-----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, P5Y+lt0oGYr+ETQ6NrTSKK3i5L2W6u98Q4mlbCa5Brt+gYs8Ss5IjftkPrdebqLz SGR112vy1t6+KQfNr/9iOw== 0000950109-98-002747.txt : 19980428 0000950109-98-002747.hdr.sgml : 19980428 ACCESSION NUMBER: 0000950109-98-002747 CONFORMED SUBMISSION TYPE: 485BPOS PUBLIC DOCUMENT COUNT: 27 FILED AS OF DATE: 19980427 EFFECTIVENESS DATE: 19980427 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: 485BPOS SEC ACT: SEC FILE NUMBER: 033-74190 FILM NUMBER: 98601916 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 485BPOS 1 SECURITY LIFE PEAMEND NO. 7 As filed with the Securities and Exchange Commission on April 27, 1998 Registration No. 33-74190 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-6 FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933 OF SECURITIES OF UNIT INVESTMENT TRUSTS REGISTERED ON FORM N-8B-2 Post-Effective Amendment No. 7 ----------------- SECURITY LIFE SEPARATE ACCOUNT L1 (Exact Name of Trust) SECURITY LIFE OF DENVER INSURANCE COMPANY (Name of Depositor) 1290 Broadway Denver, Colorado 80203-5699 (Address of Depositor's Principal Executive Offices) Copy to: GARY W. WAGGONER, ESQ. DIANE E. AMBLER, ESQ. Security Life of Denver Insurance Company Mayer, Brown & Platt 1290 Broadway 2000 Pennsylvania Avenue, N.W. Denver, Colorado 80203-5699 Washington, D.C. 20006-1882 (202) 778-0641 (Name and Address of Agent for Service) ---------------------------- It is proposed that this filing will become effective: |_| on (date) pursuant to paragraph (a) of Rule 485 |_| 60 days after filing pursuant to paragraph (a) of Rule 485 |X| on May 1, 1997 pursuant to paragraph (b) of Rule 485 |_| immediately upon filing pursuant to paragraph (b) of Rule 485 |_| this post-effective amendment designates a new effective date for a previously filed post-effective amendment Title of securities being registered: Variable life insurance policies. Approximate Date of Proposed Public Offering: As soon as practical after the effective date. SECURITY LIFE SEPARATE ACCOUNT L1 (File No. 33-74190) Cross-Reference Table Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 1, 2 Cover; Security Life of Denver Insurance Company; Security Life Separate Account L1 3 Inapplicable 4 Security Life of Denver Insurance Company 5, 6 Security Life Separate Account L1 7 Inapplicable 8 Financial Statements 9 Inapplicable 10(a), (b), (c), (d), (e) Policy Summary; Policy Values, Determining the Value of Amounts in the Divisions of the Variable Account; Charges, Deductions and Refunds; Surrender; Partial Withdrawals; The Guaranteed Interest Division; Transfers of Account Values; Right to Exchange Policy; Lapse; Reinstatement; Premiums 10(f) Voting Privileges; Right to Change Operations 10(g), (h) Right to Change Operations 10(i) Tax Considerations; Detailed Information about the FirstLine Variable Universal Life Policy; Other General Policy Provisions; The Guaranteed Interest Division 11, 12 Security Life Separate Account L1 13 Policy Summary; Charges, Deductions and Refunds; Corporate Purchasers and Group or Sponsored Arrangements ii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 14, 15 Policy Summary; Free Look; Other General Policy Provisions; Applying for a Policy 16 Premiums; Allocation of Net Premiums; How We Calculate Accumulation Unit Values for Each Division 17 Payment; Surrender; Partial Withdrawal 18 Policy Summary; Tax Considerations; Detailed Information about the FirstLine Variable Universal Life Policy; Security Life Separate Account L1; Persistency Refund 19 Reports to Policy Owners; Notification and Claims Procedures; Performance Information 20 See 10(g) & 10(a) 21 Policy Loans 22 Policy Summary; Premiums; Grace Period; Security Life Separate Account L1; Detailed Information about the FirstLine Variable Universal Life Policy 23 Inapplicable 24 Inapplicable 25 Security Life of Denver Insurance Company 26 Inapplicable 27, 28, 29, 30 Security Life of Denver Insurance Company 31, 32, 33, 34 Inapplicable 35 Inapplicable 36 Inapplicable iii Form N-8B-2 Item No. Caption in Prospectus - -------------------- --------------------- 37 Inapplicable 38, 39, 40, 41(a) Other General Policy Provisions; Distribution of the Policies; Security Life of Denver Insurance Company 41(b), 41(c), 42, 43 Inapplicable 44 Determining the Value in the Divisions of the Variable Account; How We Calculate Accumulation Unit Values for Each Division 45 Inapplicable 46 Partial Withdrawals; Detailed Information about the FirstLine Variable Universal Life Policy 47, 48, 49, 50 Inapplicable 51 Detailed Information about the FirstLine Variable Universal Life Policy 52 Determining the Value in the Divisions of the Variable Account; Right to Change Operations 53(a) Tax Considerations 53(b), 54, 55 Inapplicable 56, 57, 58 Inapplicable 59 Financial Statements iv FIRSTLINE 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 2 TABLE OF CONTENTS DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS ....................... 7 POLICY SUMMARY ............................................................ 10 GENERAL INFORMATION ....................................................... 10 DEATH BENEFITS ............................................................ 10 BENEFITS AT MATURITY ...................................................... 10 ADDITIONAL BENEFITS ....................................................... 10 PREMIUMS .................................................................. 10 ALLOCATION OF NET PREMIUMS ................................................ 10 MAXIMUM NUMBER OF INVESTMENT DIVISIONS .................................... 11 POLICY VALUES ............................................................. 11 DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT ............ 11 HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION ............... 11 TRANSFERS OF ACCOUNT VALUES ............................................... 11 DOLLAR COST AVERAGING ..................................................... 11 AUTOMATIC REBALANCING ..................................................... 11 LOANS ..................................................................... 11 PARTIAL WITHDRAWALS ....................................................... 12 SURRENDER ................................................................. 12 RIGHT TO EXCHANGE POLICY .................................................. 12 LAPSE ..................................................................... 12 REINSTATEMENT ............................................................. 12 CHARGES AND DEDUCTIONS .................................................... 12 PERSISTENCY REFUND ........................................................ 13 TAX CONSIDERATIONS ........................................................ 13 INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION ......................... 13 SECURITY LIFE OF DENVER INSURANCE COMPANY ................................. 14 SECURITY LIFE SEPARATE ACCOUNT L1 ......................................... 14 MAXIMUM NUMBER OF INVESTMENT DIVISIONS .................................... 15 INVESTMENT OBJECTIVES OF THE PORTFOLIOS ................................... 15 THE GUARANTEED INTEREST DIVISION .......................................... 18 DETAILED INFORMATION ABOUT THE FIRSTLINE VARIABLE UNIVERSAL LIFE POLICY ... 18 APPLYING FOR A POLICY ..................................................... 18 TEMPORARY INSURANCE ....................................................... 18 PREMIUMS .................................................................. 19 Scheduled Premiums ................................................. 19 Unscheduled Premium Payments ....................................... 19 Minimum Annual Premium ............................................. 19 Special Continuation Period ........................................ 19 Premium Payments Affect the Coverage ............................... 20 Choice of Definitional Tests ....................................... 20 Choice of Guaranteed Minimum Death Benefit Provisions .............. 20 Modified Endowment Contracts ....................................... 20 ALLOCATION OF NET PREMIUMS ................................................ 20 DEATH BENEFITS ............................................................ 21 Death Benefit Options .............................................. 21 Changes in Death Benefit Option .................................... 22 Changes in Death Benefit Amounts ................................... 22 Guaranteed Minimum Death Benefit Provision ......................... 23 - -------------------------------------------------------------------------------- FirstLine 3 Requirements to Maintain the Guarantee Period ........................ 23 ADDITIONAL BENEFITS ....................................................... 24 Accidental Death Benefit Rider ....................................... 24 Adjustable Term Insurance Rider ...................................... 24 Additional Insured Rider ............................................. 25 Children's Insurance Rider ........................................... 25 Right to Change Insured Rider ........................................ 25 Guaranteed Insurability Rider ........................................ 25 Waiver of Cost of Insurance Rider .................................... 25 Waiver of Specified Premium Rider .................................... 25 BENEFITS AT MATURITY ...................................................... 25 POLICY VALUES ............................................................. 25 Account Value ........................................................ 25 Cash Surrender Value ................................................. 26 Net Cash Surrender Value ............................................. 26 Net Account Value .................................................... 26 DETERMINING THE VALUE IN THE DIVISIONS OF THE VARIABLE ACCOUNT ............ 26 HOW WE CALCULATE ACCUMULATION UNIT VALUES FOR EACH DIVISION ............... 26 TRANSFERS OF ACCOUNT VALUES ............................................... 27 DOLLAR COST AVERAGING ..................................................... 27 AUTOMATIC REBALANCING ..................................................... 28 POLICY LOANS .............................................................. 28 PARTIAL WITHDRAWALS ....................................................... 29 SURRENDER ................................................................. 30 RIGHT TO EXCHANGE POLICY .................................................. 30 LAPSE ..................................................................... 30 If the Guaranteed Minimum Death Benefit Provision Is Not in Effect ... 30 If the Guaranteed Minimum Death Benefit Provision Is in Effect ....... 31 GRACE PERIOD .............................................................. 31 REINSTATEMENT ............................................................. 31 CHARGES, DEDUCTIONS AND REFUNDS ........................................... 32 DEDUCTIONS FROM PREMIUMS .................................................. 32 Tax Charges .......................................................... 32 Sales Charge ......................................................... 32 DAILY DEDUCTIONS FROM THE VARIABLE ACCOUNT ................................ 32 Mortality and Expense Risk Charge .................................... 32 MONTHLY DEDUCTIONS FROM THE ACCOUNT VALUE ................................. 32 Initial Policy Charge ................................................ 33 Monthly Administrative Charge ........................................ 33 Cost of Insurance Charges ............................................ 33 Charges for Additional Benefits ...................................... 33 Guaranteed Minimum Death Benefit Charge .............................. 33 Changes in Monthly Charges ........................................... 33 POLICY TRANSACTION FEES ................................................... 34 Partial Withdrawal ................................................... 34 Transfers ............................................................ 34 Allocation Changes ................................................... 34 Illustrations ........................................................ 34 PERSISTENCY REFUND ........................................................ 34 SURRENDER CHARGE .......................................................... 34 Administrative Surrender Charge ...................................... 35 Sales Surrender Charge ............................................... 35 Calculation of Surrender Charge ...................................... 36 CHARGES FROM PORTFOLIOS ................................................... 37 - -------------------------------------------------------------------------------- FirstLine 4 Portfolio Annual Expenses ............................................ 38 GROUP OR SPONSORED ARRANGEMENTS OR CORPORATE PURCHASERS ................... 40 OTHER CHARGES ............................................................. 40 TAX CONSIDERATIONS ........................................................ 40 LIFE INSURANCE DEFINITION ................................................. 40 DIVERSIFICATION REQUIREMENTS .............................................. 41 MODIFIED ENDOWMENT CONTRACTS .............................................. 41 TAX TREATMENT OF PREMIUMS ................................................. 42 LOANS, LAPSES, SURRENDERS AND WITHDRAWALS ................................. 42 If the Policy Is Not a Modified Endowment Contract ................... 42 If the Policy Is a Modified Endowment Contract ....................... 42 ALTERNATIVE MINIMUM TAX ................................................... 43 SECTION 1035 EXCHANGES .................................................... 43 TAX-EXEMPT POLICY OWNERS .................................................. 43 CHANGES TO COMPLY WITH LAW ................................................ 43 OTHER ..................................................................... 43 ADDITIONAL INFORMATION ABOUT THE POLICY ................................... 44 VOTING PRIVILEGES ......................................................... 44 RIGHT TO CHANGE OPERATIONS ................................................ 44 REPORTS TO OWNERS ......................................................... 45 OTHER GENERAL POLICY PROVISIONS ........................................... 45 FREE LOOK PERIOD .......................................................... 45 THE POLICY ................................................................ 45 AGE ....................................................................... 45 OWNERSHIP ................................................................. 46 BENEFICIARY ............................................................... 46 COLLATERAL ASSIGNMENT ..................................................... 46 INCONTESTABILITY .......................................................... 46 MISSTATEMENTS OF AGE OR SEX ............................................... 46 SUICIDE ................................................................... 46 PAYMENT ................................................................... 47 NOTIFICATION AND CLAIMS PROCEDURES ........................................ 47 TELEPHONE PRIVILEGES ...................................................... 47 NON-PARTICIPATING ......................................................... 47 DISTRIBUTION OF THE POLICIES .............................................. 47 SETTLEMENT PROVISIONS ..................................................... 48 ILLUSTRATIONS OF DEATH BENEFITS, ACCOUNT VALUES, SURRENDER VALUES, AND ACCUMULATED PREMIUMS .............................................. 49 ADDITIONAL INFORMATION .................................................... 57 DIRECTORS AND OFFICERS .................................................... 57 STATE REGULATION .......................................................... 60 LEGAL MATTERS ............................................................. 60 LEGAL PROCEEDINGS ......................................................... 60 EXPERTS ................................................................... 60 REGISTRATION STATEMENT .................................................... 60 YEAR 2000 PREPAREDNESS .................................................... 60 FINANCIAL STATEMENTS ...................................................... 61 - -------------------------------------------------------------------------------- FirstLine 5 APPENDIX A ................................................................ 155 APPENDIX B ................................................................ 163 APPENDIX C ................................................................ 164 - -------------------------------------------------------------------------------- FirstLine 6 DEFINITION OF SPECIAL TERMS USED IN THIS PROSPECTUS As used in this prospectus, the following terms have the indicated meanings. There are other capitalized terms which are explained or defined in other parts of this prospectus. Account Value -- The 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. 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. 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 may examine the Policy and return it for a refund. This is also called the Right to Examine Policy Period. General Account -- The account which contains all of our assets other than those held in the Variable Account or our other separate accounts. 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 7 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. Maturity Date -- The date the Policy matures. This is the Policy anniversary on which the Insured's Age is 100. 