------------------------------------------- 651,351 606,728 557,551 Expenses: Commissions 46,516 25,846 51,189 Insurance operating expenses 89,075 69,580 52,414 Amortization of deferred policy acquisition costs 116,495 94,685 71,450 -------------------------------------------------------- 903,437 796,839 732,604 -------------------------------------------------------- Income before federal income taxes 134,005 62,314 68,747 Federal income taxes (Note 9) 47,019 21,876 24,296 -------------------------------------------------------- Net income $ 86,986 $ 40,438 $ 44,451 ========================================================
See accompanying notes. Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Stockholder's Equity (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 -------------------------------------------------- Common stock: Balance at beginning and end of year $ 2,880 $ 2,880 $ 2,880 ================================================== Additional paid-in capital: Balance at beginning of year $302,722 $297,422 $150,792 Capital contributions 13,000 5,300 146,630 -------------------------------------------------- Balance at end of year $315,722 $302,722 $297,422 ================================================== Net unrealized gains on investments: Balance at beginning of year $ 58,718 $ 72,973 $ 6,862 Net change in unrealized gains (losses), net of tax 23,766 (27,716) 118,654 Effect on DPAC of unrealized gains and losses on fixed maturities, net of tax (31,546) 13,461 (52,543) -------------------------------------------------- Balance at end of year $ 50,938 $ 58,718 $ 72,973 ================================================== Retained earnings: Balance at beginning of year $413,809 $373,371 $329,640 Net income 86,986 40,438 44,451 Dividends paid to stockholder (720) -------------------------------------------------- Balance at end of year $500,795 $413,809 $373,371 ================================================== Total stockholder's equity $870,335 $778,129 $746,646 ==================================================
See accompanying notes. Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 ------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 86,986 $ 40,438 $ 44,451 Adjustments to reconcile net income to net cash and cash equivalents provided by operating activities: Increase in future policy benefits 972,284 585,581 471,331 Net decrease (increase) in federal income (12,317) 78,668 33,232 taxes Increase (decrease) in accounts payable and accrued expenses 21,033 (1,361) 31,334 Increase in accrued interest on long-term debt 1,428 3,676 24 Increase in accrued investment income (4,300) (7,294) (5,739) (Increase) decrease in reinsurance recoverable 3,733 (5,214) (24) Increase in prepaid reinsurance premiums (770,503) (336,053) (253,968) Net realized investment gains (28,645) (4,770) (6,564) Depreciation and amortization expense 3,630 3,857 4,036 Policy acquisition costs deferred (174,374) (152,299) (127,069) Amortization of deferred policy acquisition costs 116,495 94,685 71,450 Increase in accrual for postretirement 557 484 623 benefits Other, net 43,538 (15,524) (20,553) ------------------------------------------------------------ Net cash and cash equivalents provided by operating activities 259,545 284,874 242,564 INVESTING ACTIVITIES Securities available-for-sale: Sales: Fixed maturities 2,279,598 334,482 357,059 Equity securities 648 4,198 4,730 Maturities--fixed maturities 410,632 727,937 280,581 Purchases: Fixed maturities (2,919,145) (1,522,369) (935,210) Equity securities (2,561) (428) (1,300) Securities held-to-maturity: Maturities--fixed maturities - - 14,156 Sale, maturity or repayment of investments: Mortgage loans on real estate 38,756 18,102 16,061 Investment real estate - 1,354 215 Other long-term investments 2,002 - 1,064
Security Life of Denver Insurance Company and Subsidiaries Consolidated Statements of Cash Flows (continued) (Dollars in Thousands)
YEAR ENDED DECEMBER 31 1997 1996 1995 --------------------------------------------------------- INVESTING ACTIVITIES (continued) Purchase or issuance of investments: Mortgage loans on real estate $(163,528) $(186,228) $(136,218) Investment real estate (35) - 14 Policy loans, net (80,094) (41,071) (63,746) Other long-term investments (5,248) 809 (2,169) Additions to property and equipment (2,687) (4,482) (1,812) Disposals of property and equipment 145 2,389 79 --------------------------------------------------------- Net cash and cash equivalents used by investing activities (441,517) (665,307) (466,496) --------------------------------------------------------- FINANCING ACTIVITIES Increase (decrease) in indebtedness to related 5,217 42,206 (17,011) parties Cash contributions from parent 13,000 5,300 - Receipts from interest sensitive products credited to policyholder account balances 555,223 434,726 387,904 Return of policyholder account balances on interest sensitive policies (334,543) (123,949) (128,948) Dividends paid to stockholder (720) --------------------------------------------------------- Net cash and cash equivalents provided by financing activities 238,897 358,283 241,225 --------------------------------------------------------- Net increase (decrease) in cash and cash equivalents 56,925 (22,150) 17,293 Cash and cash equivalents at beginning of year 20,840 42,990 25,697 --------------------------------------------------------- Cash and cash equivalents at end of year $ 77,765 $ 20,840 $ 42,990 =========================================================
Noncash transaction: 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 was presented as indebtedness of related parties. The cash was received by the Company in January 1996. See accompanying notes. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements December 31, 1997 1. SIGNIFICANT ACCOUNTING POLICIES PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the accounts and operations, after intercompany eliminations, of Security Life of Denver Insurance Company (Security Life) and its wholly-owned subsidiaries: Midwestern United Life Insurance Company (Midwestern United); First ING Life Insurance Company of New York (First ING); First Secured Mortgage Deposit Corporation; and ING America Equities, Inc., 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, universal life, variable annuity and variable life. Operations are conducted almost entirely on the general agency basis and the Company is presently licensed in all states (approved for reinsurance only in New York), the District of Columbia and the Virgin Islands. In the reinsurance market, the Company offers financial security to clients through a mix of total risk management and traditional life insurance services. The significant accounting policies followed by the Company that materially affect the financial statements are summarized below: BASIS OF PRESENTATION The accompanying consolidated financial statements have been prepared in accordance with generally accepted accounting principles (GAAP) which, as to the insurance companies included in the consolidation, differ from statutory accounting practices prescribed or permitted by state insurance regulatory authorities. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) ACCOUNTING CHANGES During June 1996, the Financial Accounting Standards Board (FASB) issued Statement No. 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities. This Statement was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996. Also in 1996, the FASB issued Statement No. 127, which delayed certain provisions of FAS 125 dealing with transactions such as securities lending, repurchase and dollar repurchase agreements until 1998. The portion of FAS 125 that became effective in 1997 requires the entity to recognize financial and servicing assets it controls and the liabilities it has incurred and to derecognize financial assets when control has been surrendered in accordance with the criteria provided in the Statement. The application of the new rules did not have a material impact on the financial statements of the Company. The portion of FAS 125 deferred by FAS 127 is not expected to impact the Company. Beginning in 1995, the Company adopted FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan, and Statement No. 118, which amended Statement 114. Under the amended statement, the 1997 and 1996 allowances for credit losses related to loans that are identified for evaluation in accordance with Statement 114 are 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. Effective January 1, 1996, the Company adopted FASB Statement No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of, which requires impairment losses to be recorded on long-lived assets used in operations when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets' carrying amount. Statement 121 also addresses the accounting for long-lived assets that are expected to be disposed of. Adoption of this standard resulted in an insignificant impact to net income and stockholder's equity. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) INVESTMENTS Investments are presented on the following bases: The carrying value of fixed maturities depends on the classification of the security: securities held-to-maturity, securities available-for-sale, and trading securities. Management determines the appropriate classification of debt securities at the time of purchase and reevaluates such designation as of each balance sheet date. The Company does not hold any securities classified as held-to-maturity or trading securities. Debt securities and marketable equity securities are classified as available- for-sale. Available-for-sale securities are stated at fair value, with the unrealized gains and losses, net of tax and deferred policy acquisition cost adjustments, reported in a separate component of stockholder's equity. The amortized cost of debt securities classified as held-to-maturity or available-for-sale is adjusted for amortization of premiums and accretion of discounts to maturity, or in the case of mortgage-backed securities, over the estimated life of the security. Such amortization is included in interest income from investments. Interest and dividends are included in net investment income as earned. Mortgage loans are carried at the unpaid balances less an allowance for credit losses. Investment real estate is carried at cost, less accumulated depreciation. Policy loans are carried at unpaid balances. Derivatives are accounted for on the same basis as the asset hedged. Realized gains and losses, and declines in value judged to be other-than- temporary are included in net realized gains on investments. The cost of securities sold is based on the specific identification method. RECOGNITION OF PREMIUM REVENUES Premiums for traditional life insurance products, which include those products with fixed and guaranteed premiums and benefits and consist principally of whole life insurance policies, are recognized as revenue when due. Revenues for universal life insurance policies and for investment products consist of policy charges for the cost of insurance, Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) policy administration charges, and surrender charges assessed against policyholder account balances during the year. DEFERRED POLICY ACQUISITION COSTS Commissions, reinsurance allowances, and other costs of acquiring traditional life insurance including reinsurance assumed, universal life insurance (including interest sensitive products) and investment products that vary with and are primarily related to the production of new and renewal business have been deferred. Traditional life insurance acquisition costs are being amortized using assumptions consistent with those used in computing policy benefit reserves. The period of amortization is normally over the premium-paying period. In the case of policies with no first year premium, the period of amortization includes the first year, in addition to the premium-paying period. For universal life insurance and investment products, acquisition costs are being amortized generally in proportion to the present value (using the assumed crediting rate) of expected gross margins from surrender charges, investments, mortality, and expenses. This amortization is adjusted retrospectively when estimates of current or future gross margins to be realized from a group of products are revised. 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 for traditional life insurance products (other than reinsurance assumed) are computed using a net level premium method including assumptions as to investment yields, mortality, withdrawals and other assumptions based on 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 reinsurance assumed are computed using pricing assumptions with provisions for adverse deviation. Benefits for level-term reinsurance assumed are computed to recognize profits in proportion with premiums. Benefit reserves for all other reinsurance assumed are computed to recognize profits in proportion to the coverage provided. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) 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 7.81% during 1997, 4.60% to 7.45% during 1996, and 4.60% to 8.10% during 1995. 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. 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. PROPERTY AND EQUIPMENT Property and equipment are carried at cost less accumulated depreciation. Impairment losses are recorded when indicators of impairment are present and the estimated undiscounted cash flows are less than the assets' carrying value. Depreciation for major classes of assets is calculated on a straight-line basis. PARTICIPATING INSURANCE The Company accrues a liability for earnings on participating policies that cannot inure to the benefit of the Company's stockholder. The liability is determined based on earnings on participating policies in excess of 10% of profits on participating business before payment of policyholder dividends. The liability for these undistributed earnings was $6,074,000 and $6,211,000 at December 31, 1997 and 1996, respectively. Participating business approximates .3% of the Company's ordinary life insurance in force and 1.4% of premium income. Earnings for participating insurance are based on the actual earnings of Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) the participation block of policies. Expenses and taxes are allocated based on the amount of participating insurance in force. Investment income is allocated based on the yield of the participating investment portfolio. The amount of dividends to be paid is determined annually by the Board of Directors. Amounts allocable to participating policyholders are based on published dividend projections or expected dividend scales. Dividends of $3,377,000, $3,307,000, and $2,964,000 were incurred in 1997, 1996, and 1995, 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 and cash equivalents includes cash on hand, demand deposits and short-term fixed maturity instruments (with a maturity of less than one year at date of purchase). Included as a component of operating activities is interest paid of $10,110,000, $1,016,000, and $4,861,000 for 1997, 1996, and 1995, respectively. GUARANTY FUND ASSESSMENTS Insurance companies are assessed the costs of funding the insolvencies of other insurance companies by the various state guaranty associations generally based on the amount of premium companies collect in that state. The Company accrues the cost of future guaranty fund assessments based on estimates of insurance company insolvencies provided by the National Organization of Life and Health Insurance Guaranty Associations (NOLHGA) and the amount of premiums written in each state. The Company reduces the accrual by credits allowed in some states to reduce future premium taxes by a portion of assessments in that state. PENDING ACCOUNTING STANDARDS During 1998, the FASB issued Statement No. 132, Employers' Disclosures about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. Neither the measurement nor recognition of pension and other postretirement benefits will change as a result of Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Statement No. 132. The Company will apply the new disclosure requirements beginning in 1998. Based on current guidance, the Company believes the application of the new standard will not have a financial impact on the financial statements. During 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income, which requires an entity to divide comprehensive income into net income and other comprehensive income in the period which they are recognized. The Company will need to classify items of other comprehensive income by their nature in the financial statements and display the accumulated balance of other comprehensive income separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. This statement will only affect the presentation of the financial statements, with no change in the valuation of total stockholder's equity. The implementation of this Statement is required in fiscal years beginning after December 15, 1997. The Company plans to implement these new rules in 1998 and will present prior year information in a comparative format. RECLASSIFICATIONS Certain amounts in the 1996 and 1995 financial statements have been reclassified to conform to the 1997 presentation. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS The amortized cost and fair value of investments in fixed maturities and equity securities are as follows at December 31, 1997 and 1996:
DECEMBER 31, 1997 ---------------------------------------------------------------------------- COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ---------------------------------------------------------------------------- (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 51,387 $ 1,629 $ 39 $ 52,977 States, municipalities and political subdivisions 43,185 1,023 128 44,080 Public utilities securities 151,642 5,030 1,216 155,456 Debt securities issued by foreign governments 3,272 3,272 Corporate securities 1,147,380 48,001 6,539 1,188,842 Mortgage-backed securities 1,165,376 89,539 6,661 1,248,254 Other asset-backed securities 443,473 13,285 584 456,174 Derivatives hedging fixed maturities (Note 3) 1,297 3,118 1,115 3,300 ------------------------------------------------------------------------ Total fixed maturities 3,007,012 161,625 16,282 3,152,355 Preferred stocks (nonredeemable) 3,368 67 122 3,313 Common stocks 3,386 1,446 126 4,706 ------------------------------------------------------------------------ Total equity securities 6,754 1,513 248 8,019 ------------------------------------------------------------------------ Total $3,013,766 $163,138 $16,530 $3,160,374 ========================================================================
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1996 ------------------------------------------------------------------------ COST OR GROSS GROSS AMORTIZED UNREALIZED UNREALIZED FAIR COST GAINS LOSSES VALUE ------------------------------------------------------------------------ (Dollars in Thousands) Available-for-sale: U.S. Treasury securities and obligations of U.S. government corporations and agencies $ 88,526 $ 1,035 $ 858 $ 88,703 States, municipalities and political subdivisions 71,857 984 1,058 71,783 Public utilities securities 105,110 1,130 748 105,492 Debt securities issued by foreign governments 3,272 3,272 Corporate securities 921,565 20,095 5,646 936,014 Mortgage-backed securities 1,273,251 108,367 18,924 1,362,694 Other asset-backed securities 299,809 8,186 1,286 306,709 Derivatives hedging fixed maturities (Note 3) 2,098 292 1,973 417 ------------------------------------------------------------------- Total fixed maturities 2,765,488 140,089 30,493 2,875,084 Preferred stocks (nonredeemable) 2,112 66 301 1,877 Common stocks 2,787 756 75 3,468 ------------------------------------------------------------------- Total equity securities 4,899 822 376 5,345 ------------------------------------------------------------------- Total $2,770,387 $140,911 $30,869 $2,880,429 ===================================================================
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) The amortized cost and fair value of investments in fixed maturities at December 31, 1997, by contractual maturity, are shown in the following table (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
AMORTIZED COST FAIR VALUE ---------------------------- Available for sale: Due in one year or less $ 35,748 $ 35,665 Due after one year through five years 313,045 320,825 Due after five years through ten years 486,875 503,629 Due after ten years 561,198 584,508 --------------------------- 1,396,866 1,444,627 Mortgage-backed securities 1,165,376 1,248,254 Other asset-backed securities 443,473 456,174 Derivatives 1,297 3,300 --------------------------- Total available-for-sale $3,007,012 $3,152,355 ===========================
Changes in unrealized gains (losses) on investments in available-for-sale securities for the years ended December 31, 1997, 1996 and 1995 are summarized as follows (in thousands):
DECEMBER 31, 1997 ---------------------------------------------- FIXED EQUITY TOTAL ---------------------------------------------- Gross unrealized gains $161,625 $1,513 $163,138 Gross unrealized losses 16,282 248 16,530 ---------------------------------------------- Net unrealized gains (losses) 145,343 1,265 146,608 Deferred income tax (expense) benefit (50,873) (443) (51,316) ---------------------------------------------- Net unrealized gains (losses) after taxes 94,470 822 95,292 Less: Balance at beginning of year 71,237 289 71,526 ---------------------------------------------- Change in net unrealized gains (losses) $ 23,233 $ 533 $23,766 ===============================================
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED)
DECEMBER 31, 1996 ---------------------------------------------- FIXED EQUITY TOTAL ---------------------------------------------- Gross unrealized gains $140,089 $822 $140,911 Gross unrealized losses 30,493 376 30,869 ---------------------------------------------- Net unrealized gains (losses) 109,596 446 110,042 Deferred income tax (expense) benefit (38,359) (157) (38,516) ---------------------------------------------- Net unrealized gains (losses) after taxes 71,237 289 71,526 Less: Balance at beginning of year 99,389 (147) 99,242 ---------------------------------------------- Change in net unrealized gains (losses) $(28,152) $436 $(27,716) ============================================== 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 ==============================================
As part of its overall investment management strategy, the Company has entered into agreements to purchase $9,595,943 in fixed maturity securities and $27,910,000 in mortgage loans as of December 31, 1997. These agreements were settled during 1998. The Company had no agreements to sell securities at December 31, 1997. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 2. INVESTMENTS (CONTINUED) Major categories of investment income for the years ended December 31 are summarized as follows (in thousands):
1997 1996 1995 -------------------------------------------- Fixed maturities $259,936 $240,931 $190,327 Mortgage loans on real estate 40,908 29,143 16,601 Policy loans 56,087 52,205 55,438 Other investments 3,159 2,197 4,360 ------------------------------------------- 360,090 324,476 266,726 Investment expenses (19,192) (12,355) (10,661) ------------------------------------------- Net investment income $340,898 $312,121 $256,065 ===========================================
Net realized gains on investments for the years ended December 31 are summarized as follows (in thousands):
1997 1996 1995 ------------------------------------------- Fixed maturities $27,717 $4,540 $6,538 Equity securities (57) 79 5 Real estate and other 985 151 21 ------------------------------------------- Net realized gains on investments $28,645 $4,770 $6,564 ===========================================
During 1997, 1996 and 1995, debt and marketable equity securities available-for- sale were sold with fair values at the date of sale of $2,281,886,000, $334,482,000 and $306,219,000, respectively. Gross gains of $41,017,000, $7,248,000 and $9,691,000 and gross losses of $13,357,000, $2,629,000 and $3,148,000 were realized on those sales in 1997, 1996 and 1995, respectively. At December 31, 1997 and 1996, bonds with an amortized cost of $28,434,000 and $26,140,000, respectively, were on deposit with various state insurance departments to meet regulatory requirements. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING The Company enters into interest rate and currency contracts, including swaps, caps, floors, and options, to reduce and manage risks which include the risk of a change in the value, yield, price, cash flows, exchange rates or quantity of, or a degree of exposure with respect to assets, liabilities, or future cash flows which the Company has acquired or incurred. Hedge accounting practices are supported by cash flow matching, scenario testing and duration matching. Interest rate swap agreements generally involve the exchange of fixed and floating interest payments over the life of the agreement without an exchange of the underlying principal amount. Currency swap agreements generally involve the exchange of local and foreign currency payments over the life of the agreements without an exchange of the underlying principal amount. Interest rate cap and interest rate floor agreements owned entitle the Company to receive payments to the extent reference interest rates exceed or fall below strike levels in the contracts based on the notional amounts. Premiums paid for the purchase of interest rate contracts are included in other assets and are being amortized to interest expense over the remaining terms of the contracts or in a manner consistent with the financial instruments being hedged. Amounts paid or received, if any, from such contracts are included in interest expense or income. Accrued amounts payable to or receivable from counterparties are included in other liabilities or assets. Gains and losses as a result of early terminations of interest rate contracts are amortized to investment income over the remaining term of the items being hedged to the extent the hedge is considered to be effective; otherwise, they are recognized upon termination. Interest rate contracts that are matched or otherwise designated to be associated with other financial instruments are recorded at fair value if the related financial instruments mature, are sold, or are otherwise terminated or if the interest rate contracts cease to be effective hedges. The Company manages the potential credit exposure from interest rate contracts through careful evaluation of the counterparties' credit standing, collateral agreements, and master netting agreements. The Company is exposed to credit loss in the event of nonperformance by counterparties on interest rate contracts; however, the Company does not anticipate nonperformance by any of these counterparties. The amount of such exposure is generally the unrealized gains in such contacts. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED) The table below summarizes the Company's interest rate contracts at December 31, 1997 and 1996 (in thousands):
DECEMBER 31, 1997 --------------------------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET --------------------------------------------------------------- Interest rate contracts: Swaps $ 913,630 $ (185) $ (625) $ (625) Swaps-affiliates 879,745 185 1,429 1,429 --------------------------------------------------------------- Total swaps 1,793,375 - 804 804 Caps owned 760,000 986 766 766 --------------------------------------------------------------- Total caps owned 760,000 986 766 766 --------------------------------------------------------------- Floors owned 354,000 311 1,730 1,730 --------------------------------------------------------------- Total floors owned 354,000 311 1,730 1,730 Options owned 384,300 6,192 4,312 4,312 --------------------------------------------------------------- Options owned-affiliates 384,300 (6,192) (4,312) (4,312) --------------------------------------------------------------- Total options owned 768,600 - - - --------------------------------------------------------------- Total derivatives $3,675,975 $ 1,297 $ 3,300 $ 3,300 ===============================================================
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 3. DERIVATIVE FINANCIAL INSTRUMENTS HELD FOR PURPOSES OTHER THAN TRADING (CONTINUED)
DECEMBER 31, 1996 --------------------------------------------------------------- NOTIONAL AMORTIZED FAIR BALANCE AMOUNT COST VALUE SHEET --------------------------------------------------------------- Interest rate contracts: Swaps $794,520 $ - $(1,452) $(1,452) Swaps-affiliates 774,520 - 1,272 1,272 --------------------------------------------------------------- Total caps owned 1,569,040 - (180) (180) --------------------------------------------------------------- Caps owned 400,000 2,073 592 592 --------------------------------------------------------------- Total caps owned 400,000 2,073 592 592 --------------------------------------------------------------- Floors owned 100,000 25 5 5 --------------------------------------------------------------- Total floors owned 100,000 25 5 5 --------------------------------------------------------------- Options owned 212,000 3,330 3,772 3,772 Options owned-affiliates 212,000 (3,330) (3,772) (3,772) --------------------------------------------------------------- Total options owned 424,000 - - - --------------------------------------------------------------- Total derivatives $2,493,040 $ 2,098 $ 417 $ 417 ===============================================================
4. CONCENTRATIONS OF CREDIT RISK At December 31, 1997, the Company held less-than-investment-grade bonds classified as available-for-sale with a carrying value and market value of $186,614,000. These holdings amounted to 6% of the Company's investments in fixed maturity securities and 2% 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, 1997, the Company's commercial mortgages involved a concentration of properties located in Florida (17%), Texas (10%), and Georgia (9%). The remaining commercial mortgages relate to properties located in 29 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 $10,911,000. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS PENSION PLAN The Company has a qualified noncontributory defined benefit retirement plan covering substantially all employees. In addition, the Company maintains a non- qualified unfunded Supplemental Employees Retirement Plan (SERP). The benefits of both plans 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 Employee 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 1997 1996 ----------------------------------------------------------------------------- QUALIFIED QUALIFIED PLAN SERP PLAN SERP ----------------------------------------------------------------------------- Actuarial present value of accumulated benefit obligation: Vested $(31,338) $(7,903) $(26,058) $(6,725) Nonvested (805) (285) (733) (132) ----------------------------------------------------------------------------- (32,143) (8,188) (26,791) (6,857) Effect of projected future compensation (5,658) (966) (5,479) (951) ----------------------------------------------------------------------------- Projected benefit obligation (37,801) (9,154) (32,270) (7,808) Less plan assets at fair value 40,150 - 33,682 - ----------------------------------------------------------------------------- Plan assets in excess of projected benefit obligation 2,349 (9,154) 1,412 (7,808) Unrecognized net asset (1,032) - (1,316) - Unrecognized prior service benefit cost (84) 206 (97) 236 Unrecognized net loss 89 4,813 1,930 4,622 ----------------------------------------------------------------------------- Net pension asset (liability) $ 1,322 $(4,135) $ 1,929 $(2,950) =============================================================================
As of December 31, 1997 and 1996, the Company recognized an additional liability on the SERP of $3,848,000 and $3,671,000, respectively, as this plan is unfunded and the actuarial present value of accumulated benefit obligation exceeds the net pension liability. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) The net periodic pension cost for the defined benefit plans includes the following components (in thousands):
1997 1996 1995 ----------------------------------------------------------------------------------------- QUALIFIED QUALIFIED QUALIFIED PLAN SERP PLAN SERP PLAN SERP ----------------------------------------------------------------------------------------- Service cost $ 1,420 $ 524 $ 1,320 $ 388 $ 1,147 $ 285 Interest cost 2,613 639 2,262 463 1,856 517 Return on plan assets (7,279) - (4,075) - (3,497) - Net amortization and deferral 3,853 339 883 258 553 239 ----------------------------------------------------------------------------------------- Net periodic pension expense $ 607 $1,502 $ 390 $1,109 $ 59 $1,041 =========================================================================================
Assumptions used in accounting for the defined benefit plans as of December 31, 1997, 1996, and 1995 were as follows:
1997 1996 1995 --------------------------------------------------------- Weighted-average discount rate 7.25% 7.50% 7.25% Rate of increase in compensation level 4.25% 4.50% 4.25% Expected long-term rate of return on assets 9.50% 9.50% 9.50%
Plan assets of the defined benefit plans at December 31, 1997 are invested primarily in U.S. government securities, corporate bonds, mutual funds, mortgage loans, money market funds and common stock. 401(K) PLAN The Security Life of Denver Insurance Company Savings Incentive Plan (the Savings Plan) is a defined contribution plan which is available to substantially all home office employees, who work 1,000 hours or more in a plan year, to provide a savings program for additional retirement benefits. Participants may make contributions to the plan through salary reductions up to a maximum of $9,500 in 1997 and 1996 and $9,240 in 1995. Such contributions are not currently taxable to the participants. The Company matches 100% of the first 3% of participants' contributions, plus 50% of contributions which exceed 3% of participants' compensation, subject to a maximum matching percentage of 4 1/2% of the individual's salary. Company matching contributions were $1,211,000 for 1997, $1,143,000 for 1996, and $1,071,000 for 1995. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) Plan assets of the Savings Plan at December 31, 1997 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 $26.6 million and $25.5 million at December 31, 1997 and 1996, 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 1997 1996 ------------------------------------------------------------------------------------- LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL ------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation: Retirees $(1,032) $(1,228) $ (2,260) $(1,315) $(1,226) $ (2,541) Fully eligible active plan participants (665) (526) (1,191) (409) (392) (801) Other active plan participants (2,881) (1,258) (4,139) (2,038) (1,220) (3,258) ------------------------------------------------------------------------------------ (4,578) (3,012) (7,590) (3,762) (2,838) (6,600) Plan assets at fair value - - - - - - ------------------------------------------------------------------------------------ Accumulated postretirement benefit obligation in excess of plan (4,578) (3,012) (7,590) (3,762) (2,838) (6,600) assets Unrecognized prior service cost 248 22 270 355 32 387 Unrecognized net gains (losses) (5,179) 1,130 (4,049) (5,870) 1,271 (4,599) ------------------------------------------------------------------------------------ Accrued postretirement benefit cost $(9,509) $(1,860) $(11,369) $(9,277) $(1,535) $(10,812) =====================================================================================