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 Loan -- The total amount borrowed from the Policy, plus any Policy Loan interest capitalized when due, less any Policy Loan repayments. Policy Date -- The date upon which the Policy becomes effective. The Policy Date is used to determine the Monthly Processing Date, Policy months, Policy years, and Policy monthly, quarterly, semi-annual and annual anniversaries. Unless otherwise indicated, the term Policy anniversary refers to the annual anniversary of the Policy. Portfolios -- The investment options available to the Divisions of the Variable Account. Each Portfolio has a defined investment objective. Premium Class -- The underwriting class into which the Insured is categorized. This includes 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 - -------------------------------------------------------------------------------- FirstLine 8 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, 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 9 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 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. When the Policy reaches the Maturity Date during the lifetime of the Insured, we will pay a maturity benefit in lieu of a death benefit. 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 21. When we issue the Policy, the death benefit generally 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 all 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 also 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 Choice of Guaranteed Minimum Death Benefit Provisions, page 20. Benefits at Maturity If the Insured is still living on the Maturity Date, we will pay the Net Account Value. The Policy will then end. See Benefits at Maturity, page 25. 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 24. 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 to meet the requirements for the three-year Special Continuation Period. If the Owner purchases one of two Guaranteed Minimum Death Benefit provisions, 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 one of the Guaranteed Minimum Death Benefit provisions 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 20. 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 held in that Division. 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 - -------------------------------------------------------------------------------- FirstLine 10 amounts held in the Guaranteed Interest Division will remain in that Division; and the funds held in the Fidelity VIP Money Market Division will be reallocated to 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. The sum must equal 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 also 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 26. 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 Division's 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 Delivery and Free Look Periods, 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, amounts from the Guaranteed Interest Division may be transferred. 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 27. Dollar Cost Averaging Dollar Cost Averaging is available by electing this feature at application or at any other time, by completing the appropriate form or by telephoning us, if the proper telephone authorization is on file with us. 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 28. Loans - -------------------------------------------------------------------------------- FirstLine 11 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 3.75%. The Loan Division earns a guaranteed rate of interest equal to 3% on an annual basis. See Policy Loans, page 28. Partial Withdrawals A partial withdrawal of part of the Net Cash Surrender Value may be requested any time after the first Policy year, within limits. One Partial Withdrawal is allowed each 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. 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 30. 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 all 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 a Guaranteed Minimum Death Benefit provision has been elected and the requirements to maintain the Guarantee Period 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 cash surrender 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 Loan 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. The 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 if the Policy is surrendered during the 14 Policy years following the Policy Date or the addition of a new Segment. See Sales Surrender Charge, page 35. See Deductions from Premiums, page 32. 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. Monthly Deductions From The Account Value: The following charges are deducted from the Account Value at the beginning - -------------------------------------------------------------------------------- FirstLine 12 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 $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit if greater). The per thousand charge is limited to $15 per month. (iii) Cost of Insurance Charge -- A monthly charge based on the Net Amount at Risk on the life of the Insured. The amount of this charge differs for Base Death Benefit, any Adjustable Term Insurance Rider, and multiple Segments. (iv) Charges for Additional Benefits -- The cost of any additional benefits added by Rider, other than the Adjustable Term Insurance Rider. (v) Guaranteed Minimum Death Benefit Charge -- currently $0.005 per thousand of the Stated Death Benefit during the Guarantee Period. This charge is guaranteed to never be greater than $.01 per thousand of the Stated Death Benefit. See Monthly Deductions from the Account Value, page 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. See Policy Transaction Fees, page 34. (i) Partial Withdrawal fee -- the lesser of $25 or 2% of the amount requested. (ii) Transfer fee -- twelve transfers per Policy year are permitted without fees; for each transfer thereafter, a $25 fee is charged. (iii) Allocation Changes -- five premium allocation or automatic rebalancing 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 with a fee; for each illustration thereafter, a $25 fee may be charged. 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 also may be assessed if a Partial Withdrawal is taken. The charge consists of an administrative Surrender Charge plus a 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 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 37. 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 34. 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 40. Generally, under current Federal income tax law, Account Value earnings are not subject to income tax as long as they remain within the Policy. Loans, Partial Withdrawals, surrender, lapse, or an exchange of Insured may result in recognition of ordinary income for tax purposes and may result in penalties if the Policy is considered a Modified Endowment Contract as explained in Modified Endowment Contracts, page 41. INFORMATION ABOUT SECURITY LIFE, THE VARIABLE ACCOUNT, THE INVESTMENT OPTIONS AND THE GUARANTEED INTEREST DIVISION - -------------------------------------------------------------------------------- FirstLine 13 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 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 - -------------------------------------------------------------------------------- FirstLine 14 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 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 - -------------------------------------------------------------------------------- FirstLine 15 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 may enter into futures contracts on securities indexes as well as purchase and sell call and put options on these futures. The Portfolio may borrow money for the purchase of additional securities, 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. 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 - -------------------------------------------------------------------------------- FirstLine 16 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. 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 or otherwise backed by - -------------------------------------------------------------------------------- FirstLine 17 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 any interests therein are not generally subject to regulation under these Acts. As a result, the staff of the SEC has not reviewed the disclosures included in this prospectus which relate to the General Account and the Guaranteed Interest Division. These disclosures, however, may be subject to certain provisions of the Federal securities law relating to the accuracy and completeness of statements made in this prospectus. For more details regarding the General Account, see the Policy. The amount in the Guaranteed Interest Division at any time is the sum of all Net Premiums allocated to that Division, all transfers to the Guaranteed Interest Division and earned interest. This amount is reduced by amounts transferred out of or withdrawn from the Guaranteed Interest Division and deductions from 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 amounts in the Guaranteed Interest Division. These interest rates will never be less than the minimum guaranteed interest rate of 3% 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 VARIABLE UNIVERSAL LIFE POLICY This prospectus describes our standard FirstLine Variable Universal Life Policy. There may be differences in the Policy because of the requirements of the state where the Policy is issued. Any such differences will be defined in the Policy. The illustrations beginning on page 51 are intended to provide an idea of how the key financial elements of FirstLine work. The illustrations show Premiums, Account Values, Cash Surrender Values and Death Benefits. Applying for a Policy A FirstLine 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. 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 - -------------------------------------------------------------------------------- FirstLine 18 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 in the answers in the binding limited life insurance coverage form or in the application, a proposed Insured dies by suicide or intentional self-inflicted injury, or 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 pay 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. Other than the first one, required premiums may be paid by having us withdraw them via 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 set. If one of the Guaranteed Minimum Death Benefit provisions has been chosen, 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 41 and Changes to Comply with Law, page 43. If a Policy Loan is outstanding, any payment which is not a Scheduled Premium payment received before the Maturity Date is considered a loan repayment, unless 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 applicable Minimum Annual Premium based on the Age, sex and Premium Class of the Insured, the Stated Death Benefit of the Policy and any additional benefits selected. We may reduce the Minimum Annual Premium for group or sponsored arrangements or corporate purchasers. The Minimum Annual Premium for the Policy 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. 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. - -------------------------------------------------------------------------------- FirstLine 19 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 19. If one of the Guaranteed Minimum Death Benefit provisions is elected, 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 23. 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 40. If the Guideline Premium/Cash Value Corridor Test is chosen, the allowable premium payments relative to the Policy death benefit will be limited. Choice of Guaranteed Minimum Death Benefit Provisions The Owner will have the opportunity to choose from one of two Guaranteed Minimum Death Benefit provisions, which may extend the period that the Stated Death Benefit of the Policy will remain in effect if the Divisions of the Variable Account suffer adverse investment experience. These provisions require premium payment levels, the Guarantee Period Annual Premium, which are higher than the Minimum Annual Premium and will incur an extra charge from the Account Value each month during the Guarantee Period. In addition, the Owner must diversify the Net Account Value according to our requirements. See Guaranteed Minimum Death Benefit Provision, page 23. The Guarantee Period Annual Premium depends on which of the two Guarantee Periods is chosen, as well as the Stated Death Benefit of the Policy, the Insured's Age, sex, and Premium Class, the death benefit option chosen, and Rider coverage. For Policies with no other Rider coverage, the Guarantee Period Annual Premium for the Lifetime Guarantee Period will be equal to the guideline annual premium determined in accordance with the Federal income tax law definition of life insurance; the Guarantee Period Annual Premium for the Ten Year/Age 65 Guarantee Period will be the greater of the Target Premium or Minimum Annual Premium for each Segment. The Guarantee Period Annual Premium for the Lifetime Guarantee Period will be greater than that required for the Ten Year/Age 65 Guarantee Period. Adding additional benefits to the Policy will increase the Guarantee Period Annual Premium above those indicated above. 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 41. 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 the Net Premium. No allocation will be made prior to the Investment Date. After the Investment Date, the Net Premium is added to the Account Value according to the Owner's instructions. 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 automatically will be allocated according to the most recent premium allocation instructions. Thereafter, Net Premiums received 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. - -------------------------------------------------------------------------------- FirstLine 20 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 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. 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; thus no sales charge applies. The cost is included in the monthly cost of insurance charges discussed below. See Adjustable Term Insurance Rider, page 24. 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 Loan 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 three death benefit options if the Policy was delivered on or before December 31, 1997, or two death benefit options (Option 1 or Option 2) if delivered thereafter. These options may result in a Base Death Benefit which exceeds the Stated Death Benefit. The death benefit option may be changed on any Policy anniversary. See Changes In Death Benefit Option, page 22. Under Option 1, the Base Death Benefit is the greater of: (i) the Stated Death Benefit on the date of the Insured's death; or (ii) 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: (i) the Stated Death Benefit plus the Account Value on the date of the Insured's death; or (ii) 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. If the policy was delivered on or before December 31, 1997, the Owner may also choose Option 3. Under Option 3 the Base Death Benefit is the greater of: (i) the Stated Death Benefit of the Policy plus the sum of all premiums paid minus Partial Withdrawals taken under the Policy; or (ii) 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. Therefore, the Base Death Benefit generally will increase as the premiums are paid, and decrease as Partial Withdrawals are taken. In no event will the Base Death Benefit be less than the Stated Death Benefit. 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 - -------------------------------------------------------------------------------- FirstLine 21 the law. The factors are determined based upon the Age and possibly Premium Class and 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 40. 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. The change 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 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, or from Option 1 to Option 3, evidence that the Insured is insurable according to our normal rules of underwriting for that class of policy must be submitted to us. We may not allow 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 change minus the Account Value as of the effective date of the change. Option 2 Option 1 Stated Death Benefit prior to change plus the Account Value as of the effective date of the change. Option 1 Option 3 Stated Death Benefit prior to change minus (i) the sum of the premiums paid, plus (ii) Partial Withdrawals taken as of the effective date of the change. Option 3 Option 1 Stated Death Benefit prior to change plus (i) the sum of the premiums paid, minus (ii) Partial Withdrawals taken as of the effective date of the change. Option 2 Option 3 Stated Death Benefit prior to change plus (i) the Account Value as of the effective date of the change, minus (ii) the sum of premiums paid minus Partial Withdrawals taken as of the effective date of the change. Option 3 Option 2 Stated Death Benefit prior to change plus (i) the sum of the premiums paid minus Withdrawals taken as of the effective date of the change, minus (ii) the Account Value as of the effective date of the change. For purposes of a death benefit option change, the Account Value will be allocated to each 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 when this type of change is made, nor is there an adjustment to the Target Premium. See Surrender Charge, page 34. These increases and decreases in Stated Death Benefit are made so that the amount of the Base Death Benefit remains the same on the date of the change. Thus, there is no immediate change in the Net Amount at Risk on which our cost of insurance charges are based. See Cost of Insurance Charges, page 33. In addition, there will be no change to the amount of term insurance if the Adjustable Term Insurance Rider has been added. 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 Policy death benefit 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. A 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 also 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 - -------------------------------------------------------------------------------- FirstLine 22 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 40. Decreases in the death benefit generally may not decrease the Stated Death Benefit below the minimum required to issue this Policy. There may be tax consequences to the decrease, See Life Insurance Definition, page 40 and Modified Endowment Contracts, page 41. 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 otherwise indicated, any request for an increase to the Target Death Benefit will be assumed also to 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 once each 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 eliminated unless required differently by state law. If an increase creates a new Segment of Stated Death Benefit, 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 the 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 Provision Generally, the length of time the Policy remains in force depends on the Net Cash Surrender Value of the Policy. Because the charges to 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 amounts in the Divisions of the Variable Account and the interest earned in the Guaranteed Interest Division will affect the amount of the Account Value and, as a result, the length of time the Policy remains in force without the payment of additional premiums. When applying for the Policy, one of two Guaranteed Minimum Death Benefit provisions may be chosen, which may extend the period that the Policy's Stated Death Benefit remains in effect if the Divisions of the Variable Account suffer adverse investment experience. The two options vary primarily by the length of time which they cover, the Guarantee Period. The first option 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 second option has a Lifetime Guarantee Period. It protects the Stated Death Benefit for the life of the Insured for as long as the Policy is in force or to the Maturity Date. See Choice of Guaranteed Minimum Death Benefit Provisions, page 20. However, 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; and 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. The Guarantee Period Annual Premium is listed in the Schedule of the Policy. If the policy benefits are increased, the Guarantee Period Annual Premium is increased. The Guarantee Period Monthly Premium is one twelfth of the Guarantee Period Annual Premium. Although the required Guarantee Period Annual Premium level is different for the two Guarantee Periods, the mechanics of the Guaranteed Minimum Death Benefit provision is similar. As of each Monthly Processing Date we will perform a test to see if sufficient premiums have been paid to keep the guarantee in place. If (i) actual premiums paid, minus the amount of Partial Withdrawals, Policy Loans and accrued loan interest, equals or - -------------------------------------------------------------------------------- FirstLine 23 exceeds (ii) 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 terminate. The Guarantee Period also will be terminated 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 diversification requirements 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 28. Once terminated, the Guaranteed Minimum Death Benefit provision cannot be reinstated. There is a charge for the Guaranteed Minimum Death Benefit. See Guaranteed Minimum Death Benefit Charge, page 33. This charge will end at the conclusion of the Ten Year/Age 65 Guarantee Period if that option is chosen, and it will end for either option if the Guaranteed Minimum Death Benefit provision is terminated. 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 41, for information on the tax effect of adding or canceling these benefits. More details will be included in the Policy if any of these benefits are chosen. >From time to time we may make available Riders other than those listed below. Contact your Registered Representative for a complete list of the Riders available. Certain Riders may not be available for all Policies. Accidental Death Benefit Rider This Rider is not available for Policies issued on or after May 1, 1998. This rider will pay the benefit amount selected if the Insured dies as a result of an accident or if the Insured dies within 90 days of an injury sustained in an accident and the death occurs prior to the Insured's Age 70. Adjustable Term Insurance Rider The Death Proceeds may be increased by adding the Adjustable Term Insurance Rider on the life of the Insured. As the name suggests, the Adjustable Term Insurance Rider adjusts over time. At issue, a Schedule of death benefits called the Target Death Benefit is specified at levels to meet 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. 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 - -------------------------------------------------------------------------------- FirstLine 24 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 33. 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. Children's Insurance Rider This Rider is not available for Policies issued on or after May 1, 1998. This Rider will allow the addition of death benefit for children by birth or legal adoption upon attainment of 15 days of age without presenting evidence of insurability. Right to Change Insured 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. Guaranteed Insurability Rider This Rider is not available for Policies issued on or after May 1, 1998. This Rider will allow increases in the Stated Death Benefit without providing us with evidence that the Insured remains insurable. Increases are limited in amount and timing. 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. Benefits at Maturity If the Insured is still living on the Maturity Date, we will pay the Net Account Value to the Policy Owner. The Net Account Value is the Account Value reduced by outstanding Policy Loans and accrued loan interest. The Policy will then end. The Maturity Date is the Policy anniversary date on which the Insured attains Age 100. Policy Values Account Value The Account Value is the total amount in the Guaranteed Interest Division, in 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. - -------------------------------------------------------------------------------- FirstLine 25 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 any 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 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 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 26. 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. - -------------------------------------------------------------------------------- FirstLine 26 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 the minimum. However, we will transfer the entire amount in any Division of the Variable Account from which a transfer is requested, if the amount remaining in that Division is less than $100. We reserve the right to limit excessive trading activity, which can disrupt Portfolio management strategy and increase Portfolio expenses. For example, we may refuse to accept or we may place certain restrictions on transfers made by third-party agents acting on behalf of multiple Owners or made pursuant to market timing services when we determine, at our sole discretion, that such transfers will be detrimental to the Portfolios and the Owners as a whole. Such transfers may cause increased trading and transaction costs, disruption of planned investment strategies, forced and unplanned portfolio turnover, and lost opportunity costs, and may subject the Portfolios to large asset swings that diminish their ability to provide maximum investment return to all Owners. Transfers from the Guaranteed Interest Division may be made only once 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 in an application or sent by written notice to our Customer Service Center, transfers may be made by telephoning our Customer Service Center. See Telephone Privileges, page 47. Dollar Cost Averaging We offer a feature called Dollar Cost Averaging to Owners who have at least $10,000 of Account Value invested in either the Division investing in the Fidelity VIP Money Market Portfolio or the Neuberger & Berman AMT Limited Maturity Bond Portfolio. 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 or percentage of the Account value of the Division investing in 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 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 - -------------------------------------------------------------------------------- FirstLine 27 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 47. A date for Dollar Cost Averaging to terminate may be specified by the Owner. Termination also may 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 appropriate form. Automatic Rebalancing matches Account Value allocations over time to the allocation percentages set by the Owner. During the operation of the automatic rebalancing feature, 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 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 elected after the Policy Date, the first transfer will be processed on the date requested by the Owner which is at least five days after the request is received at our Customer Service Center, 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 27. 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 Provision, page 23. We will charge a fee of $25 each time the 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 - -------------------------------------------------------------------------------- FirstLine 28 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 an annual interest rate of 3.75%. Interest is due in arrears on each Policy anniversary. If the interest is not paid when it is due, it will be added to the Policy Loan as of the Policy anniversary. When an additional loan is requested, the amount 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. 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 3%. The amount of interest credited to the Loan Division for the Policy year will be transferred from the Loan Division on each Policy anniversary. 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, or the Cash Surrender Value paid on surrender, or the Account Value upon maturity. 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. A telephone request for a Policy Loan must be for an amount less than $25,000. See Telephone Privileges, page 47. Loans may have adverse Tax Consequences. See Modified Endowment Contracts, page 41. 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 Partial Withdrawals as necessitated by our administrative system. For example we may require that requests be specified as a dollar amount rather than a percentage. 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 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 40) 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 - -------------------------------------------------------------------------------- FirstLine 29 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 40. 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. We will send a new Schedule to reflect the effect of the withdrawal 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 47. Partial Withdrawals may have adverse tax consequences. See Modified Endowment Contracts, page 41. 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 created by 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 41. 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 of the entire amount in the Divisions of the Variable Account to the Guaranteed Interest Division, and the allocation of all future premium payments to the Guaranteed Interest Division. 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 18. 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 and 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 Provision Is Not in Effect Unless the Guaranteed Minimum Death Benefit provision or the Special Continuation Period is in effect and all requirements have been met, the Policy including its Riders will lapse on any Monthly Processing Date that the Net Cash Surrender Value of the Policy is not sufficient to pay the monthly deductions from the Account Value. A 61-day grace period will begin on that Monthly Processing Date. See Grace Period, page 31. - -------------------------------------------------------------------------------- FirstLine 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 Provision 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 23. 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). 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. Once terminated, the Guaranteed Minimum Death Benefit cannot be reinstated. CHARGES, DEDUCTIONS AND - -------------------------------------------------------------------------------- FirstLine 31 REFUNDS Deductions from Premiums Unless a loan is outstanding (see Policy Loans, page 28 ), payments received before the Maturity Date are considered to be premiums. Certain expenses are deducted from premium payments. The Net Premium is then added to the Account Value. The expenses which are deducted from premiums include the tax charges and the sales charge. Tax Charges Most 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. 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 only 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 0.5% 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 34. Monthly Deductions from the Account Value The following charges are deducted from the Account Value on - -------------------------------------------------------------------------------- FirstLine 32 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 $0.0125 per thousand of Stated Death Benefit (or Target Death Benefit, if greater), and is guaranteed never to exceed this amount. The per thousand charge is limited to $15 per month. This charge is designed to cover the 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 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. In addition, rates are greater for Policies with Stated Death Benefit (or Target Death Benefit, if any) that is less than $100,000 on the Policy Date. 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 and use different rating standards 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. 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 24. Guaranteed Minimum Death Benefit Charge If the Guaranteed Minimum Death Benefit is elected, we currently charge $0.005 per thousand of Stated Death Benefit each month during the Guarantee Period. This charge is guaranteed never to exceed $0.01 per thousand of Stated Death Benefit each month. Changes in Monthly Charges - -------------------------------------------------------------------------------- FirstLine 33 Any changes in the cost of insurance charges or charges for additional benefits or the guaranteed minimum death benefit charge will be made by class of Insured and will be based on changes in future expectations about such things as 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 equal to the lesser of $25 or 2% of the amount requested will be charged against the Account Value for each Partial Withdrawal. In addition, a Surrender Charge may apply. 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 27, 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. Persistency Refund Long-term Owners of FirstLine 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 0.5% of the Account Value on an annual basis for that Segment (0.04167% monthly). 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 = .0004167 Persistency refund = 10,000 x .0004167 = $4.17 Before After Persistency Persistency Refund Refund ------ ------ Variable Divisions $10,000.00 $10,004.17 The following is an example of how the persistency refund affects the Account Value each month if the Policy has a loan: Account Value = $10,000 Account Value in the Variable Divisions = $5,000 Account Value in the Loan Division = $5,000 Monthly persistency refund Rate = .0004167 Persistency refund = 10,000 x .0004167 = $4.17 Before After Persistency Persistency Refund Refund ------ ------ Variable Divisions $5,000.00 $5,004.17 Loan Division $5,000.00 $5,000.00 Surrender Charge We assess a Surrender Charge against the Account Value upon surrender, reduction in Stated Death Benefit or lapse in the first - -------------------------------------------------------------------------------- FirstLine 34 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). The amount of the administrative Surrender Charge and the maximum sales Surrender Charge stays level for the first seven Policy years following the effective date of a coverage segment. It 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 - -------------------------------------------------------------------------------- FirstLine 35 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. Upon a Partial Withdrawal which causes the Stated Death Benefit to be reduced, or a requested decrease to the Stated Death Benefit occurring 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. 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
- -------------------------------------------------------------------------------- FirstLine 36
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 37 Portfolio Annual Expenses (As a Percentage of Portfolio Average Net Assets)(1)
Investment Total Portfolio Portfolio Management Fees Other Expenses Expenses --------- --------------- -------------- -------- Neuberger & Berman Advisers Management Trust(2) Limited Maturity Bond Portfolio 0.65% 0.12% 0.77% Growth Portfolio 0.83% 0.07% 0.90% Partners Portfolio 0.80% 0.06% 0.86% The Alger American Fund Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% Alger American Growth Portfolio 0.75% 0.04% 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.15% 1.00%(3) Fidelity Variable Insurance Products Fund VIP Growth Portfolio 0.60% 0.09% 0.69%(4) VIP Overseas Portfolio 0.75% 0.17% 0.92%(4) VIP Money Market Portfolio 0.21% 0.10% 0.31% 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 - Total Return Portfolio 0.75% 0.17% 0.92%(6), (7) INVESCO VIF - Industrial Income Portfolio 0.75% 0.16% 0.91%(6), (8) INVESCO VIF - High Yield Portfolio 0.60% 0.23% 0.83%(6), (9) INVESCO VIF - Utilities Portfolio 0.60% 0.39% 0.99%(6), (10) INVESCO VIF - Small Company Growth Fund 0.75% 0.25% 1.00%(6), (11) Van Eck Worldwide Insurance Trust Worldwide Hard Assets Fund 1.00% 0.17% 1.17%(12) Worldwide Real Estate Fund 0.00% 0.00% 0.00%(13) Worldwide Emerging Markets Fund 0.80% 0.00% 0.80%(14) Worldwide Bond Fund 1.00% 0.12% 1.12% AIM Variable Insurance Funds, Inc. AIM VI - Capital Appreciation 0.64% 0.09% 0.73% AIM VI - Government Securities 0.50% 0.41% 0.91%