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 5. EMPLOYEE BENEFIT PLANS (CONTINUED) Net periodic postretirement benefit cost for 1997, 1996 and 1995 includes the following components (in thousands):
1997 1996 1995 ------------------------------------------------------------------------------------------------ LIFE LIFE LIFE MEDICAL INSURANCE MEDICAL INSURANCE MEDICAL INSURANCE PLAN PLAN TOTAL PLAN PLAN TOTAL PLAN PLAN TOTAL ------------------------------------------------------------------------------------------------ Service cost $ 287 $126 $ 413 $ 236 $151 $ 387 $ 359 $175 $ 534 Interest cost 313 205 518 268 200 468 291 112 403 Net amortization and deferral (238) 62 (176) (275) 89 (186) (209) 65 (144) ------------------------------------------------------------------------------------------------ Net periodic postretirement benefit cost $ 362 $393 $ 755 $ 229 $440 $ 669 $ 441 $352 $ 793 ================================================================================================
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 10.25% graded to 5% over 10.5 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, 1997 by $784,000 and the aggregate of the service and interest cost components of net periodic postretirement benefit cost for 1997 by $112,000. The weighted-average discount rate used in determining the accumulated postretirement benefit obligation was 7.25% at December 31, 1997 and 7.50% at December 31, 1996. 6. 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. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 7. LEASES The Company terminated a significant operating lease agreement relating to electronic data processing equipment due to outsourcing of computer operations. The Company incurred $4,819,000 in lease expense in 1997 related to that agreement prior to termination. The Company does not have any other significant lease obligations. Total rental expense for all equipment leases was approximately $4,993,000, $6,151,000 and $5,620,000 for the years ended December 31, 1997, 1996 and 1995, respectively. 8. REINSURANCE The Company is involved in both ceded and assumed reinsurance with other companies for the purpose of diversifying risk and limiting exposure on larger risks. As of December 31, 1997, the Company's retention limit for acceptance of risk on life insurance policies had been set at various levels up to $1,500,000. Reinsurance premiums, commissions, and expense reimbursements related to reinsured business are accounted for on bases consistent with those used in accounting for the original policies issued and the terms of the reinsurance contracts. Reserves are based on the terms of the reinsurance contracts, and are consistent with the risks assumed. To the extent that the assuming companies become unable to meet their obligations under these treaties, the Company remains contingently liable to its policyholders for the portion 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 reinsurers and monitors concentrations of credit risk arising from similar geographic regions, activities, or economic characteristics of the reinsurers. The Company assumes and cedes, on a coinsurance basis, guaranteed investment contracts (GICs) to and from affiliates under common ownership. As of December 31, 1997, $2.2 billion of an affiliate's invested assets were held in trust pursuant to these agreements. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 8. REINSURANCE (CONTINUED) These transactions are summarized as follows (in thousands):
1997 1996 ----------------------------------------------------------------------- PREMIUMS RESERVES PREMIUMS RESERVES ----------------------------------------------------------------------- Direct (nonaffiliated) $ 1,673,471 $ 2,527,957 $ 767,312 $ 1,785,689 Assumed from Life Insurance Company of Georgia 35,000 106,698 50,000 125,512 ----------------------------------------------------------------------- 1,708,471 2,634,655 817,312 1,911,201 Ceded to Columbine Life Insurance Company (1,479,371) (2,231,118) (484,512) (1,425,545) Ceded to Life Insurance Company of Georgia (116,100) (403,537) (282,800) (435,586) ----------------------------------------------------------------------- Net $ 113,000 $ - $ 50,000 $ 50,070 =======================================================================
Ceded GIC reserves totaling $2,635 and $1,861 million as of December 31, 1997 and 1996, respectively, are classified as part of prepaid reinsurance premiums. GIC reserves are reflected at their gross value of $2,635 and $1,911 million as of December 31, 1997 and 1996, respectively. During 1997 and 1996, the Company had 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. As of December 31, 1997, all surplus relief reinsurance contracts had been recaptured. 9. INCOME TAXES The Company files a consolidated federal income tax return with its parent and other U.S. affiliates and subsidiaries, with the exception of First ING. The affiliated companies that join in the filing of the consolidated federal income tax return have an agreement for the allocation of taxes between members that join in the consolidated return. The agreement specifies that the separate return payable or the separate return receivable of each member will be the federal income tax payable or receivable that the member would have had for the period had it filed a separate return. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of the Company's deferred tax assets and liabilities are as follows (in thousands):
DECEMBER 31 1997 1996 ----------------------------------- Deferred tax liabilities: Deferred policy acquisition costs $(239,678) $(236,445) Unrealized gains/losses (51,312) (38,516) ----------------------------------- Total deferred tax liabilities (290,990) (274,961) Deferred tax assets: Benefit reserves and surplus relief 111,610 123,410 Tax-basis deferred policy acquisition costs 71,241 60,727 Investment income 13,459 11,037 Unearned investment income 9,208 8,705 Nonqualified deferred compensation 14,129 10,649 Postretirement employee benefits 3,979 3,784 Separate accounts 8,571 4,138 Other, net 4,964 3,970 ----------------------------------- Total deferred tax assets 237,161 226,420 ----------------------------------- Net deferred tax liabilities $ (53,829) $ (48,541) ===================================
The components of federal income tax expense consist of the following (in thousands):
DECEMBER 31 1997 1996 1995 --------------------------------------------------- Current $37,542 $10,340 $(48,136) Deferred 9,477 11,536 72,870 Current year change in valuation allowance - - (438) --------------------------------------------------- Federal income tax expense $47,019 $21,876 $ 24,296 ===================================================
The Company's effective income tax rate did not vary significantly from the statutory federal income tax rate. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 9. INCOME TAXES (CONTINUED) 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 policy acquisition costs more than likely would not be fully realized. In 1995, a change in judgment about the realization of the deferred tax asset occurred and the valuation allowance was removed. The Company had net income tax payments (receipts) of $55,468,000 during 1997, $(61,467,000) during 1996, and $25,875,000 during 1995 for current income tax payments and settlements of prior year returns. The Policyholder's Surplus Account is an accumulation of certain special deductions for income tax purposes and a portion of the "gains from operations" which were not subject to current taxation under the Life Insurance Tax Act of 1959. At December 31, 1984, the balance in this account for tax return purposes was approximately $70,800,000. The Tax Reform Act of 1984 provides that no further accumulations will be made in this account. If amounts accumulated in the Policyholder's Surplus Account exceed certain limits, or if distributions to the stockholder exceed amounts in the Stockholder's Surplus Account, to the extent of such excess amount or excess distributions, as determined for income tax purposes, amounts in the Policyholder's Surplus Account would become subject to income tax at rates in effect at that time. Should this occur, the maximum tax which would be paid at the current tax rate is $24,780,000. The Company does not anticipate any such action or foresee any events which would result in such tax; accordingly, a deferred tax liability has not been established. 10. LONG-TERM DEBT Long-term indebtedness to related parties for $75,000,000 represents the cumulative cash draws on a $100,000,000 commitment from ING America Insurance Holdings, Inc. through December 31, 1997. 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. 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. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 10. LONG-TERM DEBT (CONTINUED) 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. As of December 31, 1997, the Company accrued interest of $5,100,000. Upon receiving approval from the Commissioner of Insurance of the State of Colorado, the Company made a $3,668,000 payment for accrued interest during 1997. Future minimum payments, assuming a current effective interest rate of 6.40%, are as follows (in thousands):
TOTAL YEAR PAYMENTS ----------------------------------------------------- 1999 $ 20,456 2000 20,456 2001 20,456 Subsequent years 40,911 ------------ Total 102,279 Less imputed interest (27,279) ------------ Present value of payments $ 75,000 ============
11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES Security Life and its insurance subsidiaries prepare their statutory-basis financial statements in accordance with accounting practices prescribed or permitted by their state of domicile. "Prescribed" statutory accounting practices include state laws, regulations and general administrative rules, as well as a variety of publications of the National Association of Insurance Commissioners (NAIC). "Permitted" statutory accounting practices encompass all accounting practices that are not prescribed; such practices may differ from state to state, from company to company within the state, and may change in the future. The NAIC is in the process of codifying statutory accounting practices ("Codification"). Codification will likely change, to some extent, prescribed statutory accounting practices and may result in changes to the accounting practices that Security Life uses to prepare its statutory-basis financial statements. Codification, which was approved by the NAIC in March 1998, will require adoption by the various states before it becomes the prescribed Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 11. STATUTORY ACCOUNTING INFORMATION AND PRACTICES (CONTINUED) statutory basis of accounting for insurance companies domiciled within those states. Accordingly, before Codification becomes effective for Security Life, the State of Colorado must adopt Codification as the prescribed basis of accounting on which domestic insurers must report their statutory-basis results to the Insurance Department. At this time it is unclear whether the State of Colorado will adopt Codification. Prescribed statutory reserve methodology does not fully encompass universal life-type products. The NAIC, however, has promulgated a Model Regulation regarding Universal Life Reserves. The Colorado Division of Insurance has not adopted the regulation, but requires that reserves be held which are at least as great as those required by Colorado Statutes. The NAIC UL Model Regulation is used by the Company to provide reserves consistent with the principles of this article. Because the reserves satisfy the requirements prescribed by the State of Colorado for the valuation of universal life insurance, the Company is permitted to compute reserves in accordance with this model regulation. The NAIC prescribes Risk-Based Capital (RBC) requirements for life/health insurance companies. At December 31, 1997, the Company exceeded all minimum RBC requirements. Combined capital and surplus, determined in accordance with statutory accounting practices (SAP), was $403,239,000 and $366,451,000 at December 31, 1997 and 1996, respectively. Combined net income, determined in accordance with SAP, was $22,261,000, $9,141,000, and $11,771,000 for the years ended December 31, 1997, 1996, and 1995, respectively. Security Life is required to maintain a minimum total statutory capital and surplus in the state of domicile of $1,500,000. Midwestern United is required to maintain minimum statutory capital of $200,000 and surplus of $250,000 in the state of domicile. First ING is required to maintain minimum statutory capital of $1,000,000 and paid-in surplus of at least 50% of paid-in capital in the state of domicile. Each company exceeded its respective minimum statutory capital and surplus requirements at December 31, 1997. 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. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in immediate settlement of the instruments. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. Life insurance liabilities that contain mortality risk and all nonfinancial instruments are excluded from disclosure requirements. However, the fair values of liabilities under all insurance contracts are taken into consideration in the Company's overall management of interest rate risk, such that the Company's exposure to changing interest rates is minimized through the matching of investment maturities with amounts due under insurance contracts. The carrying amounts and fair values of the Company's financial instruments at December 31, 1997 and 1996 are summarized below (in thousands):
DECEMBER 31, 1997 DECEMBER 31, 1996 ---------------------------------- ------------------------------- CARRYING CARRYING AMOUNT FAIR VALUE AMOUNT FAIR VALUE ---------------------------------- ------------------------------- ASSETS Fixed maturities (Note 2) $3,152,355 $3,152,355 $2,875,084 $2,875,084 Equity securities (Note 2) 8,019 8,019 5,345 5,345 Commercial mortgages 568,591 621,861 445,073 461,777 Residential mortgages 8,029 8,158 7,722 7,589 Policy loans 875,405 875,405 795,311 795,311 LIABILITIES Guaranteed investment contracts, net of reinsurance $ - $ - $ 50,070 $ 50,070 Supplemental contracts without life contingencies 4,240 4,240 3,023 3,023 Other policyholder funds left on deposit 99,545 99,545 98,824 98,824 Individual and group annuities, net of reinsurance 43,313 43,077 45,576 45,228
Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying values of all other financial instruments approximate their fair values. The following methods and assumptions were used by the Company in estimating the "fair value" disclosures for financial instruments: FIXED MATURITIES AND EQUITY SECURITIES: The fair values for fixed maturities -------------------------------------- (including redeemable preferred stocks) are based on quoted market prices, where available. For fixed maturities not actively traded, fair values are estimated using values obtained from independent pricing services or, in the case of private placements and collateralized mortgage obligations and other mortgage derivative investments, are estimated by discounting expected future cash flows. The discount rates used vary as a function of factors such as yield, credit quality and maturity which fall within a range between 2% - 12% over the total portfolio. The fair values of equity securities are based on quoted market prices. MORTGAGE LOANS: Estimated market values for commercial real estate loans are -------------- generated using a discounted cash flow approach. Loans in good standing are discounted using interest rates determined by U.S. Treasury yields on December 31 and spreads implied by independent published surveys. The same is applied on new loans with similar characteristics. The amortizing features of all loans are incorporated in the valuation. Where data on option features is available, option values are determined using a binomial valuation method, and are incorporated into the mortgage valuation. Restructured loans are valued in the same manner; however, these are discounted at a greater spread to reflect increased risk. All residential loans are valued at their outstanding principal balances, which approximate their fair values. POLICY LOANS: The carrying amounts reported in the balance sheets for these ------------ financial instruments approximate their fair values. DERIVATIVE FINANCIAL INSTRUMENTS: Fair values for on-balance-sheet derivative -------------------------------- financial instruments (caps and floors) and off-balance-sheet derivative financial instruments (swaps) are based on broker/dealer valuations or on internal discounted cash flow pricing models taking into account current cash flow assumptions and the counterparties' credit standing. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 12. FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED) 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 ----------------------------- contract sales in the amounts of $1,000,000 and $55,780,000 in 1997 and 1996, 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 $493,757,000 and $637,151,000 at December 31, 1997 and 1996, 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 80% of the synthetic guaranteed investment contract book values are on a participating basis and have a credited interest rate reset mechanism which passes such interest rate risk to plan participants. LETTERS OF CREDIT ----------------- The Company is the beneficiary of letters of credit totaling $175,367,000 which have a market value to the Company of $0 and two lines of credit totaling $225,484,000 which have a market value to the Company of $0 (see Note 14). 13. 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 material adverse effect on the Company's financial position or interfere with its operations. Security Life of Denver Insurance Company and Subsidiaries Notes to Consolidated Financial Statements (continued) 14. OTHER FINANCING ARRANGEMENTS The Company has a $125,484,000 line of credit issued by the Company's parent to provide short-term liquidity. The Company has an additional non-affiliated line of credit of $100,000,000, also to provide short-term liquidity, which expires July 31, 1998. The amount of funds available under this line is reduced by borrowings of certain affiliates also party to the agreement. There were no outstanding borrowings under either of these agreements at December 31, 1997 or 1996. The average balance of short-term debt was $26.5 million during 1997. The weighted average interest rate paid on this debt during 1997 was 5.71% (see Note 12). The Company is the beneficiary of letters of credit totaling $175,367,000 that were established in accordance with the terms of reinsurance agreements. The terms of the letters of credit provide for automatic renewal for the following year at December 31, unless otherwise cancelled or terminated by either party to the financing. The letters were unused during both 1997 and 1996. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. The total Year 2000 project cost is estimated at approximately $8.5 million. To date the Company has incurred approximately $1 million, primarily for assessment of the Year 2000 issue and development of the modification plan. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. Financial Statements SECURITY LIFE SEPARATE ACCOUNT L1 OF SECURITY LIFE OF DENVER INSURANCE COMPANY Year ended December 31, 1997 with Report of Independent Auditors Security Life Separate Account L1 Financial Statements Year ended December 31, 1997
CONTENTS Report of Independent Auditors......................................... 102 Financial Statements Statement of Net Assets................................................ 103 Statements of Operations............................................... 109 Statements of Changes in Net Assets.................................... 127 Notes to Financial Statements.......................................... 145
Report of Independent Auditors Policyholders Security Life Separate Account L1 of Security Life of Denver Insurance Company We have audited the accompanying statement of net assets of Security Life Separate Account L1 (comprising, respectively, the Neuberger & Berman Advisers Management Trust (comprising the Limited Maturity Bond, Growth, Government Income and Partners Divisions) ("N&B"), the Alger American Fund (comprising the American Small Capitalization, American MidCap Growth, American Growth and American Leveraged AllCap Divisions) ("Alger"), the Fidelity Variable Insurance Products Fund and Variable Insurance Products Fund II (comprising the Asset Manager, Growth, Overseas, Money Market and Index 500 Divisions) ("Fidelity"), the INVESCO Variable Investment Funds, Inc. (comprising the Total Return, Industrial Income, High Yield and Utilities Divisions) ("INVESCO") and Van Eck Worldwide Trust (comprising the Worldwide Balanced and Worldwide Hard Assets Divisions) ("Van Eck") Portfolios) as of December 31, 1997, and the related statements of operations and changes in net assets for each of the three years in the period then ended. These financial statements are the responsibility of the Separate Account's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. Our procedures included confirmation of securities owned as of December 31, 1997, 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 Separate Account L1 at December 31, 1997, and the results of its operations and changes in its net assets for each of the three years in the period then ended, in conformity with generally accepted accounting principles. Denver, Colorado April 13, 1998 /s/ ERNST & YOUNG, LLP 1 Security Life Separate Account L1 Statement of Net Assets December 31, 1997
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK --------------------------------------------------------------------------------- ASSETS Investments in mutual funds at market value; combined cost $147,677,007 (See Note C) $161,182,191 $26,710,339 $28,827,945 $89,758,414 $14,586,803 $1,298,690 --------------------------------------------------------------------------------- Total assets 161,182,191 26,710,339 28,827,945 89,758,414 14,586,803 1,298,690 --------------------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (1,303,829) (155,132) (78,097) (1,024,926) (46,534) 860 Due to (from) other divisions - (59,025) 805,434 147,171 (893,312) (268) --------------------------------------------------------------------------------- Total liabilities (1,303,829) (214,157) 727,337 (877,755) (939,846) 592 --------------------------------------------------------------------------------- Net assets $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098 ================================================================================= POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098 --------------------------------------------------------------------------------- TOTAL POLICYHOLDER RESERVES $162,486,020 $26,924,496 $28,100,608 $90,636,169 $15,526,649 $1,298,098 =================================================================================
See accompanying notes. 2 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1997
N & B ---------------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS ---------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $26,710,339 $ 6,674,552 $ 5,492,716 $ 894,319 $ 13,648,752 ---------------------------------------------------------------------- Total assets 26,710,339 6,674,552 5,492,716 894,319 13,648,752 ---------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (155,132) 3,700 (25,110) 642 (134,364) Due to (from) other divisions (59,025) (4,314) (45,846) - (8,865) ---------------------------------------------------------------------- Total liabilities (214,157) (614) (70,956) 642 (143,229) ---------------------------------------------------------------------- Net assets $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981 ====================================================================== POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981 ---------------------------------------------------------------------- TOTAL POLICYHOLDER RESERVES $26,924,496 $ 6,675,166 $ 5,563,672 $ 893,677 $ 13,791,981 ====================================================================== Number of division units outstanding (See Note G) 552,985.394 316,146.084 75,811.559 626,285.721 ======================================================= Value per divisional unit $ 12.07 $ 17.60 $ 11.79 $ 22.02 =======================================================
See accompanying notes. 3 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1997
ALGER ------------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $28,827,945 $ 11,275,478 $ 5,019,978 $ 9,621,704 $ 2,910,785 ------------------------------------------------------------------------- Total assets 28,827,945 11,275,478 5,019,978 9,621,704 2,910,785 ------------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (78,097) (58,698) (28,582) 7,334 1,849 Due to (from) other divisions 805,434 875,064 (66,978) (1,809) (843) ------------------------------------------------------------------------- Total liabilities 727,337 816,366 (95,560) 5,525 1,006 ------------------------------------------------------------------------- Net assets $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779 ========================================================================= POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779 ------------------------------------------------------------------------- TOTAL POLICYHOLDER RESERVES $28,100,608 $ 10,459,112 $ 5,115,538 $ 9,616,179 $ 2,909,779 ========================================================================= Number of division units outstanding (See Note G) 648,733.740 288,809.482 569,990.309 148,542.639 =========================================================== Value per divisional unit $ 16.12 $ 17.71 $ 16.87 $ 19.59 ===========================================================
See accompanying notes. 4 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1997
FIDELITY ------------------------------------------------------------------------------------------ TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ------------------------------------------------------------------------------------------ ASSETS Investments in mutual funds at market value $89,758,414 $ 6,058,206 $ 18,086,505 $ 12,199,260 $ 14,300,455 $ 39,113,988 ------------------------------------------------------------------------------------------ Total assets 89,758,414 6,058,206 18,086,505 12,199,260 14,300,455 39,113,988 ------------------------------------------------------------------------------------------ LIABILITIES Due to (from) Security Life of Denver (1,024,926) (6,196) 14,297 (18,336) (948,591) (66,100) Due to (from) other divisions 147,171 (72,671) (2,714) (8,183) 235,787 (5,048) ------------------------------------------------------------------------------------------ Total liabilities (877,755) (78,867) 11,583 (26,519) (712,804) (71,148) ------------------------------------------------------------------------------------------ Net assets $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136 ========================================================================================== POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136 ------------------------------------------------------------------------------------------ TOTAL POLICYHOLDER RESERVES $90,636,169 $ 6,137,073 $ 18,074,922 $ 12,225,779 $ 15,013,259 $ 39,185,136 ========================================================================================== Number of division units outstanding (See Note G) 410,906.106 983,842.388 950,328.899 1,303,059.881 1,863,056.104 =============================================================================== Value per divisional unit $ 14.94 $ 18.37 $ 12.86 $ 11.52 $ 21.03 ===============================================================================
See accompanying notes. 5 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1997
INVESCO ---------------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ---------------------------------------------------------------------- ASSETS Investments in mutual funds at market value $14,586,803 $ 3,029,149 $ 5,932,858 $ 4,464,195 $ 1,160,601 ---------------------------------------------------------------------- Total assets 14,586,803 3,029,149 5,932,858 4,464,195 1,160,601 ---------------------------------------------------------------------- LIABILITIES Due to (from) Security Life of Denver (46,534) (12,342) (23,188) (11,794) 790 Due to (from) other divisions (893,312) (3,119) (2,098) (888,095) - ---------------------------------------------------------------------- Total liabilities (939,846) (15,461) (25,286) (899,889) 790 ---------------------------------------------------------------------- Net assets $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811 ====================================================================== POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811 ---------------------------------------------------------------------- TOTAL POLICYHOLDER RESERVES $15,526,649 $ 3,044,610 $ 5,958,144 $ 5,364,084 $ 1,159,811 ====================================================================== Number of division units outstanding (See Note G) 184,042.238 297,553.033 333,501.857 78,118.685 ======================================================== Value per divisional unit $ 16.54 $ 20.02 $ 16.08 $ 14.85 ========================================================
See accompanying notes. 6 Security Life Separate Account L1 Statement of Net Assets (continued) December 31, 1997
VAN ECK ----------------------------------------------- WORLDWIDE TOTAL WORLDWIDE HARD VAN ECK BALANCED ASSETS ----------------------------------------------- ASSETS Investments in mutual funds at market value $1,298,690 $ 387,596 $ 911,094 ----------------------------------------------- Total assets 1,298,690 387,596 911,094 ----------------------------------------------- LIABILITIES Due to (from) Security Life of Denver 860 248 612 Due to (from) other divisions (268) - (268) ----------------------------------------------- Total liabilities 592 248 344 ----------------------------------------------- Net assets $1,298,098 $ 387,348 $ 910,750 =============================================== POLICYHOLDER RESERVES Reserves attributable to the policyholders (See Note B) $1,298,098 $ 387,348 $ 910,750 ----------------------------------------------- TOTAL POLICYHOLDER RESERVES $1,298,098 $ 387,348 $ 910,750 =============================================== Number of division units outstanding (See Note G) 32,139.282 77,046.773 =================================== Value per divisional unit $ 12.05 $ 11.82 ===================================
See accompanying notes. 7 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1997
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK --------------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 4,158,702 $ 678,740 $ 323,895 $2,094,346 $1,039,818 $ 21,903 Less: Valuation period deductions (See Note B) 813,630 135,310 141,930 461,022 67,625 7,743 --------------------------------------------------------------------- Net investment income (loss) 3,345,072 543,430 181,965 1,633,324 972,193 14,160 --------------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) --------------------------------------------------------------------- Net realized and unrealized gains (losses) on investments 13,842,525 2,679,881 2,542,807 7,796,838 822,618 381 --------------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $17,187,597 $3,223,311 $2,724,772 $9,430,162 $1,794,811 $ 14,541 =====================================================================
See accompanying notes. 8 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
N & B ------------------------------------------------------------ TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS ------------------------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $ 678,740 $156,667 $183,497 $ 72,086 $ 266,490 Less: Valuation period deductions (See Note B) 135,310 33,725 24,959 10,366 66,260 ------------------------------------------------------------ Net investment income (loss) 543,430 122,942 158,538 61,720 200,230 ------------------------------------------------------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 ------------------------------------------------------------ Net realized and unrealized gains (losses) on investments 2,679,881 139,095 548,903 52,644 1,939,239 ------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $3,223,311 $262,037 $707,441 $114,364 $2,139,469 ============================================================
See accompanying notes. 9 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
ALGER ----------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ----------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 323,895 $218,789 $ 55,945 $ 49,161 $ - Less: Valuation period deductions (See Note B) 141,930 51,004 28,138 48,785 14,003 ----------------------------------------------------------- Net investment income (loss) 181,965 167,785 27,807 376 (14,003) ----------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ----------------------------------------------------------- Net realized and unrealized gains (losses) on investments 2,542,807 598,169 474,852 1,207,783 262,003 ----------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $2,724,772 $765,954 $502,659 $1,208,159 $248,000 ===========================================================
See accompanying notes. 10 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