- -------------------------------------------------------------------------------- FirstLine 38 (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 .097%, 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 39 Group or Sponsored Arrangements or Corporate Purchasers This Policy is available for purchase by individuals, corporations or other institutions. 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. 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. 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. Group and sponsored plan rates are negotiated independently between Security Life and its reinsurers; thus, the rates will vary depending on group or plan size, general insurability, and underwriting standards as defined for group purposes. The negotiated rates are subject to conditions and underwriting standards which are available to Security Life at the time of sale and which reflect our costs and services. Such rates and standards shall 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." - -------------------------------------------------------------------------------- FirstLine 40 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 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 163, 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 25. Also, any interest payment accrued on Death Proceeds paid either as a lump sum or other than in one lump sum may be subject to tax. See Settlement Provisions, page 48. The Federal government has in the past and may in the future consider new legislation or regulations that, if enacted, could change the 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 - -------------------------------------------------------------------------------- FirstLine 41 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 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 - -------------------------------------------------------------------------------- FirstLine 42 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. 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 Section 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, - -------------------------------------------------------------------------------- FirstLine 43 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. 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 - -------------------------------------------------------------------------------- FirstLine 44 changes to, the Variable Account: (i) Make additional Divisions available. These Divisions will invest in Portfolios we find suitable for the Policy. (ii) Eliminate Divisions from the Variable Account, combine two or more Divisions, or substitute a new Portfolio for the Portfolio in which a Division invests. A substitution may become necessary if, in our judgment, a Portfolio no longer suits the purposes of the Policy. This may also happen due to a change in laws or regulations, or a change in a Portfolio's investment objectives or restrictions, or because the Portfolio is no longer available for investment, or for some other reason, such as a declining asset base. (iii) Transfer assets of the Variable Account, which we determine to be associated with the class of policies to which an Owner's Policy belongs, to another Variable Account. (iv) Withdraw the Variable Account from registration under the 1940 Act. (v) Operate the Variable Account as a management investment company under the 1940 Act. (vi) Cause one or more Divisions to invest in a mutual fund other than or in addition to the Portfolios. (vii) Discontinue the sale of Policies. (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 - -------------------------------------------------------------------------------- FirstLine 45 This Policy is issued at the Age stated in the Schedule. This is the Insured's Age nearest birthday, calculated as of the Policy Date. The Age of the Insured at any time is calculated by adding the number of completed Policy years to the Age shown in the Schedule. Ownership The original Owner is the person named in the application. The Owner can exercise all rights and receive the benefits during the Insured's lifetime before the Maturity Date. This includes the right to change the Owner, Beneficiaries, and methods for the payment of proceeds. All rights of the Owner are subject to the rights of any assignee and any irrevocable Beneficiary. An Owner may name a new Owner by giving us written notice. The effective date of the change to the new Owner will be the date the 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 - -------------------------------------------------------------------------------- FirstLine 46 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 periods indicated in this prospectus. See Transfers of Account Values, page 27. We may, however, postpone the processing of any such transactions at any of these 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 - -------------------------------------------------------------------------------- FirstLine 47 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 allowance may equal an amount up to 4% of premiums paid in excess of the 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 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 48 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:
Smoker Death Benefit Definition of Life Stated Death Target Death Sex Age Status Option Insurance Test Benefit Premium Benefit - --- --- ------ ------ -------------- ------- ------- ------- Male 45 Nonsmoker 1 CVAT 200,000 $3,750 200,000 Male 45 Nonsmoker 1 CVAT 100,000 $3,750 200,000 Male 45 Nonsmoker 1 GP 200,000 $3,750 200,000
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. Thethird 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 guaranteed persistency refund equivalent to 0.5% of the Account Value annually beginning after the 10th Policy anniversary. The tables also reflect a daily investment advisory fee equivalent to an annual rate of .6639% 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 .1309% 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 .7948% of the average daily net assets of an investment division including the investment advisory fee. Actual fees vary by Portfolio and may be subject to agreements by the sponsor to waive or otherwise reimburse each investment Division for operating expenses which exceed certain limits. There can be no assurance that the expense reimbursement arrangements will continue in the future, and any unreimbursed expenses would be reflected in the values included on the tables. The effect of these investment management, direct expenses and mortality and expense risk charges on a 0% gross rate of return would result in a net rate of return of (1.54)%, on 6% it would be 4.42%, and on 12% it would be 10.37%. - -------------------------------------------------------------------------------- FirstLine 49 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 50 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 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 2630 1142 200000 2995 1508 200000 2812 1325 200000 2 3750 8072 5175 3500 200000 6257 4582 200000 5705 4030 200000 3 3750 12413 7635 5773 200000 9812 7950 200000 8679 6817 200000 4 3750 16971 10128 8078 200000 13817 11767 200000 11860 9810 200000 5 3750 21757 12528 10328 200000 18188 15988 200000 15130 12930 200000 6 3750 26783 14834 12634 200000 22965 20765 200000 18490 16290 200000 7 3750 32059 17035 14835 200000 28184 25984 200000 21936 19736 200000 8 3750 37600 19123 17198 200000 33884 31959 200000 25462 23537 200000 9 3750 43417 21090 19440 200000 40114 38464 200000 29065 27415 200000 10 3750 49525 22923 21548 200000 46927 45552 200000 32738 31363 200000 15 3750 84966 30478 30478 200000 94609 94609 200000 53315 53315 200000 20 3750 130197 32941 32941 200000 171191 171191 304891 76125 76125 200000 25 3750 187925 26456 26456 200000 286629 286629 452587 100743 100743 200000 30 3750 261603 2589 2589 200000 455996 455996 648427 127587 127587 200000 AGE 65 3750 140644 32513 32513 200000 190723 190723 331095 80896 80896 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 51 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 2839 1351 200000 3218 1730 200000 3028 1540 200000 2 3750 8072 5486 3811 200000 6614 4939 200000 6038 4363 200000 3 3750 12413 7943 6080 200000 10207 8345 200000 9029 7166 200000 4 3750 16971 10432 8382 200000 14255 12205 200000 12227 10177 200000 5 3750 21757 12828 10628 200000 18674 16474 200000 15514 13314 200000 6 3750 26783 15131 12931 200000 23504 21304 200000 18894 16694 200000 7 3750 32059 17360 15160 200000 28812 26612 200000 22391 20191 200000 8 3750 37600 19527 17602 200000 34662 32737 200000 26021 24096 200000 9 3750 43417 21656 20006 200000 41139 39489 200000 29817 28167 200000 10 3750 49525 23727 22352 200000 48239 46918 200000 33766 32391 200000 15 3750 84966 34308 34308 200000 99896 99896 203588 57783 57783 200000 20 3750 130197 41927 41927 200000 184234 184234 328120 86893 86893 200000 25 3750 187925 44347 44347 200000 316744 316744 500139 122138 122138 200000 30 3750 261603 37074 37074 200000 520181 520181 739697 164417 164417 233801 AGE 65 3750 140644 42903 42903 200000 206229 206229 358014 93376 93376 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 52 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 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 2629 1792 200000 2995 2158 200000 2812 1974 200000 2 3750 8072 5175 4150 200000 6257 5232 200000 5704 4679 200000 3 3750 12413 7635 6535 200000 9811 8711 200000 8678 7578 200000 4 3750 16971 10127 9027 200000 13816 12716 200000 11859 10759 200000 5 3750 21757 12527 11427 200000 18187 17087 200000 15128 14028 200000 6 3750 26783 14832 13732 200000 22963 21863 200000 18489 17389 200000 7 3750 32059 17034 15934 200000 28181 27081 200000 21934 20834 200000 8 3750 37600 19122 18159 200000 33881 32919 200000 25460 24498 200000 9 3750 43417 21089 20264 200000 40112 39287 200000 29063 28238 200000 10 3750 49525 22922 22235 200000 46925 46238 200000 32737 32049 200000 15 3750 84966 30488 30488 200000 94610 94610 200000 53325 53325 200000 20 3750 130197 32989 32989 200000 171194 171194 304896 76170 76170 200000 25 3750 187925 26643 26643 200000 286633 286633 452594 100884 100884 200000 30 3750 261603 3239 3239 200000 456003 456003 648436 127946 127946 200000 AGE 65 3750 140644 32578 32578 200000 190726 190726 331100 80954 80954 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 53 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 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 3007 2169 200000 3397 2559 200000 3202 2364 200000 2 3750 8072 5869 4844 200000 7043 6018 200000 6444 5419 200000 3 3750 12413 8593 7493 200000 10972 9872 200000 9734 8634 200000 4 3750 16971 11353 10253 200000 15399 14299 200000 13255 12155 200000 5 3750 21757 14033 12933 200000 20255 19155 200000 16895 15795 200000 6 3750 26783 16634 15534 200000 25589 24489 200000 20664 19564 200000 7 3750 32059 19167 18067 200000 31464 30364 200000 24578 23478 200000 8 3750 37600 21640 20677 200000 37950 36988 200000 28652 27690 200000 9 3750 43417 24060 23235 200000 45104 44279 200000 32901 32076 200000 10 3750 49525 26409 25721 200000 52953 52266 200000 37316 36629 200000 15 3750 84966 37682 37682 200000 108411 108411 220942 63300 63300 200000 20 3750 130197 45366 45366 200000 197963 197963 352572 94301 94301 200000 25 3750 187925 47866 47866 200000 338634 338634 534704 132257 132257 208835 30 3750 261603 40887 40887 200000 554556 554556 788578 176536 176536 251034 AGE 65 3750 140644 46347 46347 200000 221315 221315 384203 101250 101250 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 54 PROSPECT: INSURED'S NAME MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 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 2630 1142 200000 2995 1508 200000 2812 1325 200000 2 3750 8072 5175 3500 200000 6257 4582 200000 5705 4030 200000 3 3750 12413 7635 5773 200000 9812 7950 200000 8679 6817 200000 4 3750 16971 10128 8078 200000 13817 11767 200000 11860 9810 200000 5 3750 21757 12528 10328 200000 18188 15988 200000 15130 12930 200000 6 3750 26783 14834 12634 200000 22965 20765 200000 18490 16290 200000 7 3750 32059 17035 14835 200000 28184 25984 200000 21936 19736 200000 8 3750 37600 19123 17198 200000 33884 31959 200000 25462 23537 200000 9 3750 43417 21090 19440 200000 40114 38464 200000 29065 27415 200000 10 3750 49525 22923 21548 200000 46297 45552 200000 32738 31363 200000 15 3750 84966 30478 30478 200000 94609 94609 200000 53315 53315 200000 20 3750 130197 32941 32941 200000 175842 175842 214528 76125 76125 200000 25 3750 187925 26456 26456 200000 312045 312045 361973 100743 100743 200000 30 3750 261603 2589 2589 200000 535784 535784 573289 127587 127587 200000 AGE 65 3750 140644 32513 32513 200000 198051 198051 237662 80896 80896 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 55 PROSPECT: INSURED'S NAME: MALE 45 NON-SMOKER PRESENTED BY: SECURITY LIFE FIRSTLINE 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 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 2839 1351 200000 3218 1730 200000 3028 1540 200000 2 3750 8072 5486 3811 200000 6614 4939 200000 6038 4363 200000 3 3750 12413 7943 6080 200000 10207 8345 200000 9029 7166 200000 4 3750 16971 10432 8382 200000 14255 12205 200000 12227 10177 200000 5 3750 21757 12828 10628 200000 18674 16474 200000 15514 13314 200000 6 3750 26783 15131 12931 200000 23504 21304 200000 18894 16694 200000 7 3750 32059 17360 15160 200000 28812 26612 200000 22391 20191 200000 8 3750 37600 19527 17602 200000 34662 32737 200000 26021 24096 200000 9 3750 43417 21656 20006 200000 41139 39489 200000 29817 28167 200000 10 3750 49525 23727 22352 200000 48293 46918 200000 33766 32391 200000 15 3750 84966 34308 34308 200000 99897 99897 200000 57783 57783 200000 20 3750 130197 41927 41927 200000 187851 187851 229178 86893 86893 200000 25 3750 187925 44347 44347 200000 334661 334661 388207 122138 122138 200000 30 3750 261603 37074 37074 200000 577480 577480 617904 166881 166881 200000 AGE 65 3750 140644 42903 42903 200000 211666 211666 253999 93376 93376 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 56 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 57 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 58 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 59 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 60 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 ?. 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 statement 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 61 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 of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995
CONTENTS Report of Independent Auditors................................ 64 Audited Consolidated Financial Statements Consolidated Balance Sheets................................... 65 Consolidated Statements of Income............................. 67 Consolidated Statements of Stockholder's Equity............... 68 Consolidated Statements of Cash Flows......................... 69 Notes to Consolidated Financial Statements.................... 71
63 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 MALE NONSMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 155 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy MALE SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 156 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy FEMALE NONSMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 14.687 25 6.861 50 3.013 75 1.493 1 14.680 26 6.638 51 2.920 76 1.461 2 14.279 27 6.421 52 2.831 77 1.430 3 13.873 28 6.211 53 2.745 78 1.401 4 13.471 29 6.007 54 2.662 79 1.373 5 13.073 30 5.809 55 2.583 80 1.347 6 12.682 31 5.618 56 2.507 81 1.322 7 12.294 32 5.432 57 2.433 82 1.299 8 11.915 33 5.252 58 2.362 83 1.278 9 11.541 34 5.078 59 2.293 84 1.257 10 11.175 35 4.910 60 2.226 85 1.239 11 10.817 36 4.747 61 2.162 86 1.221 12 10.469 37 4.590 62 2.100 87 1.205 13 10.132 38 4.439 63 2.040 88 1.190 14 9.807 39 4.294 64 1.983 89 1.176 15 9.494 40 4.154 65 1.928 90 1.163 16 9.192 41 4.019 66 1.876 91 1.150 17 8.899 42 3.890 67 1.826 92 1.137 18 8.617 43 3.765 68 1.778 93 1.125 19 8.344 44 3.645 69 1.732 94 1.112 20 8.078 45 3.530 70 1.688 95 1.098 21 7.821 46 3.419 71 1.645 96 1.084 22 7.571 47 3.312 72 1.604 97 1.069 23 7.327 48 3.208 73 1.565 98 1.054 24 7.091 49 3.109 74 1.528 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 157 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy FEMALE SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 13.162 25 6.032 50 2.728 75 1.451 1 13.099 26 5.836 51 2.651 76 1.423 2 12.723 27 5.647 52 2.578 77 1.396 3 12.346 28 5.463 53 2.507 78 1.371 4 11.974 29 5.285 54 2.438 79 1.347 5 11.608 30 5.113 55 2.373 80 1.325 6 11.248 31 4.946 56 2.310 81 1.303 7 10.894 32 4.785 57 2.249 82 1.283 8 10.547 33 4.629 58 2.190 83 1.263 9 10.207 34 4.478 59 2.132 84 1.246 10 9.874 35 4.332 60 2.076 85 1.229 11 9.550 36 4.192 61 2.022 86 1.214 12 9.234 37 4.056 62 1.969 87 1.199 13 8.930 38 3.926 63 1.919 88 1.186 14 8.636 39 3.801 64 1.870 89 1.173 15 8.352 40 3.682 65 1.824 90 1.161 16 8.085 41 3.568 66 1.780 91 1.149 17 7.826 42 3.459 67 1.738 92 1.137 18 7.577 43 3.354 68 1.697 93 1.125 19 7.336 44 3.254 69 1.658 94 1.112 20 7.102 45 3.158 70 1.620 95 1.098 21 6.876 46 3.065 71 1.583 96 1.084 22 6.655 47 2.976 72 1.547 97 1.069 23 6.441 48 2.890 73 1.513 98 1.054 24 6.234 49 2.808 74 1.481 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 158 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 NONSMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.574 25 6.095 50 2.671 75 1.396 1 12.681 26 5.904 51 2.589 76 1.372 2 12.341 27 5.717 52 2.509 77 1.349 3 11.996 28 5.533 53 2.433 78 1.328 4 11.655 29 5.354 54 2.360 79 1.307 5 11.316 30 5.179 55 2.290 80 1.288 6 10.979 31 5.008 56 2.223 81 1.270 7 10.644 32 4.843 57 2.159 82 1.253 8 10.311 33 4.682 58 2.097 83 1.236 9 9.982 34 4.527 59 2.038 84 1.221 10 9.660 35 4.376 60 1.982 85 1.207 11 9.345 36 4.231 61 1.928 86 1.195 12 9.041 37 4.091 62 1.877 87 1.183 13 8.750 38 3.955 63 1.828 88 1.172 14 8.476 39 3.825 64 1.781 89 1.161 15 8.218 40 3.699 65 1.736 90 1.151 16 7.973 41 3.577 66 1.694 91 1.141 17 7.740 42 3.461 67 1.654 92 1.131 18 7.517 43 3.348 68 1.615 93 1.120 19 7.301 44 3.240 69 1.579 94 1.109 20 7.091 45 3.136 70 1.544 95 1.097 21 6.886 46 3.036 71 1.511 96 1.083 22 6.684 47 2.939 72 1.480 97 1.069 23 6.484 48 2.847 73 1.450 98 1.054 24 6.288 49 2.757 74 1.422 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 159 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 1 SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.511 25 4.963 50 2.267 75 1.330 1 10.508 26 4.811 51 2.205 76 1.312 2 10.203 27 4.661 52 2.145 77 1.295 3 9.897 28 4.515 53 2.088 78 1.280 4 9.597 29 4.371 54 2.034 79 1.265 5 9.301 30 4.231 55 1.982 80 1.251 6 9.007 31 4.094 56 1.933 81 1.238 7 8.718 32 3.962 57 1.886 82 1.225 8 8.433 33 3.834 58 1.841 83 1.213 9 8.153 34 3.710 59 1.798 84 1.202 10 7.879 35 3.590 60 1.757 85 1.191 11 7.613 36 3.475 61 1.717 86 1.182 12 7.356 37 3.363 62 1.680 87 1.173 13 7.109 38 3.256 63 1.644 88 1.164 14 6.876 39 3.153 64 1.610 89 1.155 15 6.654 40 3.054 65 1.577 90 1.147 16 6.456 41 2.959 66 1.547 91 1.138 17 6.269 42 2.869 67 1.518 92 1.129 18 6.091 43 2.782 68 1.490 93 1.120 19 5.919 44 2.698 69 1.464 94 1.109 20 5.752 45 2.619 70 1.438 95 1.097 21 5.590 46 2.542 71 1.414 96 1.083 22 5.430 47 2.469 72 1.391 97 1.069 23 5.272 48 2.399 73 1.369 98 1.054 24 5.117 49 2.331 74 1.349 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 160 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 NONSMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 12.943 25 6.234 50 2.733 75 1.418 1 13.032 26 6.037 51 2.649 76 1.392 2 12.683 27 5.845 52 2.568 77 1.368 3 12.327 28 5.657 53 2.490 78 1.345 4 11.975 29 5.473 54 2.415 79 1.323 5 11.626 30 5.294 55 2.343 80 1.303 6 11.278 31 5.120 56 2.275 81 1.283 7 10.934 32 4.950 57 2.209 82 1.265 8 10.593 33 4.786 58 2.146 83 1.247 9 10.256 34 4.627 59 2.085 84 1.231 10 9.926 35 4.474 60 2.027 85 1.216 11 9.604 36 4.325 61 1.972 86 1.202 12 9.292 37 4.182 62 1.918 87 1.190 13 8.994 38 4.043 63 1.868 88 1.178 14 8.710 39 3.910 64 1.819 89 1.166 15 8.443 40 3.782 65 1.773 90 1.155 16 8.188 41 3.658 66 1.729 91 1.144 17 7.945 42 3.539 67 1.687 92 1.133 18 7.712 43 3.424 68 1.647 93 1.122 19 7.487 44 3.314 69 1.609 94 1.110 20 7.267 45 3.208 70 1.573 95 1.097 21 7.053 46 3.106 71 1.538 96 1.084 22 6.843 47 3.007 72 1.506 97 1.069 23 6.637 48 2.912 73 1.475 98 1.054 24 6.433 49 2.821 74 1.445 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 161 APPENDIX A (CONT.) Factors for the Cash Value Accumulation Test For a Life Insurance Policy UNISEX 2 SMOKER Attained Attained Attained Attained Age Factor Age Factor Age Factor Age Factor 0 10.942 25 5.143 50 2.347 75 1.361 1 10.931 26 4.984 51 2.282 76 1.341 2 10.616 27 4.828 52 2.221 77 1.323 3 10.298 28 4.675 53 2.162 78 1.306 4 9.985 29 4.526 54 2.105 79 1.289 5 9.677 30 4.380 55 2.052 80 1.274 6 9.373 31 4.239 56 2.000 81 1.259 7 9.072 32 4.102 57 1.951 82 1.244 8 8.777 33 3.969 58 1.904 83 1.230 9 8.487 34 3.841 59 1.859 84 1.217 10 8.203 35 3.717 60 1.816 85 1.205 11 7.927 36 3.597 61 1.774 86 1.194 12 7.660 37 3.481 62 1.735 87 1.183 13 7.405 38 3.371 63 1.697 88 1.173 14 7.161 39 3.264 64 1.660 89 1.163 15 6.930 40 3.162 65 1.626 90 1.153 16 6.721 41 3.064 66 1.594 91 1.143 17 6.523 42 2.970 67 1.563 92 1.133 18 6.334 43 2.880 68 1.534 93 1.122 19 6.152 44 2.794 69 1.505 94 1.110 20 5.975 45 2.711 70 1.478 95 1.097 21 5.803 46 2.632 71 1.452 96 1.084 22 5.634 47 2.556 72 1.427 97 1.069 23 5.468 48 2.484 73 1.404 98 1.054 24 5.305 49 2.414 74 1.382 99 1.040 100 1.000 THE POLICY'S BASE DEATH BENEFIT AT ANY TIME WILL BE AT LEAST EQUAL TO THE ACCOUNT VALUE TIMES THE APPROPRIATE FACTOR FROM THIS TABLE. - -------------------------------------------------------------------------------- FirstLine 162 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 163 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 standard, nonsmoker male, Age 45. In each case, it is assumed that all premiums are allocated to the Division illustrated for the period shown. The benefits are calculated for a specific date. The amount and timing of Premium Payments and the use of other Policy features, such as Policy Loans, would affect individual Policy benefits. The amounts shown for the Cash Surrender Values, Account Values and Death Benefits take into account the charges against premiums, current cost of insurance and monthly deductions, the daily charge against the Variable Account for mortality and expense risks, and each Portfolio's charges and expenses. See Charges, Deductions and 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 49. - -------------------------------------------------------------------------------- FirstLine 164 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% 1,603 3,090 200,000 12/31/89 10.77% 4,771 6,446 200,000 12/31/90 8.32% 7,887 9,749 200,000 12/31/91 11.34% 11,715 13,764 200,000 12/31/92 5.18% 14,923 17,123 200,000 12/31/93 6.63% 18,667 20,867 200,000 12/31/94 (0.15)% 20,991 23,191 200,000 12/31/95 10.94% 26,430 28,355 200,000 12/31/96 4.31% 30,338 31,988 200,000 12/31/97 6.74% 35,205 36,580 200,000 Neuberger & Berman AMT Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 25.97% 2,198 3,686 200,000 12/31/89 29.47% 6,693 8,368 200,000 12/31/90 (8.19)% 8,092 9,955 200,000 12/31/91 29.73% 14,326 16,376 200,000 12/31/92 9.54% 18,504 20,704 200,000 12/31/93 6.79% 22,514 24,714 200,000 12/31/94 (4.99)% 23,489 25,688 200,000 12/31/95 31.73% 35,132 37,057 200,000 12/31/96 9.14% 41,324 42,974 200,000 12/31/97 29.01% 57,107 58,482 200,000 Neuberger & Berman AMT Partners Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 36.47% 2,532 4,020 200,000 12/31/96 29.57% 7,130 8,805 200,000 12/31/97 31.25% 13,136 14,998 200,000 The assumptions underlying these values are described in Performance Information, page 164. * 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 165 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% 3,427 4,914 200,000 12/31/90 8.71% 6,618 8,293 200,000 12/31/91 57.54% 15,437 17,299 200,000 12/31/92 3.55% 18,514 20,564 200,000 12/31/93 13.28% 23,957 26,157 200,000 12/31/94 (4.38)% 25,079 27,279 200,000 12/31/95 44.31% 40,788 42,988 200,000 12/31/96 4.18% 45,250 47,176 200,000 12/31/97 11.39% 53,470 55,120 200,000 Alger American MidCap Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (1.54)% 1,328 2,815 200,000 12/31/95 44.45% 6,456 8,130 200,000 12/31/96 11.90% 10,103 11,965 200,000 12/31/97 15.01% 14,723 16,773 200,000 Alger American Growth Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 4.14% 1,507 2,994 200,000 12/31/91 40.39% 6,466 8,141 200,000 12/31/92 12.38% 10,168 12,030 200,000 12/31/93 22.47% 15,918 17,968 200,000 12/31/94 1.45% 18,552 20,752 200,000 12/31/95 36.37% 29,566 31,766 200,000 12/31/96 13.35% 36,522 38,722 200,000 12/31/97 25.75% 49,779 51,704 200,000 Alger American Leveraged All Cap Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 12.04% 1,757 3,244 200,000 12/31/97 19.68% 5,504 7,179 200,000 The assumptions underlying these values are described in Performance Information, page 164. * 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 166 HYPOTHETICAL ILLUSTRATION (Continued) Nonsmoker Male Age 45 Cash ValueAccumulation Test Standard Risk Class Death BenefitOption 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% 1,869 3,356 200,000 12/31/89 31.51% 6,399 8,074 200,000 12/31/90 (11.73)% 7,434 9,296 200,000 12/31/91 45.51% 15,420 14,470 200,000 12/31/92 9.32% 19,654 21,854 200,000 12/31/93 19.37% 26,853 29,053 200,000 12/31/94 (0.02)% 29,187 31,387 200,000 12/31/95 35.36% 43,867 45,792 200,000 12/31/96 14.71% 53,545 55,195 200,000 12/31/97 23.48% 69,638 71,013 200,000 Fidelity VIP Overseas Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/88 8.13% 1,633 3,120 200,000 12/31/89 26.28% 5,766 7,441 200,000 12/31/90 (1.67)% 7,921 9,784 200,000 12/31/91 8.00% 11,326 13,376 200,000 12/31/92 (10.72)% 11,922 14,122 200,000 12/31/93 37.35% 20,716 22,916 200,000 12/31/94 1.72% 23,514 25,714 200,000 12/31/95 9.74% 28,880 30,805 200,000 12/31/96 13.15% 35,863 37,513 200,000 12/31/97 11.56% 43,035 44,410 200,000 The assumptions underlying these values are described in Performance Information, page 164. * 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 167 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 Death Ended: Return* Value Value Benefit 12/31/88 7.39% 1,610 3,097 200,000 12/31/89 9.12% 4,677 6,352 200,000 12/31/90 8.04% 7,759 9,622 200,000 12/31/91 6.09% 10,910 12,960 200,000 12/31/92 3.90% 13,876 16,076 200,000 12/31/93 3.23% 16,908 19,108 200,000 12/31/94 4.25% 20,206 22,406 200,000 12/31/95 5.87% 24,280 26,205 200,000 12/31/96 5.41% 28,419 30,069 200,000 12/31/97 5.51% 32,756 34,131 200,000 Fidelity VIP II Asset Manager Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/90 6.72% 1,588 3,076 200,000 12/31/91 22.56% 5,481 7,156 200,000 12/31/92 11.71% 8,996 10,859 200,000 12/31/93 21.23% 14,316 16,366 200,000 12/31/94 (6.09)% 15,477 17,677 200,000 12/31/95 16.96% 21,383 23,583 200,000 12/31/96 14.60% 27,598 29,798 200,000 12/31/97 20.65% 36,915 38,840 200,000 Fidelity VIP II Index 500 Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/93 9.74% 1,684 3,171 200,000 12/31/94 1.04% 4,254 5,928 200,000 12/31/95 37.19% 9,905 11,767 200,000 12/31/96 22.82% 15,649 17,699 200,000 12/31/97 32.82% 24,757 26,957 200,000 The assumptions underlying these values are described in Performance Information, page 164. * 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 168 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 Death Ended: Return* Value Value Benefit 12/31/95 22.79% 2,097 3,585 200,000 12/31/96 12.18% 5,410 7,085 200,000 12/31/97 22.91% 10,046 11,908 200,000 INVESCO VIF Industrial Income Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 29.25% 2,303 3,790 200,000 12/31/96 22.28% 6,333 8,008 200,000 12/31/97 28.17% 11,754 13,617 200,000 INVESCO VIF High Yield Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 19.76% 2,001 3,489 200,000 12/31/96 16.59% 5,592 7,267 200,000 12/31/97 17.33% 9,696 11,559 200,000 INVESCO VIF Utilities Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/95 9.08% 1,663 3,150 200,000 12/31/96 12.76% 4,961 6,636 200,000 12/31/97 23.41% 9,543 11,406 200,000 Van Eck Worldwide Hard Assets Fund Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/91 (2.93)% 1,284 2,771 200,000 12/31/92 (4.09)% 3,552 5,227 200,000 12/31/93 64.83 % 11,226 13,088 200,000 12/31/94 (4.78)% 12,831 14,881 200,000 12/31/95 10.99 % 17,129 19,329 200,000 12/31/96 18.04 % 23,551 25,751 200,000 12/31/97 (1.67)% 25,421 27,621 200,000 The assumptions underlying these values are described in Performance Information, page 164. * 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 169 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% 1,732 3,219 200,000 12/31/91 18.39% 5,393 7,068 200,000 12/31/92 (5.25)% 7,197 9,060 200,000 12/31/93 7.79% 10,521 12,571 200,000 12/31/94 (1.32)% 12,663 14,863 200,000 12/31/95 17.30% 18,161 20,360 200,000 12/31/96 2.53% 21,109 23,309 200,000 12/31/97 2.38% 24,321 26,246 200,000 Van Eck Worldwide Emerging Markets Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/96 26.82% 2,225 3,713 200,000 12/31/97 (11.61)% 3,944 5,619 200,000 AIM VI Capital Appreciation Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 2.50% 1,455 2,942 200,000 12/31/95 35.69% 6,110 7,785 200,000 12/31/96 17.58% 10,328 12,191 200,000 12/31/97 13.51% 14,753 16,803 200,000 AIM VI Government Securities Portfolio Year Annual Total Cash Surrender Account Death Ended: Return* Value Value Benefit 12/31/94 (3.73%) 1,259 2,746 200,000 12/31/95 15.56% 4,670 6,345 200,000 12/31/96 2.29% 7,216 9,079 200,000 12/31/97 8.16% 10,587 12,636 200,000 The assumptions underlying these values are described in Performance Information, page 164. *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 170 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 --------- --------------- -------------- -------- Neuberger & Berman Advisers Management Trust(2) Limited Maturity Bond Portfolio 0.65% 0.12% 0.77% Growth Portfolio 0.83% 0.07% 0.90% Partners Portfolio 0.80% 0.06% 0.86% The Alger American Fund Alger American Small Capitalization Portfolio 0.85% 0.04% 0.89% Alger American MidCap Growth Portfolio 0.80% 0.04% 0.84% Alger American Growth Portfolio 0.75% 0.04% 0.79% Alger American Leveraged AllCap Portfolio 0.85% 0.15% 1.00%(3) Fidelity Variable Insurance Products Fund VIP Growth Portfolio 0.60% 0.09% 0.69%(4) VIP Overseas Portfolio 0.75% 0.17% 0.92%(4) VIP Money Market Portfolio 0.21% 0.10% 0.31% 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 - Total Return Portfolio 0.75% 0.17% 0.92%(6), (7) INVESCO VIF - Industrial Income Portfolio 0.75% 0.16% 0.91%(6), (8) INVESCO VIF - High Yield Portfolio 0.60% 0.23% 0.83%(6), (9) INVESCO VIF - Utilities Portfolio 0.60% 0.39% 0.99%(6), (10) INVESCO VIF - Small Company Growth Fund 0.75% 0.25% 1.00%(6), (11) Van Eck Worldwide Insurance Trust Worldwide Hard Assets Fund 1.00% 0.17% 1.17%(12) Worldwide Real Estate Fund 0.00% 0.00% 0.00%(13) Worldwide Emerging Markets Fund 0.80% 0.00% 0.80%(14) Worldwide Bond Fund 1.00% 0.12% 1.12% AIM Variable Insurance Funds, Inc. AIM VI - Capital Appreciation 0.64% 0.09% 0.73% AIM VI - Government Securities 0.50% 0.41% 0.91%
- -------------------------------------------------------------------------------- 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 .6639% 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 .1309% 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 .7948% 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 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 2361 874 200000 2710 1222 200000 2535 1048 200000 2 3750 8072 4625 2950 200000 5639 3964 200000 5121 3446 200000 3 3750 12413 6789 4926 200000 8807 6944 200000 7756 5893 200000 4 3750 16971 8971 6921 200000 12366 10316 200000 10563 8513 200000 5 3750 21757 11044 8844 200000 16226 14026 200000 13422 11222 200000 6 3750 26783 13006 10806 200000 20418 18218 200000 16333 14133 200000 7 3750 32059 14842 12642 200000 24967 22767 200000 19283 17083 200000 8 3750 37600 16544 14619 200000 29905 27980 200000 22266 20341 200000 9 3750 43417 18099 16449 200000 35267 33617 200000 25272 23622 200000 10 3750 49525 19492 18117 200000 41094 39719 200000 28288 26913 200000 15 3750 84966 24453 24453 200000 81789 81789 200000 44669 44669 200000 20 3750 130197 23511 23511 200000 149088 149088 258220 61231 61231 200000 25 3750 187925 12203 12203 200000 251519 251519 389854 75999 75999 200000 30 3750 261603 -- -- 200000 402682 402682 566171 85528 85528 200000 AGE 65 3750 140644 22254 22254 200000 166406 166406 281560 64390 64390 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 2813 1326 200000 3191 1703 200000 3002 1514 200000 2 3750 8072 5537 3862 200000 6665 4990 200000 6089 4414 200000 3 3750 12413 8169 6307 200000 10449 8587 200000 9263 7401 200000 4 3750 16971 10833 8783 200000 14708 12658 200000 12654 10604 200000 5 3750 21757 13410 11210 200000 19367 17167 200000 16150 13950 200000 6 3750 26783 15899 13699 200000 24469 22269 200000 19756 17556 200000 7 3750 32059 18292 16092 200000 30053 27853 200000 23467 21267 200000 8 3750 37600 20584 18659 200000 36169 34244 200000 27285 25360 200000 9 3750 43417 22768 21118 200000 42871 41221 200000 31207 29557 200000 10 3750 49525 24839 23464 200000 50222 48847 200000 35236 33861 200000 15 3750 84966 34510 34510 200000 102794 102794 201682 58952 58952 200000 20 3750 130197 41440 41440 200000 189425 189425 328084 87986 87986 200000 25 3750 187925 44578 44578 200000 328131 328131 508603 124488 124488 200000 30 3750 261603 41432 41432 200000 548129 548129 770670 170171 170171 239261 AGE 65 3750 140644 42443 42443 200000 212249 212249 359126 94613 94613 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 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 2360 1522 200000 2708 1871 200000 2534 1696 200000 2 3750 8072 4622 3597 200000 5635 4610 200000 5118 4093 200000 3 3750 12413 6784 5684 200000 8801 7701 200000 7750 6650 200000 4 3750 16971 8964 7864 200000 12358 11258 200000 10556 9456 200000 5 3750 21757 11035 9935 200000 16215 15115 200000 13413 12313 200000 6 3750 26783 12995 11895 200000 20403 19303 200000 16320 15220 200000 7 3750 32059 14829 13729 200000 24948 23848 200000 19267 18167 200000 8 3750 37600 16529 15567 200000 29881 28918 200000 22247 21284 200000 9 3750 43417 18081 17256 200000 35238 34413 200000 25248 24423 200000 10 3750 49525 19471 18783 200000 41058 40370 200000 28261 27573 200000 15 3750 84966 24411 24411 200000 81703 81703 200000 44607 44607 200000 20 3750 130197 24287 24287 200000 148940 148940 257964 61107 61107 200000 25 3750 187925 12065 12065 200000 251292 251292 389502 75763 75763 200000 30 3750 261603 -- -- 200000 402339 402339 565688 85063 85063 200000 AGE 65 3750 140644 22168 22168 200000 166245 166245 281287 64250 64250 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 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 2988 2151 200000 3377 2539 200000 3182 2345 200000 2 3750 8072 5890 4865 200000 7063 6038 200000 6464 5439 200000 3 3750 12413 8705 7605 200000 11088 9988 200000 9849 8749 200000 4 3750 16971 11560 10460 200000 15627 14527 200000 13472 12372 200000 5 3750 21757 14340 13240 200000 20610 19510 200000 17227 16127 200000 6 3750 26783 17048 15948 200000 26090 24990 200000 21121 20021 200000 7 3750 32059 19680 18580 200000 32119 31019 200000 25159 24059 200000 8 3750 37600 22237 21274 200000 38757 37795 200000 29348 28385 200000 9 3750 43417 24712 23887 200000 46064 45239 200000 33691 