FIDELITY ------------------------------------------------------------------ TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ------------------------------------------------------------------ INVESTMENT INCOME Dividends from mutual funds $2,094,346 $204,696 $ 274,868 $ 451,874 $764,538 $ 398,370 Less: Valuation period deductions (See Note B) 461,022 27,097 91,298 60,714 107,253 174,660 ------------------------------------------------------------------ Net investment income (loss) 1,633,324 177,599 183,570 391,160 657,285 223,710 ------------------------------------------------------------------ REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 - 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667 ------------------------------------------------------------------ Net realized and unrealized gains (losses) on investments 7,796,838 383,408 2,010,229 27,088 - 5,376,113 ------------------------------------------------------------------ NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $9,430,162 $561,007 $2,193,799 $ 418,248 $657,285 $5,599,823 ==================================================================
See accompanying notes. 11 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
INVESCO -------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES -------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $1,039,818 $ 76,461 $417,376 $ 519,369 $ 26,612 Less: Valuation period deductions (See Note B) 67,625 12,921 27,525 23,478 3,701 -------------------------------------------------------- Net investment income (loss) 972,193 63,540 389,851 495,891 22,911 -------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 -------------------------------------------------------- Net realized and unrealized gains (losses) on investments 822,618 249,670 441,718 16,568 114,662 -------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $1,794,811 $313,210 $831,569 $ 512,459 $137,573 ========================================================
See accompanying notes. 12 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1997
VAN ECK ---------------------------------------------------- WORLDWIDE TOTAL WORLDWIDE HARD VAN ECK BALANCED ASSETS ---------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 21,903 $ 9,006 $ 12,897 Less: Valuation period deductions (See Note B) 7,743 3,329 4,414 ---------------------------------------------------- Net investment income (loss) 14,160 5,677 8,483 ---------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ---------------------------------------------------- Net realized and unrealized gains (losses) on investments 381 41,907 (41,526) ---------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $ 14,541 $47,584 $(33,043) ====================================================
See accompanying notes. 13 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1996
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK -------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $1,183,779 $292,143 $ 56,842 $ 593,973 $238,653 $ 2,168 Less: Valuation period deductions (See Note B) 241,127 50,116 44,898 128,637 14,752 2,724 -------------------------------------------------------------- Net investment income (loss) 942,652 242,027 11,944 465,336 223,901 (556) -------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 -------------------------------------------------------------- Net realized and unrealized gains (losses) on investments 3,077,159 643,752 458,973 1,834,000 100,274 40,160 -------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $4,019,811 $885,779 $470,917 $2,299,336 $324,175 $39,604 ==============================================================
See accompanying notes. 14 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
N & B --------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS --------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $292,143 $127,305 $ 76,287 $35,420 $ 53,131 Less: Valuation period deductions (See Note B) 50,116 13,218 9,400 8,882 18,616 --------------------------------------------------------- Net investment income (loss) 242,027 114,087 66,887 26,538 34,515 --------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 --------------------------------------------------------- Net realized and unrealized gains (losses) on investments 643,752 (45,891) 42,460 4,310 642,873 --------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $885,779 $ 68,196 $109,347 $30,848 $677,388 =========================================================
See accompanying notes. 15 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
ALGER -------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP -------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 56,842 $ 7,668 $ 10,435 $ 37,109 $ 1,630 Less: Valuation period deductions (See Note B) 44,898 18,457 7,398 16,087 2,956 -------------------------------------------------------- Net investment income (loss) 11,944 (10,789) 3,037 21,022 (1,326) -------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 -------------------------------------------------------- Net realized and unrealized gains (losses) on investments 458,973 66,527 99,334 250,014 43,098 -------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $470,917 $ 55,738 $102,371 $271,036 $41,772 ========================================================
See accompanying notes. 16 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
FIDELITY ------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 593,973 $ 9,800 $109,786 $ 27,966 $246,349 $ 200,072 Less: Valuation period deductions (See Note B) 128,637 3,818 25,455 16,972 35,006 47,386 ------------------------------------------------------------- Net investment income (loss) 465,336 5,982 84,331 10,994 211,343 152,686 ------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 - 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 - 1,161,135 ------------------------------------------------------------- Net realized and unrealized gains (losses) on investments 1,834,000 70,973 283,096 272,764 - 1,207,167 ------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $2,299,336 $76,955 $367,427 $283,758 $211,343 $1,359,853 =============================================================
See accompanying notes. 17 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
INVESCO ------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $238,653 $25,285 $ 93,816 $114,676 $ 4,876 Less: Valuation period deductions (See Note B) 14,752 3,402 4,272 6,357 721 ------------------------------------------------------- Net investment income 223,901 21,883 89,544 108,319 4,155 ------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ------------------------------------------------------- Net realized and unrealized gains (losses) on investments 100,274 39,220 23,847 29,428 7,779 ------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $324,175 $61,103 $113,391 $137,747 $11,934 =======================================================
See accompanying notes. 18 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1996
VAN ECK ---------------------------------------------------- TOTAL WORLDWIDE WORLDWIDE VAN ECK BALANCED HARD ASSETS ---------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 2,168 $ 169 $ 1,999 Less: Valuation period deductions (See Note B) 2,724 1,304 1,420 --------------------------------------------------- Net investment income (loss) (556) (1,135) 579 --------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 --------------------------------------------------- Net realized and unrealized gains (losses) on investments 40,160 22,327 17,833 --------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $39,604 $21,192 $18,412 ===================================================
See accompanying notes. 19 Security Life Separate Account L1 Statement of Operations Year Ended December 31, 1995
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK ---------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 134,683 $ 104 $ 3 $ 78,541 $55,575 $ 460 Less: Valuation period deductions (See Note B) 37,280 11,277 5,431 18,478 1,863 231 ---------------------------------------------------------------- Net investment income (loss) 97,403 (11,173) (5,428) 60,063 53,712 229 ---------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 76,547 25,418 17,143 28,840 4,788 358 Net unrealized gains (losses) on investments 186,727 144,429 (54,571) 102,924 (6,574) 519 ---------------------------------------------------------------- Net realized and unrealized gains (losses) on investments 263,274 169,847 (37,428) 131,764 (1,786) 877 ---------------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $ 360,677 $ 158,674 $(42,856) $ 191,827 $51,926 $1,106 ================================================================
See accompanying notes. 20 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1995
N & B ---------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS ---------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 104 $ 65 $ 34 $ - $ 5 Less: Valuation period deductions (See Note B) 11,277 4,624 1,717 2,366 2,570 ---------------------------------------------------------- Net investment income (loss) (11,173) (4,559) (1,683) (2,366) (2,565) ---------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 25,418 8,399 4,077 2,729 10,213 Net unrealized gains (losses) on investments 144,429 54,564 (1,928) 33,629 58,164 ---------------------------------------------------------- Net realized and unrealized gains (losses) on investments 169,847 62,963 2,149 36,358 68,377 ---------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $158,674 $58,404 $ 466 $33,992 $65,812 ==========================================================
See accompanying notes. 21 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1995
ALGER ------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 3 $ - $ 3 $ - $ - Less: Valuation period deductions (See Note B) 5,431 2,496 551 2,242 142 ------------------------------------------------------------- Net investment income (loss) (5,428) (2,496) (548) (2,242) (142) ------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on 17,143 19,457 3,402 1,513 (7,229) investments Net unrealized gains (losses) on investments (54,571) (57,427) 3,400 (1,664) 1,120 ------------------------------------------------------------- Net realized and unrealized gains (losses) on investments (37,428) (37,970) 6,802 (151) (6,109) ------------------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $(42,856) $(40,466) $6,254 $(2,393) $(6,251) =============================================================
See accompanying notes. 22 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1995
FIDELITY -------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 -------------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 78,541 $ - $ - $ - $78,541 $ - Less: Valuation period deductions (See Note B) 18,478 257 3,373 2,080 10,362 2,406 -------------------------------------------------------------- Net investment income (loss) 60,063 (257) (3,373) (2,080) 68,179 (2,406) -------------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 28,840 632 13,932 2,684 - 11,592 Net unrealized gains (losses) on investments 102,924 6,607 (11,822) 28,250 - 79,889 -------------------------------------------------------------- Net realized and unrealized gains (losses) on investments 131,764 7,239 2,110 30,934 - 91,481 -------------------------------------------------------------- NET INCREASE (DECREASE)IN NET ASSETS RESULTING FROM OPERATIONS $191,827 $6,982 $ (1,263) $28,854 $68,179 $89,075 ==============================================================
See accompanying notes. 23 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1995
INVESCO ---------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ---------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $55,575 $3,093 $ 9,220 $ 43,135 $127 Less: Valuation period deductions (See Note B) 1,863 243 567 1,017 36 ---------------------------------------------------- Net investment income (loss) 53,712 2,850 8,653 42,118 91 ---------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 4,788 2,380 1,156 1,237 15 Net unrealized gains (losses) on investments (6,574) 2,264 12,495 (22,224) 891 ---------------------------------------------------- Net realized and unrealized gains (losses) on investments (1,786) 4,644 13,651 (20,987) 906 ---------------------------------------------------- NET INCREASE (DECREASE) IN NET ASSETS RESULTING FROM OPERATIONS $51,926 $7,494 $22,304 $ 21,131 $997 ====================================================
See accompanying notes. 24 Security Life Separate Account L1 Statement of Operations (continued) Year Ended December 31, 1995
VAN ECK ----------------------------------------------------------- TOTAL WORLDWIDE WORLDWIDE VAN ECK BALANCED HARD ASSETS ----------------------------------------------------------- INVESTMENT INCOME Dividends from mutual funds $ 460 $416 $ 44 Less: Valuation period deductions (See Note B) 231 171 60 ----------------------------------------------------------- Net investment income (loss) 229 245 (16) ----------------------------------------------------------- REALIZED AND UNREALIZED GAINS (LOSSES) ON INVESTMENTS Net realized gains (losses) on investments 358 (5) 363 Net unrealized gains (losses) on investments 519 (62) 581 ----------------------------------------------------------- Net realized and unrealized gains (losses) on investments 877 (67) 944 ---------------------------------------------------------- NET INCREASE IN NET ASSETS RESULTING FROM OPERATIONS $1,106 $178 $928 ==========================================================
See accompanying notes. 25 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1997
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 3,345,072 $ 543,430 $ 181,965 $ 1,633,324 $ 972,193 $ 14,160 Net realized gains (losses) on investments 3,199,375 406,286 894,818 1,320,426 523,956 53,889 Net unrealized gains (losses) on investments 10,643,150 2,273,595 1,647,989 6,476,412 298,662 (53,508) ---------------------------------------------------------------------------------- Increase (decrease) in net assets from operations 17,187,597 3,223,311 2,724,772 9,430,162 1,794,811 14,541 ---------------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 104,747,260 5,555,766 6,944,048 89,309,110 2,683,620 254,716 Cost of insurance and administrative charges (8,284,944) (957,887) (1,466,664) (5,155,026) (614,145) (91,222) Benefit payments (406,386) (20,591) (63,369) (322,263) (163) - Surrenders (1,977,696) (146,698) (412,252) (1,294,484) (112,699) (11,563) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (6,642,529) 8,721,432 9,006,938 (32,708,946) 7,796,299 541,748 Other 5,891 9,817 11,046 (21,999) 11,180 (4,153) ---------------------------------------------------------------------------------- Increase (decrease) from principal transactions 87,441,596 13,161,839 14,019,747 49,806,392 9,764,092 689,526 ---------------------------------------------------------------------------------- Total increase (decrease) in net assets 104,629,193 16,385,150 16,744,519 59,236,554 11,558,903 704,067 Net assets at beginning of year 57,856,827 10,539,346 11,356,089 31,399,615 3,967,746 594,031 ---------------------------------------------------------------------------------- Net assets at end of year $162,486,020 $26,924,496 $28,100,608 $ 90,636,169 $15,526,649 $1,298,098 ==================================================================================
See accompanying notes. 26 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
N & B -------------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS -------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 543,430 $ 122,942 $ 158,538 $ 61,720 $ 200,230 Net realized gains (losses) on investments 406,286 (20,056) 14,997 25,762 385,583 Net unrealized gains (losses) on investments 2,273,595 159,151 533,906 26,882 1,553,656 -------------------------------------------------------------------- Increase (decrease) in net assets from operations 3,223,311 262,037 707,441 114,364 2,139,469 -------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 5,555,766 1,332,125 1,158,704 324,257 2,740,680 Cost of insurance and administrative charges (957,887) (163,472) (219,117) (62,075) (513,223) Benefit payments (20,591) - - - (20,591) Surrenders (146,698) (3,761) (71,838) (792) (70,307) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 8,721,432 2,758,363 2,141,068 (1,023,987) 4,845,988 Other 9,817 (2,202) 11,700 (6,404) 6,723 -------------------------------------------------------------------- Increase (decrease) from principal transactions 13,161,839 3,921,053 3,020,517 (769,001) 6,989,270 -------------------------------------------------------------------- Total increase (decrease) in net assets 16,385,150 4,183,090 3,727,958 (654,637) 9,128,739 Net assets at beginning of year 10,539,346 2,492,076 1,835,714 1,548,314 4,663,242 -------------------------------------------------------------------- Net assets at end of year $26,924,496 $6,675,166 $5,563,672 $ 893,677 $13,791,981 ====================================================================
See accompanying notes. 27 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
ALGER ------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 181,965 $ 167,785 $ 27,807 $ 376 $ (14,003) Net realized gains (losses) on investments 894,818 114,651 228,363 237,727 314,077 Net unrealized gains (losses) on investments 1,647,989 483,518 246,489 970,056 (52,074) ------------------------------------------------------------------- Increase (decrease) in net assets from operations 2,724,772 765,954 502,659 1,208,159 248,000 ------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 6,944,048 2,630,863 1,276,492 2,334,377 702,316 Cost of insurance and administrative charges (1,466,664) (526,742) (299,891) (479,902) (160,129) Benefit payments (63,369) - (62,593) (776) - Surrenders (412,252) (255,386) (74,317) (58,850) (23,699) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 9,006,938 3,518,384 1,419,061 2,796,911 1,272,582 Other 11,046 (6,069) 19,072 2,082 (4,039) ------------------------------------------------------------------- Increase (decrease) from principal transactions 14,019,747 5,361,050 2,277,824 4,593,842 1,787,031 ------------------------------------------------------------------- Total increase (decrease) in net assets 16,744,519 6,127,004 2,780,483 5,802,001 2,035,031 Net assets at beginning of year 11,356,089 4,332,108 2,335,055 3,814,178 874,748 ------------------------------------------------------------------- Net assets at end of year $28,100,608 $10,459,112 $5,115,538 $9,616,179 $2,909,779 ===================================================================
See accompanying notes. 28 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
FIDELITY ---------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ---------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 1,633,324 $ 177,599 $ 183,570 $ 391,160 $ 657,285 $ 223,710 Net realized gains (losses) on investments 1,320,426 33,000 662,436 332,544 - 292,446 Net unrealized gains (losses) on investments 6,476,412 350,408 1,347,793 (305,456) - 5,083,667 ---------------------------------------------------------------------------------- Increase (decrease) in net assets from operations 9,430,162 561,007 2,193,799 418,248 657,285 5,599,823 ---------------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 89,309,110 2,162,759 4,558,270 2,410,373 73,366,740 6,810,968 Cost of insurance and administrative charges (5,155,026) (242,289) (813,161) (525,615) (2,213,630) (1,360,331) Benefit payments (322,263) (20,969) (548) (1,233) (257,371) (42,142) Surrenders (1,294,484) (92,218) (135,829) (91,869) (870,621) (103,947) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (32,708,946) 2,215,879 5,219,755 5,730,183 (63,929,591) 18,054,828 Other (21,999) 7,567 3,217 10,563 (35,219) (8,127) ---------------------------------------------------------------------------------- Increase (decrease) from principal transactions 49,806,392 4,030,729 8,831,704 7,532,402 6,060,308 23,351,249 ---------------------------------------------------------------------------------- Total increase (decrease) in net assets 59,236,554 4,591,736 11,025,503 7,950,650 6,717,593 28,951,072 Net assets at beginning of year 31,399,615 1,545,337 7,049,419 4,275,129 8,295,666 10,234,064 ---------------------------------------------------------------------------------- Net assets at end of year $ 90,636,169 $6,137,073 $18,074,922 $12,225,779 $ 15,013,259 $39,185,136 ==================================================================================
See accompanying notes. 29 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
INVESCO --------------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES --------------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 972,193 $ 63,540 $ 389,851 $ 495,891 $ 22,911 Net realized gains (losses) on investments 523,956 46,241 116,951 269,799 90,965 Net unrealized gains (losses) on investments 298,662 203,429 324,767 (253,231) 23,697 --------------------------------------------------------------- Increase (decrease) in net assets from operations 1,794,811 313,210 831,569 512,459 137,573 --------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,683,620 517,831 1,250,551 835,890 79,348 Cost of insurance and administrative charges (614,145) (133,107) (266,208) (177,612) (37,218) Benefit payments (163) - - (163) - Surrenders (112,699) (28,672) (37,810) (9,783) (36,434) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 7,796,299 1,498,300 2,804,344 2,695,587 798,068 Other 11,180 2,581 6,081 2,305 213 --------------------------------------------------------------- Increase (decrease) from principal transactions 9,764,092 1,856,933 3,756,958 3,346,224 803,977 --------------------------------------------------------------- Total increase (decrease) in net assets 11,558,903 2,170,143 4,588,527 3,858,683 941,550 Net assets at beginning of year 3,967,746 874,467 1,369,617 1,505,401 218,261 --------------------------------------------------------------- Net assets at end of year $15,526,649 $3,044,610 $5,958,144 $5,364,084 $1,159,811 ===============================================================
See accompanying notes. 30 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1997
VAN ECK ----------------------------------------------------------- WORLDWIDE TOTAL WORLDWIDE HARD VAN ECK BALANCED ASSETS ----------------------------------------------------------- INCREASE (DECREASE) IN NET ASSETS OPERATIONS Net investment income (loss) $ 14,160 $ 5,677 $ 8,483 Net realized gains (losses) on investments 53,889 37,785 16,104 Net unrealized gains (losses) on investments (53,508) 4,122 (57,630) ------------------------------------------------------ Increase (decrease) in net assets from operations 14,541 47,584 (33,043) ------------------------------------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 254,716 65,167 189,549 Cost of insurance and administrative charges (91,222) (44,774) (46,448) Benefit payments - - - Surrenders (11,563) (7,995) (3,568) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 541,748 (120) 541,868 Other (4,153) (319) (3,834) ------------------------------------------------------ Increase (decrease) from principal transactions 689,526 11,959 677,567 ------------------------------------------------------ Total increase (decrease) in net 704,067 59,543 644,524 assets Net assets at beginning of year 594,031 327,805 266,226 ------------------------------------------------------ Net assets at end of year $1,298,098 $387,348 $910,750 ======================================================
See accompanying notes. 31 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1996
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK -------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 942,652 $ 242,027 $ 11,944 $ 465,336 $ 223,901 $ (556) Net realized gains (losses) on investments 401,852 86,478 62,058 97,833 143,358 12,125 Net unrealized gains (losses) on investments 2,675,307 557,274 396,915 1,736,167 (43,084) 28,035 -------------------------------------------------------------------------------- Increase in net assets from operations 4,019,811 885,779 470,917 2,299,336 324,175 39,604 -------------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 44,534,972 2,246,849 2,646,310 38,833,137 609,861 198,815 Cost of insurance and administrative charges (2,843,666) (378,501) (531,589) (1,733,703) (158,637) (41,236) Benefit payments (9,641) - (9,457) (184) - - Surrenders (139,851) (10,863) (32,300) (89,374) (5,730) (1,584) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (905,917) 3,446,134 6,535,350 (13,409,127) 2,217,943 303,783 Other (25,415) 4,193 (1,186) (29,113) 1,108 (417) -------------------------------------------------------------------------------- Increase from principal transactions 40,610,482 5,307,812 8,607,128 23,571,636 2,664,545 459,361 -------------------------------------------------------------------------------- Total increase in net assets 44,630,293 6,193,591 9,078,045 25,870,972 2,988,720 498,965 Net assets at beginning of year 13,226,534 4,345,755 2,278,044 5,528,643 979,026 95,066 -------------------------------------------------------------------------------- Net assets at end of year $57,856,827 $10,539,346 $11,356,089 $ 31,399,615 $3,967,746 $594,031 ================================================================================
See accompanying notes. 32 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
N & B -------------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS -------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 242,027 $ 114,087 $ 66,887 $ 26,538 $ 34,515 Net realized gains (losses) on investments 86,478 (16,561) (22,601) 3,867 121,773 Net unrealized gains (losses) on investments 557,274 (29,330) 65,061 443 521,100 -------------------------------------------------------------------- Increase in net assets from operations 885,779 68,196 109,347 30,848 677,388 -------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,246,849 317,539 634,087 372,680 922,543 Cost of insurance and administrative charges (378,501) (74,422) (101,596) (56,065) (146,418) Benefit payments - - - - - Surrenders (10,863) (1,157) (2,385) (48) (7,273) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 3,446,134 398,684 433,683 368,389 2,245,378 Other 4,193 (272) (579) 41 5,003 -------------------------------------------------------------------- Increase from principal transactions 5,307,812 640,372 963,210 684,997 3,019,233 -------------------------------------------------------------------- Total increase in net assets 6,193,591 708,568 1,072,557 715,845 3,696,621 Net assets at beginning of year 4,345,755 1,783,508 763,157 832,469 966,621 -------------------------------------------------------------------- Net assets at end of year $10,539,346 $2,492,076 $1,835,714 $1,548,314 $4,663,242 ====================================================================
See accompanying notes. 33 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
ALGER -------------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP -------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 11,944 $ (10,789) $ 3,037 $ 21,022 $ (1,326) Net realized gains (losses) on investments 62,058 8,187 9,936 22,907 21,028 Net unrealized gains (losses) on investments 396,915 58,340 89,398 227,107 22,070 -------------------------------------------------------------------- Increase in net assets from operations 470,917 55,738 102,371 271,036 41,772 -------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 2,646,310 792,375 410,528 1,189,559 253,848 Cost of insurance and administrative charges (531,589) (209,010) (92,306) (193,812) (36,461) Benefit payments (9,457) (4,658) - - (4,799) Surrenders (32,300) (7,839) (10,926) (9,795) (3,740) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 6,535,350 2,581,122 1,649,714 1,717,965 586,549 Other (1,186) (3,605) 587 1,213 619 -------------------------------------------------------------------- Increase from principal transactions 8,607,128 3,148,385 1,957,597 2,705,130 796,016 -------------------------------------------------------------------- Total increase in net assets 9,078,045 3,204,123 2,059,968 2,976,166 837,788 Net assets at beginning of year 2,278,044 1,127,985 275,087 838,012 36,960 -------------------------------------------------------------------- Net assets at end of year $11,356,089 $4,332,108 $2,335,055 $3,814,178 $874,748 ====================================================================
See accompanying notes. 34 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
FIDELITY ---------------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 ---------------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 465,336 $ 5,982 $ 84,331 $ 10,994 $ 211,343 $ 152,686 Net realized gains (losses) on investments 97,833 7,905 9,661 34,235 - 46,032 Net unrealized gains (losses) on investments 1,736,167 63,068 273,435 238,529 - 1,161,135 ---------------------------------------------------------------------------------- Increase in net assets from operations 2,299,336 76,955 367,427 283,758 211,343 1,359,853 ---------------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 38,833,137 202,285 1,158,382 537,007 36,012,540 922,923 Cost of insurance and administrative charges (1,733,703) (59,703) (298,466) (145,781) (938,219) (291,534) Benefit payments (184) - - - - (184) Surrenders (89,374) (973) (9,215) (8,511) (56,983) (13,692) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (13,409,127) 1,199,005 4,485,230 2,637,971 (28,785,556) 7,054,223 Other (29,113) 277 (47) (13) (27,783) (1,547) ---------------------------------------------------------------------------------- Increase from principal transactions 23,571,636 1,340,891 5,335,884 3,020,673 6,203,999 7,670,189 ---------------------------------------------------------------------------------- Total increase in net assets 25,870,972 1,417,846 5,703,311 3,304,431 6,415,342 9,030,042 Net assets at beginning of year 5,528,643 127,491 1,346,108 970,698 1,880,324 1,204,022 ---------------------------------------------------------------------------------- Net assets at end of year $ 31,399,615 $1,545,337 $7,049,419 $4,275,129 $ 8,295,666 $10,234,064 ==================================================================================
See accompanying notes. 35 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
INVESCO ----------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES ----------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 223,901 $ 21,883 $ 89,544 $ 108,319 $ 4,155 Net realized gains (losses) on investments 143,358 28,264 30,929 82,830 1,335 Net unrealized gains (losses) on investments (43,084) 10,956 (7,082) (53,402) 6,444 ----------------------------------------------------------- Increase in net assets from operations 324,175 61,103 113,391 137,747 11,934 ----------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 609,861 199,674 243,848 121,818 44,521 Cost of insurance and administrative charges (158,637) (45,283) (55,233) (48,934) (9,187) Benefit payments - - - - - Surrenders (5,730) (2,038) (2,171) (1,386) (135) Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,217,943 506,505 810,269 750,404 150,765 Other 1,108 943 (126) 277 14 ----------------------------------------------------------- Increase from principal transactions 2,664,545 659,801 996,587 822,179 185,978 ----------------------------------------------------------- Total increase in net assets 2,988,720 720,904 1,109,978 959,926 197,912 Net assets at beginning of year 979,026 153,563 259,639 545,475 20,349 ----------------------------------------------------------- Net assets at end of year $3,967,746 $874,467 $1,369,617 $1,505,401 $218,261 ===========================================================
See accompanying notes. 36 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1996
VAN ECK ----------------------------------- WORLDWIDE TOTAL WORLDWIDE HARD VAN ECK BALANCED ASSETS ----------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (556) $ (1,135) $ 579 Net realized gains (losses) on investments 12,125 2,984 9,141 Net unrealized gains (losses) on investments 28,035 19,343 8,692 ----------------------------------- Increase in net assets from operations 39,604 21,192 18,412 ----------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 198,815 135,181 63,634 Cost of insurance and administrative charges (41,236) (29,480) (11,756) Benefit payments - - - Surrenders (1,584) (1,584) - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 303,783 126,152 177,631 Other (417) (468) 51 ----------------------------------- Increase from principal transactions 459,361 229,801 229,560 ----------------------------------- Total increase in net assets 498,965 250,993 247,972 Net assets at beginning of year 95,066 76,812 18,254 ----------------------------------- Net assets at end of year $594,031 $327,805 $266,226 ===================================
See accompanying notes. 37 Security Life Separate Account L1 Statement of Changes in Net Assets Year Ended December 31, 1995
TOTAL ALL TOTAL TOTAL TOTAL TOTAL TOTAL DIVISIONS N&B ALGER FIDELITY INVESCO VAN ECK ------------------------------------------------------------------------ INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 97,403 $ (11,173) $ (5,428) $ 60,063 $ 53,712 $ 229 Net realized gains (losses) on investments 76,547 25,418 17,143 28,840 4,788 358 Net unrealized gains (losses) on investments 186,727 144,429 (54,571) 102,924 (6,574) 519 ------------------------------------------------------------------------ Increase (decrease) in net assets from operations 360,677 158,674 (42,856) 191,827 51,926 1,106 ------------------------------------------------------------------------ CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 13,329,581 39,552 255,704 12,996,026 28,034 10,265 Cost of insurance and administrative charges (515,616) (94,109) (72,491) (327,795) (17,857) (3,364) Benefit payments - - - - - - Surrenders - - - - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) - 4,235,249 2,130,456 (7,368,518) 915,744 87,069 Other 19,851 6,389 7,231 5,062 1,179 (10) ------------------------------------------------------------------------ Increase from principal transactions 12,833,816 4,187,081 2,320,900 5,304,775 927,100 93,960 ------------------------------------------------------------------------ Total increase in net assets 13,194,493 4,345,755 2,278,044 5,496,602 979,026 95,066 Net assets at beginning of year 32,041 - - 32,041 - - ------------------------------------------------------------------------ Net assets at end of year $13,226,534 $4,345,755 $2,278,044 $ 5,528,643 $979,026 $95,066 ========================================================================
See accompanying notes. 38 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