32866 200000 10 3750 49525 27103 26416 200000 54069 53382 200000 38193 37506 200000 15 3750 84966 38689 38689 200000 110387 110387 216580 64881 64881 200000 20 3750 130197 47866 47866 200000 201715 201715 349370 97301 97301 200000 25 3750 187925 54056 54056 200000 347929 347929 539290 137538 137538 213185 30 3750 261603 55691 55691 200000 579821 579821 815229 186057 186057 261596 AGE 65 3750 140644 49385 49385 200000 225776 225776 382012 104659 104659 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 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 2361 874 200000 2710 1222 200000 2535 1048 200000 2 3750 8072 4625 2950 200000 5639 3964 200000 5121 3446 200000 3 3750 12413 6789 4926 200000 8807 6944 200000 7756 5893 200000 4 3750 16971 8971 6921 200000 12366 10316 200000 10563 8513 200000 5 3750 21757 11044 8844 200000 16226 14026 200000 13422 11222 200000 6 3750 26783 13006 10806 200000 20418 18218 200000 16333 14133 200000 7 3750 32059 14842 12642 200000 24967 22767 200000 19283 17083 200000 8 3750 37600 16544 14619 200000 29905 27980 200000 22266 20341 200000 9 3750 43417 18099 16449 200000 35267 33617 200000 25272 23622 200000 10 3750 49525 19492 18117 200000 41094 39719 200000 28288 26913 200000 15 3750 84966 24453 24453 200000 81789 81789 200000 44669 44669 200000 20 3750 130197 23511 23511 200000 151022 151022 200000 61231 61231 200000 25 3750 187925 12203 12203 200000 271207 271207 314600 75999 75999 200000 30 3750 261603 -- -- 200000 469893 469893 502785 85528 85528 200000 AGE 65 3750 140644 22254 22254 200000 170466 170466 204559 64390 64390 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 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 2813 1326 200000 3191 1703 200000 3002 1514 200000 2 3750 8072 5537 3862 200000 6665 4990 200000 6089 4414 200000 3 3750 12413 8169 6307 200000 10449 8587 200000 9263 7401 200000 4 3750 16971 10833 8783 200000 14708 12658 200000 12654 10604 200000 5 3750 21757 13410 11210 200000 19367 17167 200000 16150 13950 200000 6 3750 26783 15899 13699 200000 24469 22269 200000 19756 17556 200000 7 3750 32059 18292 16092 200000 30053 27853 200000 23467 21267 200000 8 3750 37600 20584 18659 200000 36169 34244 200000 27285 25360 200000 9 3750 43417 22768 21118 200000 42871 41221 200000 31207 29557 200000 10 3750 49525 24839 23464 200000 50222 48847 200000 35236 33861 200000 15 3750 84966 34510 34510 200000 102794 102794 200000 58952 58952 200000 20 3750 130197 41440 41440 200000 193125 193125 235613 87986 87986 200000 25 3750 187925 44578 44578 200000 345132 345132 400353 124488 124488 200000 30 3750 261603 41432 41432 200000 599082 599082 641017 172517 172517 200000 AGE 65 3750 140644 42443 42443 200000 217693 217693 261232 94613 94613 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 of Denver Insurance Company and Subsidiaries Consolidated Financial Statements Years ended December 31, 1997, 1996 and 1995
CONTENTS Report of Independent Auditors................................ 64 Audited Consolidated Financial Statements Consolidated Balance Sheets................................... 65 Consolidated Statements of Income............................. 67 Consolidated Statements of Stockholder's Equity............... 68 Consolidated Statements of Cash Flows......................... 69 Notes to Consolidated Financial Statements.................... 71
63 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 153 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 154 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 155 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 156 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 157 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 158 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 159 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 160 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 161 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 162 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 163 PART II UNDERTAKING TO FILE REPORTS Incorporated herein by reference to Post-Effective Amendment No. 4 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 1, 1997 (File No. 33-74190). UNDERTAKING REGARDING INDEMNIFICATION Incorporated herein by reference to Post-Effective Amendment No. 4 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on May 1, 1997 (File No. 33-74190). UNDERTAKING REQUIRED BY SECTION 26(e)(2)(A) OF THE INVESTMENT COMPANY ACT OF 1940, AS AMENDED Security Life of Denver Insurance Company represents that the fees and charges deducted under the Policy, in the aggregate, are reasonable in relation to the services rendered, the expenses expected to be incurred and the risks assumed by the Company. Contents of Registration Statement This Registration Statement comprises the following papers and documents: The facing sheet. Cross-Reference table. The prospectuses. FirstLine FirstLine II The undertaking to file reports. The undertaking regarding indemnification. The undertaking required by Section 26(e)2(A) of the Investment Company Act of 1940, as amended. The signatures. Written consents of the following persons: Lawrence D. Taylor (See Exhibit 6B). Ernst & Young, L.L.P. (See Exhibit 7A). Mayer, Brown & Platt (See Exhibit 7B). - -------------------------------------------------------------------------------- FirstLine II II-1 The following exhibits: 1.A (1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant. (2) Not Applicable. (3) (a) Security Life of Denver Distribution Agreement. (b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule.(5) (i) Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Paine Webber Incorporated.(1) (c) Commission Schedule for Policies.(5) (4) Not Applicable. (5) (a) Specimen Variable Universal Life Insurance Policy (Form No. 1195 (VUL)-5/97).(1) (i) Specimen Variable Universal Life Policy Issued in Massachusetts (Form No. 1195 (VUL)-MA-5/97).(1) (ii) Specimen Variable Universal Life Policy Issued in Maryland. (Form No. 1195 (VUL)-MA-5/97).(1) (iii) Specimen Variable Universal Life Policy Issued in Texas. (Form No. 1195 (VUL)-MA-5/97).(1) (iv) Specimen Variable Universal Life Insurance Policy (Form No. 2500 (VUL)-7/97).(2) (v) Specimen Variable Universal Life Insurance Policy (Form No. 2502 (VUL)-6/98). (5) (b) Adjustable Term Insurance Rider (Form No. R2000-3/96).(1) (6) (a) Security Life of Denver's Restated Articles of Incorporation. (b-g) Amendments to Articles of Incorporation through June 12, 1987. (h) Security Life of Denver's By-Laws. (i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997). (4) (7) Not Applicable. (8) (a) Addendum to Sales Agreement. (i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Security Life of Denver, on Behalf of Itself and its Separate Accounts and ING America Equities, Inc. (5) (ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and Security Life of Denver Insurance Company. (iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company. (iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company. (vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company. Amendments to Participation Agreements. (b) (i) First Amendment to Fund Participation Agreement between Security Life of Denver, - -------------------------------------------------------------------------------- FirstLine II II-2 Van Eck Investment Trust and Van Eck Associates Corporation. (5) (ii) Second Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Worldwide Insurance Trust and Van Eck Associates Corporation. (5) (iii) Assignment and Modification Agreement between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, Advisers Managers Trust and Security Life of Denver Insurance Company.(5) (iv) First Amendment to Participation Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company. (v) First Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (vi) Second Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (vii) First Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (viii) Second Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. (ix) First Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. (c) Service Agreement. (d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. (e) Amendment to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. (9) Not Applicable. (10) (a) (i) Specimen Variable Life Insurance Application (Form No. Q-2006-9/97).(2) (ii) Specimen Variable Life Insurance Application (Form No. Q-1155-98).(3) 2. Included as Exhibit 1.A(5) above. 3.A Opinion and Consent of Eugene L. Copeland as to securities being registered. B Opinion and Consent of Gary W. Waggoner as to securities being registered. 4. Not Applicable. 5. Not Applicable. 6.A Opinion and Consent of Shirley A. Knarr.(4) B Opinion and Consent of Lawrence D. Taylor. 7.A Consent of Ernst & Young L.L.P. B Consent of Mayer, Brown & Platt. 8. Not Applicable. - --------------- (1) Incorporated herein by reference to Post-Effective Amendment No. 4 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 30, 1997 (File No. 33-88148). (2) To be used on or before May 1, 1998. - -------------------------------------------------------------------------------- FirstLine II II-3 (3) To be used on or before May 1, 1998, where Exhibit 1.A(10)(a)(i) has not been approved. (4) Incorporated herein by reference to Post-Effective Amendment No. 5 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 29, 1997 (File No. 33-74190). (5) Incorporated herein by reference to Post-Effective Amendment No. 6 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). - -------------------------------------------------------------------------------- FirstLine II II-4 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, Security Life of Denver Insurance Company and the Registrant, Security Life Separate Account L1, certify that they meet all the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933, and have duly caused this Post-Effective Amendment No. 7 to the Registration Statement to be signed on their behalf by the undersigned, hereunto duly authorized, and their seal to be hereunto fixed and attested, all in the City and County of Denver and the State of Colorado on the 27th day of April 1998. SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher -------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/ Gary W. Waggoner - -------------------- Gary W. Waggoner SECURITY LIFE SEPARATE ACCOUNT L1 (Registrant) BY: SECURITY LIFE OF DENVER INSURANCE COMPANY (Depositor) BY: /s/ Stephen M. Christopher -------------------------- Stephen M. Christopher President and Chief Operating Officer (Seal) ATTEST: /s/ Gary W. Waggoner - -------------------- Gary W. Waggoner - -------------------------------------------------------------------------------- FirstLine II II-5 Pursuant to the requirements of the Securities Act of 1933, this Post-Effective Amendment No. 7 to the Registration Statement has been signed below by the following persons in the capacities with Security Life of Denver Insurance Company and on the date indicated. PRINCIPAL EXECUTIVE OFFICERS: /s/ Fred S. Hubbell - ------------------- Fred S. Hubbell Chief Executive Officer /s/ Stephen M. Christopher - -------------------------- Stephen M. Christopher President and Chief Operating Officer PRINCIPAL FINANCIAL OFFICER /s/ Stephen J. Yarina - --------------------- Stephen J. Yarina Vice President, Treasurer and Chief Financial Officer PRINCIPAL ACCOUNTING OFFICER /s/ Stephen J. Yarina - --------------------- Stephen J. Yarina Vice President, Treasurer and Chief Financial Officer DIRECTORS: /s/ Fred S. Hubbell - ------------------- Fred S. Hubbell /s/ Michael W. Cunningham - ------------------------- Michael W. Cunningham /s/ Linda B. Emory - ------------------ Linda B. Emory /s/ Stephen M. Christopher - -------------------------- Stephen M. Christopher - -------------------------------------------------------------------------------- FirstLine II II-6 EXHIBIT INDEX Exhibit No. Description of Exhibit - ----------- ---------------------- 1.A(1) Resolution of the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Security Life of Denver") authorizing the establishment of the Registrant. 1.A(2) Not Applicable. 1.A(3)(a) Security Life of Denver Distribution Agreement. 1.A(3)(b) Specimen Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Compensation Schedule.(5) 1.A(3)(b)(i) Broker/Dealer Supervisory and Selling Agreement for Variable Contracts with Paine Webber Incorporated.(1) 1.A(3)(c) Commission Schedule for Policies. 1.A(4) Not Applicable. 1.A(5)(a) Specimen Variable Universal Life Insurance Policy (Form No. 1197 (VUL)-5/97).(1) 1.A(5)(a)(i) Specimen Variable Universal Life Insurance Policy issued in Maryland (Form No. 1195(VUL)-MD-5/97).(1) 1.A(5)(a)(ii) Specimen Variable Universal Life Insurance Policy issued in Massachusetts (Form No. 1195(VUL)-MA-5/97).(1) 1.A(5)(a)(iii) Specimen Variable Universal Life Insurance Policy issued in Texas (Form No. 1195(VUL)-TX-5/97).(1) 1.A(5)(a)(iv) Specimen Variable Universal Life Insurance Policy (Form No. 2500 (VUL)-7/97).(2) 1.A(5)(a)(v) Specimen Variable Universal Life Insurance Policy (Form No. 2502 (VUL)-6/98).(5) 1.A(5)(b) Adjustable Term Insurance Rider (Form No. R2000-3/96).(1) 1.A(6)(a) Security Life of Denver's Restated Articles of Incorporation. 1.A(6)(b-g) Amendments to Articles of Incorporation through June 12, 1987. 1.A(6)(h) Security Life of Denver's By-Laws. 1.A(6)(h)(i) Bylaws of Security Life of Denver Insurance Company (Restated with Amendments through September 30, 1997). (4) 1.A(7) Not Applicable. 1.A(8)(a) Addendum to Sales Agreement. 1.A(8)(a)(i) Participation Agreement by and among AIM Variable Insurance Funds, Inc., Security Life of Denver, on Behalf of Itself and its Separate Accounts and ING America Equities, Inc. (5) 1.A(8)(a)(ii) Sales Agreement by and among The Alger American Fund, Fred Alger Management, Inc., and - -------------------------------------------------------------------------------- FirstLine II II-7 Security Life of Denver Insurance Company. 1.A(8)(a)(iii) Sales Agreement by and among Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, and Security Life of Denver Insurance Company. 1.A(8)(a)(iv) Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(a)(v) Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(a)(vi) Participation Agreement among INVESCO Variable Investment Funds, Inc., INVESCO Funds Group, Inc., and Security Life of Denver Insurance Company. 1.A(8)(a)(vii) Participation Agreement between Van Eck Investment Trust and the Trust's investment adviser, Van Eck Associates Corporation, and Security Life of Denver Insurance Company. Amendments to Participation Agreements. 1.A(8)(b)(i) First Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Investment Trust and Van Eck Associates Corporation.(5) 1.A(8)(b)(ii) Second Amendment to Fund Participation Agreement between Security Life of Denver, Van Eck Worldwide Insurance Trust and Van Eck Associates Corporation.(5) 1.A(8)(b)(iii) Assignment and Modification Agreement between Neuberger & Berman Advisers Management Trust, Neuberger & Berman Management Incorporated, Neuberger & Berman Advisers Management Trust, Advisers Managers Trust and Security Life of Denver Insurance Company.(5) 1.A(8)(b)(iv) First Amendment to Participation Agreement by and among The Alger American Fund, Fred Alger Management, Inc., Security Life of Denver Insurance Company. 1.A(8)(b)(v) First Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(b)(vi) Second Amendment to Participation Agreement among Variable Insurance Products Fund, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(b)(vii) First Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(b)(viii) Second Amendment to Participation Agreement among Variable Insurance Products Fund II, Fidelity Distributors Corporation and Security Life of Denver Insurance Company. 1.A(8)(b)(ix) First Amendment to Participation Agreement among Security Life of Denver Insurance Company, INVESCO Variable Investment Funds, Inc. and INVESCO Funds Group, Inc. 1.A(8)(c) Service Agreement. 1.A(8)(d) Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 1.A(8)(e) Amendments to Administrative Services Agreement between Security Life of Denver and Financial Administrative Services Corporation. 1.A(9) Not Applicable. - -------------------------------------------------------------------------------- FirstLine II II-8 1.A(10)(a)(i) Specimen Variable Life Insurance Application (Form No. Q-2006-9/97).(2),(4) 1.A(10)(a)(ii) Specimen Variable Life Insurance Application (Form No. Q-1155-98).(3),(4) 2. Included as Exhibit 1.A(5) above. 3.A Opinion and Consent of Eugene L. Copeland as to securities being registered. B Opinion and Consent of Gary W. Waggoner as to securities being registered. 4. Not Applicable. 5. Not Applicable. 6.A Opinion and Consent of Shirley A. Knarr.(4) B Opinion and Consent of Lawrence D. Taylor. 7.A Consent of Ernst & Young L.L.P. B Consent of Mayer, Brown and Platt. 8. Not Applicable. - ---------- (1) Incorporated herein by reference to Post-Effective Amendment No. 2 to the form S-6 registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on April 30, 1997 (File No. 33-88148). (2) To be used on or before May 1, 1998. (3) To be used on or before May 1, 1998, where Exhibit 1.A(10)(a)(i) has not been approved. (4) Incorporated herein by reference to Post-Effective Amendment No. 5 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on October 29, 1997 (File No. 33-74190). (5) Incorporated herein by reference to Post-Effective Amendment No. 6 to the Form S-6 Registration Statement of Security Life of Denver Insurance Company and its Security Life Separate Account L1, filed with the Securities and Exchange Commission on March 2, 1998 (File No. 33-74190). - -------------------------------------------------------------------------------- FirstLine II II-9 EX-1.A(1) 2 RES: AUTH. & ESTABLISHMENT OF REGISTRANT EXHIBIT 1.A(1) RESOLUTION: AUTHORIZATION AND ESTABLISHMENT OF SECURITY LIFE SEPARATE ACCOUNT L1 -------------------------------------------------------------------- BE IT RESOLVED, That the Executive Committee of the Board of Directors of Security Life of Denver Insurance Company ("Company"), pursuant to the provisions of C.R.S. Section 10-7-402 of the Colorado Insurance Laws, hereby authorizes and directs the establishment of Security Life Separate Account L1 ("Separate Account L1") for the following use and purposes, and subject to such conditions as hereinafter set forth: FURTHER RESOLVED, That Separate Account L1 is established for the purpose of providing a funding medium to support reserves under flexible premium adjustable life insurance policies, or other insurance contracts as may be issued by the Company and as the President, any Senior Vice President, any Vice President, or the Treasurer (such persons hereinafter referred to as the "Officers") may designate for such purpose ("Contracts"), and shall constitute a separate account into which are allocated amounts paid to or held by the Company under such contracts. FURTHER RESOLVED, That the income, gains and losses, realized or unrealized from assets allocated to Separate Account L1 shall, in accordance with the Contracts, be credited to or charged against such account without regard to other income, gains, or losses of the Company; and FURTHER RESOLVED, That the fundamental investment policy of Separate Account L1 shall be to invest or reinvest the assets of the Separate Account L1 in securities issued by investment companies registered under the Investment Company Act of 1940, as amended, as the Officers may designate pursuant to the provisions of the Contracts; and FURTHER RESOLVED, That Separate Account L1 shall be divided into Investment Subdivisions, each Investment Subdivision in Separate Account L1 shall invest in the shares of a designated mutual fund portfolio, and net premiums under the Contracts shall be allocated to the eligible Portfolios set forth in the Contracts in accordance with instructions received from owners of the Contracts; and FURTHER RESOLVED, That the Executive Committee of the Board of Directors expressly reserves the right to add or remove any Investment Subdivision of Separate Account L1 as it may hereafter deem necessary or appropriate; and FURTHER RESOLVED, That the President, any Senior Vice President, or the Treasurer, and each of them, with full power to act without the others, be, and they hereby are, severally authorized to invest such amount or amounts of the Company's cash in Separate Account L1 or in any Investment Subdivision thereof as may be deemed necessary or appropriate to facilitate the commencement of Separate Account L1's operations and/or to meet any minimum capital requirements under the Investment Company Act of 1940; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, be, and they hereby are, severally authorized to transfer cash from time to time between the Company's general account and Separate Account L1 as deemed necessary or appropriate and consistent with the terms of the Contracts; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, with such assistance from the Company's independent certified public accountants, legal counsel and independent consultants or others as they may require, be, and they hereby are, severally authorized and directed to take all action necessary to: (a) Register Separate Account L1 as a unit investment trust under the Investment Company Act of 1940, as amended; (b) Register interests in the Contracts in such amounts, which may be an indefinite amount, as the Officers of the Company shall from time to time deem appropriate under the Securities Act of 1933; (c) Take all other actions which are necessary in connection with the offering of said Contracts for sale and the operation of Separate Account L1 in order to comply with the Investment Company Act of 1940, the Securities Exchange Act of 1934, the Securities Act of 1933, and other applicable federal laws, including the filing of any registration statements and amendments thereto, any undertakings, and any applications for exemptions, including any amendments thereto, from the Investment Company Act of 1940 or other applicable federal laws as the officers of the Company shall deem necessary or appropriate; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the other, hereby are severally authorized and empowered to prepare, execute and cause to be filed with the Securities and Exchange Commission on behalf of Separate Account L1, and by the Company as sponsor and depositor a Form of Notification of Registration Statement under the Securities Act of 1933 registering the Contracts, and any and all amendments to the foregoing on behalf of Separate Account L1 and the Company and on behalf of and as attorneys-in-fact for the principal executive officer and/or the principal financial officer and/or the principal accounting officer and/or any other officer of the Company; and FURTHER RESOLVED, That Eugene L. Copeland, Senior Vice President, Secretary and General Counsel, and Stephan M. Largent, Vice President, Variable Life and Pr oduct Research and Development, are duly appointed as agent for service of process for the Company to receive communications and notices from the Securities and Exchange Commission; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, hereby is severally authorized on behalf of Separate Account L1 and on behalf of the Company to take any and all action that each of them may deem necessary or advisable in order to offer and sell the Contracts, including any registrations, filings and qualifications both of the Company, its officers, agents and employees, and of the policies, under the insurance and securities laws of any of the states of the United States of America or other jurisdictions, and in connection therewith to prepare, execute, deliver and file all such applications, reports, covenants, resolutions, applications for exemptions, consents to service of process and other papers and instruments as may be required under such laws, and to take any and all further action which the Officers or legal counsel of the Company may deem necessary or desirable (including entering into whatever agreements and contracts may be necessary) in order to maintain such registrations or qualifications for as long as the Officers or legal counsel deem it to be in the best interests of Separate Account L1 and the Company; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, be and they hereby are, severally authorized in the names and on behalf of Separate Account L1 and the Company to execute and file irrevocable written consents on the part of Separate Account L1 and of the Company to be used in such states wherein such consents to service of process may be requisite under the insurance or securities laws therein in connection with said registration or qualification of the Contracts and to appoint the appropriate state official, or such other person as may be allowed by said insurance or securities laws, agent of Separate Account L1 and of the Company for the purpose of receiving and accepting process; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, be, and hereby are, severally authorized to establish procedures under which the Company will institute procedures for providing a pass-through of voting rights for owners of the Contracts as required by applicable laws with respect to the shares of any investment companies which are held in Separate Account L1; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, are hereby severally authorized to execute such agreement or agreements as deemed necessary and appropriate (i) with SLD Equities, Inc. ("SLD Equities") or other qualified entity under which SLD Equities or such other entity will be appointed principal underwriter and distributor for the Contracts and (ii) with one or more qualified banks or other qualified entities to provide administrative and/or custodial services in connection with the establishment and maintenance of Separate Account L1 and the design, issuance, and administration of the Contracts; and FURTHER RESOLVED, That the Officers, and each of them, with full power to act without the others, are hereby severally authorized to execute and deliver such agreements and other documents and do such acts and things as each of them may deem necessary or desirable to carry out the foregoing resolutions and the intent and purposes thereof; and FURTHER RESOLVED, That the following Standards of Suitability which express the policy of the Company with respect to determining the suitability for applicants be adopted: A. No recommendation shall be made to a potential applicant to purchase a variable life insurance policy and no variable life insurance policy shall be issued in the absence of reasonable grounds to believe that the purchase of such policy is not unsuitable for such applicant on the basis of information furnished after reasonable inquiry of such applicant concerning the applicant's insurance and investment objectives, financial situation and needs, and any other information known to the Company or to the agent making the recommendation. B. Lapse rates for variable life insurance within the first two policy years which are significantly higher than both those encountered by the Company or any affiliate for corresponding fixed benefit life insurance policies and lapse rates of other insurers issuing variable life insurance policies shall be considered in determining whether the above guidelines adopted by the Company are reasonable and also whether the Company and its agents are engaging, as a general business practice, in the sale of variable life insurance to persons for whom it is unsuitable. For purposes of this Clause B, conversions from variable life insurance to fixed benefit life insurance policies pursuant to the NAIC Model Variable Life Insurance Regulation shall not be considered lapses. FURTHER RESOLVED, That the following Standards of Conduct with respect to variable life insurance separate accounts and variable life insurance operations be adopted: A. With respect to variable life insurance separate accounts, neither the Company nor any affiliate shall (unless otherwise approved in writing in advance of the transaction by the insurance regulatory official of each state requiring such approval in which the Company shall be authorized to issue variable life insurance): 1) sell to or purchase from any such separate account established by the Company any securities or other property, other than variable life insurance policies; 2) purchase or allow to be purchased for any such separate account any securities of which the Company or any affiliate is the issuer; 3) accept any compensation, other than regular salary or wages from the Company or an affiliate, for the sale or purchase of securities to or from any such separate account other than as provided in Clause B(3) below; 4) engage in any joint transaction, participation, or common undertaking whereby the Company or an affiliate participates with such a separate account in any transaction in which the Company or any affiliate obtains an advantage in the price or quality of the item purchased, in the service received, or in the cost of such service and the Company or any other affiliate is disadvantaged in any of these respects by the same transaction; or 5) borrow money or securities from any such separate account other than under a policy loan provision. B. No provision of this Statement shall be construed to prohibit: 1) the investment of separate account assets in securities issued by one or more investment companies registered pursuant to the Investment Company Act of 1940 which are sponsored or managed by the Company or an affiliate and the payment of investment management or advisory fees on such assets; 2) the combination of orders for the purchase or sale of securities for the Company, an affiliate, any separate accounts, or any one or more of them, which is for their mutual benefit or convenience, so long as any securities so purchased or the proceeds of any sale thereof are allocated among the participants on some predetermined basis expressed in writing which is designed to assure the equitable treatment of all participants; 3) the Company or an affiliate to act as a broker or dealer in connection with the sale of securities to or by such separate account; however, any commission fee or remuneration charged therefore shall not exceed the minimum broker's commission established for any such transaction by any national securities exchange through which such transaction could be effected or where such charges are subject to negotiation or where no minimum charge is applicable; then such charge shall be consistent with the charges prevailing in the ordinary course of business in the community where such transaction is effected; or 4) the rendering of investment management or investment advisory services by the Company or an affiliate for a fee, subject to any applicable variable life insurance regulation. ********************************* The undersigned hereby certifies that she is the Assistant Secretary of Security Life of Denver Insurance Company, a corporation organized and existing under the laws of the State of Colorado; that the foregoing is a true and correct copy of a resolution duly adopted by the Executive Committee of the Board of Directors on November 3, 1993; that passage of this resolution is in all respects legal and that this resolution remains in full force and effect as of this 16/th/ of June, 1995. -------------------- /s/ Irene M. Colorosa --------------------- Irene M. Colorosa Assistant Secretary EX-1.A(3)(A) 3 DISTRIBUTION AGMT. SECURITY LIFE OF DENVER INSURANCE COMPANY EXHIBIT 1.A(3)(a) DISTRIBUTION AGREEMENT AGREEMENT made this 22nd day of September 1994, by and between Security Life of Denver Insurance Company, a Colorado domestic insurance company ("Security Life") on its own behalf and on behalf of Security Life Separate Account Al ("Separate Account Al") and Security Life Separate Account L1 ("Separate Account L1" and both collectively referred to as "Separate Accounts"), and SLD Equities, Inc., a Colorado corporation, ("SLD Equities") WHEREAS, Security Life has established and maintains Separate account Al and Separate Account L1, which are separate investment accounts, for the purpose of selling variable annuity contracts and variable life contracts ("Contracts") to commence after the effectiveness of the Registration Statements relating thereto filed with the Securities and Exchange Commission pursuant to the Securities Act of 1933, as amended (the "1933 Act"), through SLD Equities, acting as general agent of Security Life; WHEREAS, the Separate Accounts are registered as unit investment trusts under the Investment Company Act of 1940 ("the 1940 Act"); WHEREAS, SLD Equities is registered as a broker-dealer under the Securities Exchange Act of 1934 (the "Securities Exchange Act") and is a member of the National Association of Securities Dealers, Inc. ("NASD"); and WHEREAS, Security Life desires to retain SLD Equities as the Distributor and Principal Underwriter to provide for the sale and distribution to the public of the Contracts issued by Security Life and funded by interests in the General Account of Security Life and in Separate Account Al or Separate Account L1, and SLD Equities is willing to render such services: NOW, THEREFORE, in consideration of the mutual promises and covenants hereinafter set forth, the parties agree as follows: 1. Principal Underwriter. Security Life hereby appoints SLD Equities, during the term of this Agreement, subject to the registration requirements of the 1933 Act and the 1940 Act and the provisions of the Securities Exchange Act, to be the Distributor and Principal Underwriter for the sale of Contracts to the public in each state and other jurisdictions in which the Contracts may be lawfully sold. Security Life also appoints SLD Equities as its independent General Agent for sale of its Contracts (including any riders which Security Life may make available in connection therewith or any contracts for which the Contracts may be exchanged or converted) and for sale of such other insurance contracts or annuity contracts as Security Life may, from time to time, authorize in writing by amendment thereto. SLD Equities shall offer the Contracts for sale and distribution at premium rates set by Security Life. 2. Selling Agreements. SLD Equities is hereby authorized to enter into separate written agreements, on such terms and conditions as SLD Equities determines are not inconsistent with this Agreement, with such organizations which agree to participate as a general agent and/or broker-dealer in the distribution of the Contracts and to use their best efforts to solicit applications for Contracts. Any such broker-dealer (hereinafter "Broker") shall be both registered as a broker-dealer under the Securities Exchange Act and a member of the NASD. SLD Equities shall be responsible for ensuring that Broker and its agents or representatives and general agent and its sub-agents soliciting applications for Contracts shall be duly and appropriately licensed, registered and otherwise qualified for the sale of the Contracts (and the riders and other contracts offered in connection therewith) under the insurance laws and any applicable blue sky laws of each state or other jurisdiction in which such policies may be lawfully sold and in which Security Life is licensed to sell such Contracts. Security Life shall undertake to appoint Broker's qualified agents or representatives and general agent's sub-agents as life insurance agents of Security Life, provided that Security Life reserves the right to refuse to appoint any proposed representative, agent, or sub-agent, or once appointed, to terminate such appointment. SLD Equities shall be responsible for ensuring that Broker and general agent supervise its agents, representatives, or sub-agents. SLD Equities is also authorized to enter into separate written agreements, on such terms and conditions as SLD Equities determines are not inconsistent with this Agreement, with such organizations ("wholesalers") that agree to participate in the distribution of the Contracts and to use their best efforts to solicit Brokers and general agents that, in turn, will solicit applications of the Contracts. 