N & B ------------------------------------------------------------- TOTAL LIMITED GOVERNMENT N&B MATURITY BOND GROWTH INCOME PARTNERS ------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (11,173) $ (4,559) $ (1,683) $ (2,366) $ (2,565) Net realized gains (losses) on investments 25,418 8,399 4,077 2,729 10,213 Net unrealized gains (losses) on investments 144,429 54,564 (1,928) 33,629 58,164 ------------------------------------------------------------- Increase (decrease) in net assets from operations 158,674 58,404 466 33,992 65,812 ------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 39,552 4,133 13,771 12,086 9,562 Cost of insurance and administrative charges (94,109) (25,947) (23,846) (15,635) (28,681) Benefit payments - - - - - Surrenders - - - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 4,235,249 1,745,908 770,482 801,675 917,184 Other 6,389 1,010 2,284 351 2,744 ------------------------------------------------------------- Increase from principal transactions 4,187,081 1,725,104 762,691 798,477 900,809 ------------------------------------------------------------- Total increase in net assets 4,345,755 1,783,508 763,157 832,469 966,621 Net assets at beginning of year - - - - - ------------------------------------------------------------- Net assets at end of year $4,345,755 $1,783,508 $763,157 $832,469 $966,621 =============================================================
See accompanying notes. 39 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
ALGER ------------------------------------------------------------- AMERICAN AMERICAN AMERICAN TOTAL SMALL MIDCAP AMERICAN LEVERAGED ALGER CAPITALIZATION GROWTH GROWTH ALLCAP ------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ (5,428) $ (2,496) $ (548) $ (2,242) $ (142) Net realized gains (losses) on investments 17,143 19,457 3,402 1,513 (7,229) Net unrealized gains (losses) on investments (54,571) (57,427) 3,400 (1,664) 1,120 ------------------------------------------------------------- Increase (decrease) in net assets from operations (42,856) (40,466) 6,254 (2,393) (6,251) ------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 255,704 224,681 18,375 9,493 3,155 Cost of insurance and administrative charges (72,491) (24,235) (8,062) (38,073) (2,121) Benefit payments - - - - - Surrenders - - - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 2,130,456 963,613 257,593 866,852 42,398 Other 7,231 4,392 927 2,133 (221) ------------------------------------------------------------- Increase from principal transactions 2,320,900 1,168,451 268,833 840,405 43,211 ------------------------------------------------------------- Total increase in net assets 2,278,044 1,127,985 275,087 838,012 36,960 Net assets at beginning of year - - - - - ------------------------------------------------------------- Net assets at end of year $2,278,044 $1,127,985 $275,087 $838,012 $36,960 =============================================================
See accompanying notes. 40 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
FIDELITY -------------------------------------------------------------------------- TOTAL ASSET MONEY FIDELITY MANAGER GROWTH OVERSEAS MARKET INDEX 500 -------------------------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 60,063 $ (257) $ (3,373) $ (2,080) $ 68,179 $ (2,406) Net realized gains (losses) on investments 28,840 632 13,932 2,684 - 11,592 Net unrealized gains (losses) on investments 102,924 6,607 (11,822) 28,250 - 79,889 -------------------------------------------------------------------------- Increase (decrease) in net assets from operations 191,827 6,982 (1,263) 28,854 68,179 89,075 -------------------------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 12,996,026 18,939 37,113 24,037 12,848,110 67,827 Cost of insurance and administrative charges (327,795) (5,716) (45,365) (17,969) (242,041) (16,704) Benefit payments - - - - - - Surrenders - - - - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) (7,368,518) 107,141 1,355,450 935,792 (10,830,183) 1,063,282 Other 5,062 145 173 (16) 4,218 542 -------------------------------------------------------------------------- Increase from principal transactions 5,304,775 120,509 1,347,371 941,844 1,780,104 1,114,947 -------------------------------------------------------------------------- Total increase in net assets 5,496,602 127,491 1,346,108 970,698 1,848,283 1,204,022 Net assets at beginning of year 32,041 - - - 32,041 - -------------------------------------------------------------------------- Net assets at end of year $ 5,528,643 $127,491 $1,346,108 $970,698 $ 1,880,324 $1,204,022 ==========================================================================
See accompanying notes. 41 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
INVESCO --------------------------------------------------------- TOTAL TOTAL INDUSTRIAL INVESCO RETURN INCOME HIGH YIELD UTILITIES --------------------------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 53,712 $ 2,850 $ 8,653 $ 42,118 $ 91 Net realized gains (losses) on investments 4,788 2,380 1,156 1,237 15 Net unrealized gains (losses) on investments (6,574) 2,264 12,495 (22,224) 891 --------------------------------------------------------- Increase (decrease) in net assets from operations 51,926 7,494 22,304 21,131 997 --------------------------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 28,034 3,844 12,548 8,941 2,701 Cost of insurance and administrative charges (17,857) (4,401) (5,390) (6,776) (1,290) Benefit payments - - - - - Surrenders - - - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 915,744 145,676 230,040 522,094 17,934 Other 1,179 950 137 85 7 --------------------------------------------------------- Increase from principal transactions 927,100 146,069 237,335 524,344 19,352 --------------------------------------------------------- Total increase in net assets 979,026 153,563 259,639 545,475 20,349 Net assets at beginning of year - - - - - --------------------------------------------------------- Net assets at end of year $979,026 $153,563 $259,639 $545,475 $20,349 =========================================================
See accompanying notes. 42 Security Life Separate Account L1 Statement of Changes in Net Assets (continued) Year Ended December 31, 1995
VAN ECK -------------------------------------- TOTAL WORLDWIDE WORLDWIDE VAN ECK BALANCED HARD ASSETS -------------------------------------- INCREASE IN NET ASSETS OPERATIONS Net investment income (loss) $ 229 $ 245 $ (16) Net realized gains (losses) on investments 358 (5) 363 Net unrealized gains (losses) on investments 519 (62) 581 ------------------------------------- Increase (decrease) in net assets from operations 1,106 178 928 ------------------------------------- CHANGES FROM PRINCIPAL TRANSACTIONS Net premiums 10,265 6,352 3,913 Cost of insurance and administrative charges (3,364) (2,360) (1,004) Benefit payments - - - Surrenders - - - Net transfers among divisions (including the loan division and guaranteed interest division in the general account) 87,069 72,661 14,408 Other (10) (19) 9 ------------------------------------- Increase from principal transactions 93,960 76,634 17,326 ------------------------------------- Total increase in net assets 95,066 76,812 18,254 Net assets at beginning of year - - - ------------------------------------- Net assets at end of year $95,066 $76,812 $18,254 =====================================
See accompanying notes. 43 Security Life Separate Account L1 Notes to Financial Statements December 31, 1997 NOTE A. ORGANIZATION Security Life Separate Account L1 (the "Separate Account") was established by resolution of the Board of Directors of Security Life of Denver Insurance Company (the "Company") on November 3, 1993. The Separate Account is organized as a unit investment trust registered with the Securities and Exchange Commission under the Investment Company Act of 1940. The Separate Account supports the operations of the FirstLine and Strategic Advantage Variable Universal Life ("FirstLine and Strategic Advantage") policies offered by the Company. The Separate Account may be used to support other variable life policies as they are offered by the Company. The assets of the Separate Account are the property of the Company. However, the portion of the Separate Account's assets attributable to the policies will not be charged with liabilities arising out of any other operations of the Company. As of December 31, 1997, the Separate Account offered seventeen investment divisions to the policyholders, each of which invests in an independently managed mutual fund portfolio ("Fund"). The Funds included: PORTFOLIO MANAGERS/PORTFOLIOS (FUNDS) Neuberger & Berman Management Incorporated (N&B) Neuberger & Berman Limited Maturity Bond Portfolio Neuberger & Berman Growth Portfolio Neuberger & Berman Partners Portfolio Fred Alger Management, Inc. (Alger) Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio Fidelity Management & Research Company (Fidelity) Fidelity Investments VIP II Asset Manager Portfolio Fidelity Investments VIP Growth Portfolio Fidelity Investments VIP Overseas Portfolio Fidelity Investments VIP Money Market Portfolio Fidelity Investments VIP II Index 500 Portfolio 44 Security Life Separate Account L1 Notes to Financial Statement (continued) NOTE A. ORGANIZATION (CONTINUED) INVESCO Funds Group, Inc. (INVESCO) INVESCO VIF Total Return Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Utilities Portfolio Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Hard Assets Portfolio (formerly known as "Van Eck Gold and Natural Resources Portfolio") Effective May 1, 1997, the Divisions of the Separate Account investing in the Neuberger & Berman Government Income Portfolio and the Van Eck Worldwide Balanced Fund stopped accepting new investments. The Company and the fund managers intend to discontinue these divisions in 1998 pending approval by the Securities and Exchange Commission. Effective February 19, 1998, six new divisions became available to the policyholders for investment in the following funds: Van Eck Associates Corporation (Van Eck) Van Eck Worldwide Real Estate Portfolio Van Eck Wordlwide Emerging Markets Portfolio Van Eck Worldwide Bond Portfolio AIM Advisors, Inc. (AIM) AIM VI--Capital Appreciation Portfolio AIM VI--Government Securities Portfolio INVESCO Funds Group, Inc. (INVESCO) INVESCO VIP Small Company Growth Fund The FirstLine and Strategic Advantage policies allow the policyholders to specify the allocation of their net premium to the various Funds. They can also transfer their account values among the Funds. The FirstLine and Strategic Advantage products also provide the policyholders the option to allocate their net premiums, or to transfer their account values, to a Guaranteed Interest Division ("GID") in the Company's general account. The GID guarantees a rate of interest to the policyholder, and it is not variable in nature. Therefore, it is not included in these Separate Account statements. NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying financial statements of the Separate Account have been prepared on the basis of generally accepted accounting principles ("GAAP"). The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 45 Security Life Separate Account L1 Notes to Financial Statement (continued NOTE B. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) The significant accounting principles followed by the Separate Account and the methods of applying those principles are presented below or in the footnotes which follow: INVESTMENT VALUATION--The investments in shares of the Funds are valued at the closing net asset value (market value) per share as determined by the Funds on the day of measurement. INVESTMENT TRANSACTIONS AND RELATED INVESTMENT INCOME--The investments in shares of the Funds are accounted for on the date the order to buy or sell is confirmed. Dividend income and distributions of capital gains are recorded on the ex-dividend date. Realized gains and losses from sales transactions are reported using the first-in first-out (FIFO) method of accounting for cost. The difference between cost and current market value of investments owned on the day of measurement is recorded as unrealized gain or loss on investment. VALUATION PERIOD DEDUCTIONS--Charges are made directly against the assets of the Separate Account divisions and are reflected daily in the computation of the unit values of the divisions. 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, 1997 were $813,630. 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 and administrative charges. The cost of insurance and administrative charges were $8,284,944 for the year ended December 31, 1997. Distributions made by the Funds are reinvested in the Funds. 46 Security Life Separate Account L1 Note To Financial Statement (Continued) NOTE C. INVESTMENTS (CONTINUED) The following is a summary of fund shares owned as of December 31, 1997:
NUMBER NET VALUE OF ASSET OF SHARES COST OF FUND SHARES VALUE AT MARKET SHARES - ---------------------------------------------------------------------------------------------------------------------------- Neuberger & Berman Management Incorporated: Limited Maturity Bond 472,701.98 $ 14.12 $ 6,674,552 $ 6,490,167 Growth 179,853.19 30.54 5,492,716 4,895,677 Government Income 80,279.96 11.14 894,319 833,365 Partners 662,560.75 20.60 13,648,752 11,515,832 Fred Alger Management, Inc.: American Small Capitalization 257,725.20 43.75 11,275,478 10,791,047 American MidCap Growth 207,608.67 24.18 5,019,978 4,680,691 American Growth 225,016.46 42.76 9,621,704 8,426,205 American Leveraged AllCap 125,627.34 23.17 2,910,785 2,939,669 Fidelity Management & Research Co.: Asset Manager 336,380.12 18.01 6,058,206 5,638,123 Growth 487,506.87 37.10 18,086,505 16,477,099 Overseas 635,378.14 19.20 12,199,260 12,237,937 Money Market 14,300,454.76 1.00 14,300,455 14,300,455 Index 500 341,935.38 114.39 39,113,988 32,789,297 INVESCO Funds Group, Inc.: Total Return 191,597.05 15.81 3,029,149 2,812,500 Industrial Income 348,172.42 17.04 5,932,858 5,602,678 High Yield 358,282.11 12.46 4,464,195 4,793,052 Utilities 80,597.26 14.40 1,160,601 1,129,569 Van Eck Associates Corporation: Worldwide Balanced 32,219.15 12.03 387,596 364,193 Worldwide Hard Assets 57,957.64 15.72 911,094 959,451 ---------------------------------- Total $161,182,191 $147,677,007 ==================================
For the year ended December 31, 1997, the aggregate cost of purchases (plus reinvested dividends) and the proceeds from sales of investments were $217,622,926 and $127,420,840, respectively. 47 Security Life Separate Account L1 Note To Financial Statement (Continued) NOTE D. OTHER POLICY DEDUCTIONS The FirstLine and Strategic Advantage products provide for certain deductions for sales and tax loads from premium payments received from the policyholders and for surrender charges and taxes from amounts paid to policyholders. Such deductions are taken before the purchase of divisional units or after the redemption of divisional units of the Separate Account. Such deductions are not included in the Separate Account financial statements. NOTE E. POLICY LOANS The FirstLine and Strategic Advantage policies allow the policyholders to borrow against their policies by using them as collateral for a loan. At the time they borrow against their policies, 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. 48 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS The following schedule summarizes the changes in divisional units for the year ended December 31, 1997:
INCREASE (DECREASE) OUTSTANDING INCREASE (DECREASE) FOR BENEFITS OUTSTANDING AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR - ------------------------------------------------------------------------------------------------------------------ Neuberger & Berman Management Incorporated: Limited Maturity Bond 218,725.891 113,561.726 221,010.356 (312.579) 552,985.394 Growth 133,567.983 72,014.748 115,419.209 (4,855.856) 316,146.084 Government Income 142,773.403 30,012.660 (96,910.921) (63.583) 75,811.559 Partners 275,892.457 132,546.949 221,612.103 (3,765.788) 626,285.721 Fred Alger Management, Inc.: American Small Capitalization 297,073.322 169,734.967 198,924.378 (16,998.927) 648,733.740 American MidCap Growth 150,480.473 75,478.169 67,932.067 (5,081.227) 288,809.482 American Growth 282,175.287 148,033.913 143,986.035 (4,204.926) 569,990.309 American Leveraged AllCap 53,044.470 37,468.208 59,275.281 (1,245.320) 148,542.639 Fidelity Management & Research Co: Asset Manager 123,908.168 153,704.775 140,410.567 (7,117.404) 410,906.106 Growth 470,285.667 266,903.356 255,537.409 (8,884.044) 983,842.388 Overseas 367,948.109 188,693.884 401,169.888 (7,482.982) 950,328.899 Money Market 753,707.969 6,017,484.702 (5,391,420.354) (76,712.436) 1,303,059.881 Index 500 640,890.650 344,372.391 883,047.870 (5,254.807) 1,863,056.104 INVESCO Funds Group, Inc.: Total Return 64,490.483 34,892.581 86,543.479 (1,884.305) 184,042.238 Industrial Income 87,035.356 67,888.068 144,731.840 (2,102.231) 297,553.033 High Yield 108,999.107 54,880.757 170,263.533 (641.540) 333,501.857 Utilities 18,008.490 6,137.976 56,869.352 (2,897.133) 78,118.685 Van Eck Associates Corporation: Worldwide Balanced 29,808.787 5,838.562 (2,850.258) (657.809) 32,139.282 Worldwide Hard Assets 21,966.093 15,549.154 39,774.054 (242.528) 77,046.773
49 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1996:
INCREASE (DECREASE) OUTSTANDING INCREASE (DECREASE) FOR BENEFITS, OUTSTANDING AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR - ----------------------------------------------------------------------------------------------------------------- Neuberger & Berman Management Incorporated: Limited Maturity Bond 162,009.578 22,341.563 34,959.370 (584.620) 218,725.891 Growth 60,162.107 40,992.586 33,140.220 (726.930) 133,567.983 Government Income 77,187.706 30,340.987 35,590.000 (345.290) 142,773.403 Partners 73,535.288 52,840.719 150,615.480 (1,099.030) 275,892.457 Fred Alger Management, Inc.: American Small Capitalization 80,027.266 41,830.466 176,940.020 (1,724.430) 297,073.322 American MidCap Growth 19,692.860 21,703.253 110,111.630 (1,027.270) 150,480.473 American Growth 69,805.233 79,036.444 135,021.170 (1,687.560) 282,175.287 American Leveraged AllCap 2,494.731 14,117.529 37,093.470 (661.260) 53,044.470 Fidelity Management & Research Co: Asset Manager 11,627.088 11,928.100 100,648.740 (295.760) 123,908.168 Growth 102,248.988 60,000.429 309,854.870 (1,818.620) 470,285.667 Overseas 93,906.733 36,170.266 239,414.430 (1,543.320) 367,948.109 Money Market 178,653.159 3,174,656.740 (2,593,671.600) (5,930.330) 753,707.969 Index 500 91,903.027 43,453.963 507,578.000 (2,044.340) 640,890.650 INVESCO Funds Group, Inc.: Total Return 12,602.664 11,847.269 40,812.090 (771.540) 64,490.483 Industrial Income 20,026.102 12,961.494 54,377.610 (329.850) 87,035.356 High Yield 45,708.358 5,929.679 57,717.210 (356.140) 108,999.107 Utilities 1,879.859 3,104.181 13,093.330 (68.880) 18,008.490 Van Eck Associates Corporation: Worldwide Balanced 7,739.274 10,375.993 12,036.370 (342.850) 29,808.787 Worldwide Hard Assets 1,765.913 4,573.270 15,683.750 (56.840) 21,966.093
50 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE G. SUMMARY OF CHANGES IN UNITS (CONTINUED) The following schedule summarizes the changes in divisional units for the year ended December 31, 1995:
INCREASE (DECREASE) OUTSTANDING INCREASE (DECREASE) FOR BENEFITS, OUTSTANDING AT BEGINNING FOR PAYMENTS FOR DIVISIONAL SURRENDERS, AT END DIVISION OF YEAR RECEIVED TRANSFERS AND CHARGES OF YEAR - ----------------------------------------------------------------------------------------------------------------- Neuberger & Berman Management Incorporated: 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 Capitalization 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 Associates Corporation: Worldwide Balanced 0.000 639.571 7,336.953 (237.250) 7,739.274 Worldwide Hard Assets 0.000 384.059 1,482.141 (100.287) 1,765.913
51 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE H. NET ASSETS Net assets at December 31, 1997 consisted of the following:
ACCUMULATED NET ACCUMULATED NET REALIZED UNREALIZED INVESTMENT GAINS GAINS PRINCIPAL INCOME (LOSSES) ON (LOSSES) ON DIVISION TRANSACTIONS (LOSS) INVESTMENTS INVESTMENTS NET ASSETS - -------------------------------------------------------------------------------------------------------------- Neuberger & Berman Management Incorporated: Limited Maturity Bond $ 6,286,529 $ 232,470 $ (28,218) $ 184,385 $ 6,675,166 Growth 4,746,418 223,742 (3,527) 597,039 5,563,672 Government Income 714,473 85,892 32,358 60,954 893,677 Partners 10,909,312 232,180 517,569 2,132,920 13,791,981 Fred Alger Management, Inc.: American Small Capitalization 9,677,886 154,500 142,295 484,431 10,459,112 American MidCap Growth 4,504,254 30,296 241,701 339,287 5,115,538 American Growth 8,139,377 19,156 262,147 1,195,499 9,616,179 American Leveraged AllCap 2,626,258 (15,471) 327,876 (28,884) 2,909,779 Fidelity Management & Research Co: Asset Manager 5,492,129 183,324 41,537 420,083 6,137,073 Growth 15,514,959 264,528 686,029 1,609,406 18,074,922 Overseas 11,494,919 400,074 369,463 (38,677) 12,225,779 Money Market 14,076,418 936,841 - - 15,013,259 Index 500 32,136,385 373,990 350,070 6,324,691 39,185,136 INVESCO Funds Group, Inc.: Total Return 2,662,803 88,273 76,885 216,649 3,044,610 Industrial Income 4,990,880 488,048 149,036 330,180 5,958,144 High Yield 4,692,747 646,328 353,866 (328,857) 5,364,084 Utilities 1,009,307 27,157 92,315 31,032 1,159,811 Van Eck Associates Corporation: Worldwide Balanced 318,394 4,787 40,764 23,403 387,348 Worldwide Hard Assets 924,453 9,046 25,608 (48,357) 910,750 --------------------------------------------------------------------- Total $140,917,901 $4,385,161 $3,677,774 $13,505,184 $162,486,020 =====================================================================
52 Security Life Separate Account L1 Notes to Financial Statements (continued) NOTE I. YEAR 2000 (UNAUDITED) The Company has initiated a program to prepare the Company's computer systems and applications for the year 2000. This program includes all systems utilized by the Company as well as the systems of other companies that interface with the Company. The Company has completed an assessment and is in the process of modifying portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Accordingly, the Company does not expect the amounts required for this project to have a material effect on its financial position. The project is estimated to be completed no later than June 1999, which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software, and conversions to new software, the Year 2000 will not pose significant operational problems for its computer software systems. However, if such modifications and conversions are not made, or are not completed in a timely manner, it could have a material impact on the operations of the Company. The Company has initiated formal communications and interface testing plans with all of its suppliers and customers to determine the extent to which its interface systems are vulnerable to those third parties' failure to have their systems Year 2000 compatible and will act accordingly to prevent operational disruptions. 53 APPENDIX A Factors for the Cash Value Accumulation Test For a Life Insurance Policy Attained Age Male Female Unisex --- ---- ------ ------ 0 11.727 14.234 12.149 1 11.785 14.209 12.194 2 11.458 13.815 11.857 3 11.128 13.417 11.515 4 10.803 13.023 11.178 5 10.481 12.635 10.845 6 10.161 12.253 10.514 7 9.844 11.875 10.187 8 9.530 11.505 9.863 9 9.221 11.141 9.545 10 8.918 10.784 9.233 11 8.623 10.436 8.928 12 8.338 10.098 8.634 13 8.066 9.771 8.353 14 7.808 9.455 8.085 15 7.564 9.150 7.831 16 7.335 8.857 7.592 17 7.118 8.575 7.364 18 6.911 8.302 7.148 19 6.713 8.038 6.939 20 6.521 7.782 6.737 21 6.334 7.534 6.540 22 6.150 7.293 6.347 23 5.969 7.059 6.158 24 5.791 6.831 5.971 25 5.615 6.611 5.788 26 5.441 6.396 5.608 27 5.271 6.188 5.431 28 5.104 5.986 5.258 29 4.940 5.791 5.089 30 4.781 5.601 4.925 31 4.626 5.418 4.765 32 4.476 5.241 4.610 33 4.330 5.069 4.459 34 4.188 4.902 4.314 35 4.052 4.742 4.173 ________________________________________________________________________________ FirstLine II 60 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy Attained Age Male Female Unisex --- ---- ------ ------ 36 3.920 4.586 4.037 37 3.793 4.437 3.906 38 3.670 4.293 3.780 39 3.553 4.154 3.658 40 3.439 4.021 3.541 41 3.330 3.894 3.429 42 3.226 3.771 3.322 43 3.125 3.654 3.218 44 3.028 3.541 3.119 45 2.936 3.432 3.023 46 2.846 3.328 2.931 47 2.761 3.227 2.843 48 2.678 3.129 2.758 49 2.599 3.035 2.676 50 2.522 2.945 2.597 51 2.449 2.858 2.522 52 2.378 2.774 2.449 53 2.311 2.693 2.379 54 2.246 2.615 2.312 55 2.184 2.540 2.248 56 2.125 2.468 2.187 57 2.068 2.398 2.128 58 2.014 2.330 2.071 59 1.962 2.265 2.017 60 1.912 2.201 1.965 61 1.864 2.139 1.915 62 1.818 2.079 1.867 63 1.774 2.022 1.821 64 1.732 1.967 1.777 65 1.692 1.914 1.735 66 1.654 1.863 1.695 67 1.617 1.815 1.657 68 1.583 1.769 1.620 69 1.550 1.724 1.585 ________________________________________________________________________________ FirstLine II 61 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy Attained Age Male Female Unisex --- ---- ------ ------ 70 1.518 1.681 1.552 71 1.488 1.639 1.520 72 1.459 1.599 1.489 73 1.432 1.560 1.460 74 1.406 1.524 1.433 75 1.382 1.490 1.407 76 1.359 1.457 1.383 77 1.338 1.427 1.360 78 1.318 1.398 1.338 79 1.299 1.371 1.318 80 1.281 1.345 1.298 81 1.264 1.321 1.280 82 1.248 1.298 1.262 83 1.233 1.277 1.245 84 1.218 1.257 1.230 85 1.205 1.238 1.215 86 1.193 1.221 1.202 87 1.181 1.205 1.189 88 1.171 1.190 1.177 89 1.160 1.176 1.166 90 1.151 1.163 1.155 91 1.141 1.150 1.144 92 1.131 1.137 1.133 93 1.120 1.125 1.122 94 1.109 1.112 1.110 95 1.097 1.098 1.097 96 1.083 1.084 1.084 97 1.069 1.069 1.069 98 1.054 1.054 1.054 99 1.040 1.040 1.040 100 1.000 1.000 1.000 ________________________________________________________________________________ FirstLine II 62 APPENDIX B Factors for the Guideline Premium/Cash Value Corridor Test For a Life Insurance Policy 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. ________________________________________________________________________________ FirstLine II 63 APPENDIX C Performance Information POLICY PERFORMANCE The following hypothetical illustrations demonstrate how the actual investment experience of each Division of the Variable Account affects the Cash Surrender Value, Account Value and Death Benefit of a Policy. These hypothetical illustrations are based on the actual historical return of each Portfolio as if a Policy had been issued on the date indicated. Each Portfolio's Annual Total Return is based on the total return calculated for each fiscal year. These Annual Total Return figures reflect the Portfolio's management fees and other operating expenses but do not reflect the Policy level or Variable Account asset based charges and deductions, which if reflected, would result in lower total return figures than those shown. The illustrations are based on the payment of a $3,750 annual premium, paid at the beginning of each year, for a hypothetical Policy with a $200,000 face amount, the Cash Value Accumulation Test, death benefit Option 1, issued to a preferred, 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 Refund, page 31. This prospectus also contains illustrations based on assumed rates of return. See Illustrations of Death Benefits, Account Values, Surrender Values and Accumulated Premiums, page 47. ________________________________________________________________________________ FirstLine II 64 HYPOTHETICAL ILLUSTRATIONS Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 - -------------------------------------------------------------------------------- Neuberger & Berman AMT Limited Maturity Bond Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 7.17% 1,576 3,064 200,000 12/31/89 10.77% 4,822 6,497 200,000 12/31/90 8.32% 8,125 9,988 200,000 12/31/91 11.34% 12,165 14,215 200,000 12/31/92 5.18% 15,582 17,782 200,000 12/31/93 6.63% 19,561 21,761 200,000 12/31/94 (0.15)% 22,047 24,247 200,000 12/31/95 10.94% 27,735 29,660 200,000 12/31/96 4.31% 31,758 33,409 200,000 12/31/97 6.74% 36,728 38,103 200,000 Neuberger & Berman AMT Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 25.97% 2,170 3,657 200,000 12/31/89 29.47% 6,743 8,418 200,000 12/31/90 (8.19)% 8,304 10,166 200,000 12/31/91 29.73% 14,801 16,851 200,000 12/31/92 9.54% 19,210 21,410 200,000 12/31/93 6.79% 23,454 25,654 200,000 12/31/94 (4.99)% 24,538 26,738 200,000 12/31/95 31.73% 36,655 38,580 200,000 12/31/96 9.14% 43,041 44,691 200,000 12/31/97 29.01% 59,324 60,699 200,000 Neuberger & Berman AMT Partners Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 2,502 3,990 200,000 12/31/96 29.57% 7,178 8,853 200,000 12/31/97 31.25% 13,398 15,260 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 65 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 - -------------------------------------------------------------------------------- Alger American Small Capitalization Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/89 64.48% 3,393 4,881 200,000 12/31/90 8.71% 6,661 8,336 200,000 12/31/91 57.54% 15,724 17,586 200,000 12/31/92 3.55% 18,981 21,031 200,000 12/31/93 13.28% 24,668 26,868 200,000 12/31/94 (4.38)% 25,930 28,130 200,000 12/31/95 44.31% 42,201 44,401 200,000 12/31/96 4.18% 46,832 48,757 200,000 12/31/97 11.39% 55,280 56,930 200,000 Alger American MidCap Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 1,303 2,790 200,000 12/31/95 44.45% 6,512 8,187 200,000 12/31/96 11.90% 10,350 12,213 200,000 12/31/97 15.01% 15,192 17,242 200,000 Alger American Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 1,481 2,968 200,000 12/31/91 40.39% 6,521 8,196 200,000 12/31/92 12.38% 10,414 12,276 200,000 12/31/93 22.47% 16,411 18,461 200,000 12/31/94 1.45% 19,228 21,428 200,000 12/31/95 36.37% 30,699 32,899 200,000 12/31/96 13.35% 37,964 40,164 200,000 12/31/97 25.75% 51,715 53,640 200,000 Alger American Leveraged All Cap Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 1,730 3,217 200,000 12/31/97 19.68% 5,555 7,230 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 66 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 Fidelity VIP Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 15.58% 1,841 3,329 200,000 12/31/89 31.51% 6,451 8,126 200,000 12/31/90 (11.73)% 7,643 9,505 200,000 12/31/91 45.51% 15,938 17,988 200,000 12/31/92 9.32% 20,403 22,603 200,000 12/31/93 19.37% 27,943 30,143 200,000 12/31/94 (0.02)% 30,430 32,630 200,000 12/31/95 35.36% 45,684 47,609 200,000 12/31/96 14.71% 55,679 57,329 200,000 12/31/97 23.48% 72,271 73,646 200,000 Fidelity VIP Overseas Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 8.13% 1,607 3,094 200,000 12/31/89 26.28% 5,819 7,494 200,000 12/31/90 (1.67)% 8,146 10,009 200,000 12/31/91 8.00% 11,751 13,801 200,000 12/31/92 (10.72)% 12,473 14,673 200,000 12/31/93 37.35% 21,695 23,895 200,000 12/31/94 1.72% 24,672 26,872 200,000 12/31/95 9.74% 30,280 32,206 200,000 12/31/96 13.15% 37,507 39,157 200,000 12/31/97 11.56% 44,874 46,249 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 67 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 Fidelity VIP Money Market Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/88 7.39% 1,583 3,071 200,000 12/31/89 9.12% 4,728 6,403 200,000 12/31/90 8.04% 7,997 9,860 200,000 12/31/91 6.09% 11,344 13,394 200,000 12/31/92 3.90% 14,511 16,711 200,000 12/31/93 3.23% 17,754 19,954 200,000 12/31/94 4.25% 21,256 23,456 200,000 12/31/95 5.87% 25,523 27,448 200,000 12/31/96 5.41% 29,791 31,441 200,000 12/31/97 5.51% 34,211 35,586 200,000 Fidelity VIP II Asset Manager Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/90 6.72% 1,562 3,049 200,000 12/31/91 22.56% 5,533 7,208 200,000 12/31/92 11.71% 9,240 11,103 200,000 12/31/93 21.23% 14,804 16,854 200,000 12/31/94 (6.09)% 16,107 18,307 200,000 12/31/95 16.96% 22,320 24,520 200,000 12/31/96 14.60% 28,842 31,042 200,000 12/31/97 20.65% 38,546 40,471 200,000 Fidelity VIP II Index 500 Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/93 9.74% 1,657 3,145 200,000 12/31/94 1.04% 4,303 5,978 200,000 12/31/95 37.19% 10,181 12,043 200,000 12/31/96 22.82% 16,180 18,230 200,000 12/31/97 32.82% 25,663 27,863 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 68 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 INVESCO VIF Total Return Portfolio Year Annual Total Cash Surrender Account Benefit Ended Return * Value Value Death 12/31/95 22.79% 2,069 3,557 200,000 12/31/96 12.18% 5,459 7,134 200,000 12/31/97 22.91% 10,301 12,163 200,000 INVESCO VIF Industrial Income Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 2,274 3,761 200,000 12/31/96 22.28% 6,382 8,057 200,000 12/31/97 28.17% 12,041 13,877 200,000 INVESCO VIF High Yield Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 1,973 3,461 200,000 12/31/96 16.59% 5,642 7,317 200,000 12/31/97 17.33% 9,945 11,807 200,000 INVESCO VIF Utilities Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 1,636 3,124 200,000 12/31/96 12.76% 5,012 6,688 200,000 12/31/97 23.41% 9,803 11,665 200,000 Van Eck Worldwide Hard Assets Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 1,259 2,746 200,000 12/31/92 (4.09)% 3,603 5,278 200,000 12/31/93 64.83 % 11,541 13,404 200,000 12/31/94 (4.78)% 13,298 15,348 200,000 12/31/95 10.99 % 17,836 20,036 200,000 12/31/96 18.04 % 24,583 26,783 200,000 12/31/97 (1.67)% 26,593 28,793 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 69 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash Value Accumulation Test Standard Risk Class Death Benefit Option 1 Stated Death Benefit $200,000 Annual Premium $3,750 Van Eck Worldwide Bond Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 11.25% 1,705 3,192 200,000 12/31/91 18.39% 5,444 7,119 200,000 12/31/92 (5.25)% 7,416 9,279 200,000 12/31/93 7.79% 10,940 12,990 200,000 12/31/94 (1.32)% 13,257 15,457 200,000 12/31/95 17.30% 19,062 21,262 200,000 12/31/96 2.53% 22,199 24,399 200,000 12/31/97 2.38% 25,566 27,491 200,000 Van Eck Worldwide Emerging Markets Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 2,197 3,684 200,000 12/31/97 (11.61)% 3,989 5,664 200,000 AIM VI Capital Appreciation Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 1,429 2,917 200,000 12/31/95 35.69% 6,165 7,840 200,000 12/31/96 17.58% 10,582 12,445 200,000 12/31/97 13.51% 15,225 17,275 200,000 AIM VI Government Securities Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (3.73%) 1,234 2,721 200,000 12/31/95 15.56% 4,724 6,399 200,000 12/31/96 2.29% 7,449 9,312 200,000 12/31/97 8.16% 11,021 13,071 200,000 The assumptions underlying these values are described in Performance Information, page 159. * 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. ________________________________________________________________________________ FirstLine II 70 -----END PRIVACY-ENHANCED MESSAGE-----