3. Life Insurance Agents. Security Life shall be responsible for ensuring that Broker and its agents or representatives and general agent and its sub- agents meet all qualifications and hold any Licenses or authorizations that may be required for the solicitation or sale of the Contracts under the insurance laws of the applicable jurisdictions. 4. Suitability. Security Life desires to ensure that Contracts will be sold to purchasers for whom the Contract will be suitable. SLD Equities shall take reasonable steps to ensure that the various representatives of Broker and sub-agents of general agents shall not make recommendations to an applicant to purchase a contract in the absence of reasonable grounds to believe the purchase of the Contract is suitable for such applicant. While not limited to the following, a determination of suitability shall be based on information furnished to a representative or sub-agent after reasonable inquiry of such applicant concerning the applicant's other security holdings, insurance and investment objectives, financial situation and needs, and the likelihood that the applicant will continue to make any premium payments contemplated by the Contracts and will keep the Policy in force for a sufficient period of time so that Security Life's acquisition costs are amortized over a reasonable period of time. 2 5. Conformity With Registration Statement and Approved Sales Materials. In performing its duties as Distributor, SLD Equities will act in conformity with the Prospectus and with the instructions and directions of Security Life, the requirements of the 1933 Act, the 1940 Act, the Securities Exchange Act, and all other applicable federal and state laws and regulations. SLD Equities shall not give any information nor make any representations, concerning any aspect of the Contract or of Security Life's operations to any persons or entity unless such information or representations are contained in the Registration Statement and the pertinent prospectus filed with the Securities and Exchange Commission, or are contained in sales or promotional literature approved by Security Life. SLD Equities will not use and will take reasonable steps to ensure Broker will not use any sales promotion material and advertising which has not been previously approved by Security Life. 6. Expenses. During the term of this Agreement, SLD Equities will bear all of its expenses in complying with this Agreement, including the following expenses: (a) costs of sales presentations, mailings, sales promotion materials, advertising, and any other marketing efforts by SLD Equities in connection with the distribution or sale of the Contracts; and (b) any compensation paid to employees of SLD Equities and to wholesalers, Brokers and general agents in connection with the distribution or sale of the Contracts. Notwithstanding any other provision of this Agreement, it is understood and agreed that Security Life shall at all times retain the ultimate responsibility for and control of all functions performed pursuant to this Agreement, and for marketing the Contract, and reserves the right to direct, approve or disapprove any action hereunder taken on its behalf by SLD Equities. 7. Applications. Completed applications for Contracts solicited by such Broker through its agents or representatives or by general agent through its sub-agents shall be transmitted directly to Security Life. All payments under the Contracts shall be made by check to Security Life, or by other method acceptable to Security Life, and if received by SLD Equities, shall be held at all times in a fiduciary capacity and remitted promptly to Security Life. All such payments will be the property of Security Life. Security Life has the sole authority to approve or reject such applications or payments and maintains ultimate responsibility for underwriting. Anything in this Agreement to the contrary notwithstanding, Security Life retains the ultimate right to control the sale of the Contracts and to appoint and discharge life insurance agents of Security Life. 8. Standard of Care. SLD Equities shall be responsible for exercising reasonable care in carrying out the provisions of this Agreement. 3 9. Reports. SLD Equities shall be responsible for maintaining the records of Broker and general agent and their agents, representatives or sub-agents who are licensed, registered and otherwise qualified to sell the Contracts; calculating and furnishing the fees payable to Brokers or general agents; and for furnishing periodic reports to Security Life as to the sale of Contracts made pursuant to this Agreement. 10. Records. SLD Equities shall maintain and preserve such records as are required of it by applicable laws and regulations. The books, accounts and records of Security Life, the Separate Accounts and SLD Equities shall be maintained so as to clearly and accurately disclose the nature and details of the transactions, including such accounting information as necessary to support the reasonableness of the amounts to be paid by Security Life hereunder. 11. Compensation. For the service rendered and product development in the initial sales efforts and continuing obligations under this Agreement, Security Life shall pay SLD Equities in the amounts set forth in Schedule A, which schedule is incorporated herein. Security Life shall arrange for the payment of commissions, through SLD Equities to those Brokers and general agents that sell Contracts under agreements entered into pursuant to Section 2, hereof, and to wholesalers that solicit brokers and general agents to sell Contracts under agreements entered into pursuant to Section 2, hereof, in amounts as may be agreed to by Security Life and SLD Equities specified in such written agreements. 12. Investigation and Proceedings. SLD Equities and Security Life agree to cooperate fully in any insurance regulatory investigation or proceeding or judicial proceeding arising in connection with the Contracts distributed under this Agreement. SLD Equities further agrees to furnish regulatory authorities with any information or reports in connection with such services which may be requested in order to ascertain whether the operations of Security Life and the Separate Account are being conducted in a manner consistent with applicable laws and regulations. SLD Equities and Security Life further agree to cooperate fully in any securities regulatory investigation or proceeding with respect to Security Life, SLD Equities, their affiliates and their agents or representatives to the extent that such investigation or proceeding is in connection with Contracts distributed under this Agreement. Without limiting the foregoing: (a) SLD Equities will be notified promptly of any customer complaint or notice of any regulatory investigation or proceeding or judicial proceeding received by Security Life with respect to SLD Equities or any agent, representative, or sub-agent of a Broker or general agent or which may affect Security Life's issuance of any Contract sold under this Agreement; and (b) SLD Equities will promptly notify Security Life of any customer complaint or notice of any regulatory investigation or proceeding received by SLD Equities or its affiliates with respect to Security Life or any agent, representative, or sub- agent of a Broker or general agent in connection 4 with any Contract distributed under this Agreement or any activity in connection with any such Contract. In the case of a meritorious customer complaint, SLD Equities and Security Life will cooperate in investigating such complaint and any response will be sent to the other party to this Agreement for approval not less than five business days prior to its being sent to the customer or regulatory authority, except that if a more prompt response is required, the proposed response shall be communicated by telephone or telegraph. 13. Indemnification. Security Life hereby agrees to indemnify and hold harmless SLD Equities and its officers and directors, and employees for any expenses (including legal expenses), losses, claims, damages, or liabilities incurred by reason of any untrue or alleged untrue statement or representation of a material fact or any omission or alleged omission to state a material fact required to be stated to make other statements not misleading, if made in reliance on any prospectus, registration statement, post-effective amendment thereof, or sales materials supplied or approved by Security Life or the Separate Accounts. Security Life shall reimburse each such person for any legal or other expenses reasonably incurred in connection with investigating or defending any such loss, liability, damage, or claim. However, in no case shall Security Life be required to indemnify for any expenses, losses, claims, damages, or liabilities which have resulted from the willful misfeasance, bad faith, negligence, misconduct, or wrongful act of SLD Equities. SLD Equities hereby agrees to indemnify and hold harmless Security Life, its officers, directors, and employees, and the Separate Accounts for any expenses, losses, claims, damages, or liabilities arising out of or based upon any of the following in connection with the offer or sale of the contracts: 1) except for such statements made in reliance on any prospectus, registration statement or sales material supplied or approved by Security Life or the Separate Accounts, any untrue or alleged untrue statement or representation made; 2) any failure to deliver a currently effective prospectus; 3) the use of any unauthorized sales literature by any officer, employee, agent, or sub-agent of SLD Equities, Broker or general agent; or 4) any willful misfeasance, bad faith, negligence, misconduct or wrongful act. SLD Equities shall reimburse each such person for any legal or other expenses reasonably incurred in connection with investigating or defending any such loss, liability, damage, or claim. Promptly after receipt by a party entitled to indemnification ("indemnified party") of notice of the commencement of any action, if a claim for indemnification in respect thereof is to be made against Security Life or SLD Equities ("indemnifying party") such indemnified party will notify indemnifying party in writing of the commencement thereof, but failure to notify the indemnifying party of any claim shall not relieve it from any liability which it may have to the person against whom such action is brought otherwise than on account of this agreement contained in this Section 13. The indemnifying party will be entitled to participate in the defense of the indemnified party and such participation will not relieve such indemnifying party of the obligation to reimburse the indemnified party, for reasonable legal and other expenses incurred by such indemnified party in defending himself. 5 14. Agent of Security Life or Separate Accounts. Any person, even though also an officer, director, employee, or agent of SLD Equities, who may be or become an officer, director, employee, or agent of Security Life or the Separate Accounts shall be deemed, when rendering services to Security Life or the Separate Accounts or acting in any business of Security Life or the Separate Accounts, to be rendering such services to or acting solely for Security Life or the Separate Accounts and not as an officer, director, employee, or agent or one under the control or direction of SLD Equities even though paid by SLD Equities. Likewise, any person, even though also an officer, director, employee, or agent of Security Life or the Separate Accounts, who may be or become an officer, director, employee, or agent of SLD Equities shall be deemed, when rendering services to SLD Equities or acting in any business of SLD Equities to be rendering such services to or acting solely for SLD Equities and not as an officer, director, employee, or agent or one under the control or direction of Security Life or the Separate Accounts even though paid by Security Life or the Separate Accounts. 15. Books and Records. It is expressly understood and agreed that all documents, reports, records, books, files and other materials relating to this Agreement and the services to be performed hereunder shall be the sole property of Security Life and the Separate Accounts and that such property shall be held by SLD Equities as agent, during the effective term of this Agreement. This material shall be delivered to Security Life upon the termination of this Agreement free from any claim or retention of rights by SLD Equities. During the term of this Agreement and for a period of three years from the date of termination of this Agreement, SLD Equities will not disclose or use any records or information and will regard and preserve as confidential all information related to the business of Security Life or the Separate Accounts that may be obtained by SLD Equities from any source as a result of this Agreement and will disclose such information only if Security Life or the Separate Accounts have authorized such disclosure, or if such disclosure is expressly required by applicable federal or state regulatory authorities. SLD Equities further acknowledges and agrees that, in the event of a breach or threatened breach by it of the provisions of this article, Security Life will have no adequate remedy in moneys or damages and, accordingly, Security Life shall be entitled in its discretion to seek an injunction against such breach. However, no specification in this Agreement of a specific legal or equitable remedy shall be construed as a waiver or prohibition against any other legal or equitable remedy in the event of a breach of a provision of this Agreement. 16. Employees. SLD Equities will not employ, except with the prior written approval of the Commissioner of Insurance of the state of Colorado, in any material connection with the handling of the Separate Accounts' assets any person who, to the knowledge of SLD Equities: (a) in the last 10 years has been convicted of any felony or misdemeanor arising out of conduct involving embezzlement, fraudulent conversion, or misappropriation of funds or securities, or involving violations of Sections 1341, 1342, or 1343 of Title 18, United States Code; or 6 (b) within the last 10 years has been found by any state regulatory authority to have violated or has acknowledged violation of any provision of any state insurance law involving fraud, deceit, or knowing misrepresentation or (c) within the last 10 years has been found by any federal or state regulatory authorities to have violated or have acknowledged violation of any provision of federal or state securities laws involving fraud, deceit, or knowing misrepresentation. 17. Termination. This Agreement shall terminate automatically upon its assignment without the prior written consent of both parties. This Agreement may be terminated at any time, for any reason, by either party on 60 days' written notice to the other party, without the payment of any penalty. Upon termination of this Agreement, all authorizations, rights and obligations shall cease except the obligation to settle accounts hereunder, including commissions on premiums subsequently received for Contracts in effect at time of termination, and the agreements contained in Sections 12 and 13 hereof. 18. Regulation. This Agreement shall be subject to the provisions of the 1940 Act and the Securities Exchange Act and the rules, regulations and rulings thereunder, and of the applicable rules and regulations of the NASD, and applicable state insurance law and other applicable law, from time to time in effect, and the terms hereof shall be interpreted and construed in accordance therewith. 19. Independent Contractor. SLD Equities shall act as an independent contractor and nothing herein contained shall constitute SLD Equities or its agents, officers or employees as agents, officers, or employees of Security Life in connection with the sale of the Contacts. 20. Notices. Notices of any kind to be given to SLD Equities by Security Life or the Separate Accounts shall be in writing and shall be duly given if mailed, first class postage prepaid, or delivered to SLD Equities at 1290 Broadway, Denver, Colorado 80203, or at such other address or to such individual as shall be specified by SLD Equities. Notices of any kind to be given to Security Life or the Separate Accounts shall be in writing and shall be duly given if mailed, first class postage prepaid, or delivered to them at 1290 Broadway, Denver, Colorado 80203, or at such other address or to such individual as shall be specified by Security Life. If any provisions of this Agreement shall be held or made invalid by a court decision, statute rule or otherwise, the remainder of this Agreement shall not be affected thereby. 21. Governing Law. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Colorado. 7 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed as of the day and year first above written. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ V. S. Benfell PRESIDENT ATTEST: /s/ Eugene L. Copeland SECRETARY SLD EQUITIES, INC. By: /s/ Steve Largent PRESIDENT WITNESS: /s/ Bonnie C. Dailey VICE PRESIDENT 8 SCHEDULE "A" COMPENSATION SCHEDULE This Schedule "A" to the Distribution Agreement between Security Life of Denver Insurance Company ("Security Life") and SLD Equities, Inc. ("SLD Equities"), dated September 22, 1994, sets forth the compensation to be paid to SLD Equities for its services as underwriter and distributor of the following products, as follows: 1. EXCHEQUER ANNUITY A Flexible Premium Deferred Combination Fixed & Variable Annuity Contract Form 1192(VA) Total Gross Dealer Concessions earned in the first year by Selling Broker- Dealer pursuant to its Selling Agreement with Security Life and SLD Equities (pursuant to the Selling Broker-Dealer's election, this will be either 5% or 6% of funds actually received and accepted by Security Life during the first year of the contract), plus an additional 1% of funds actually received and accepted by Security Life during the first year of the contract. After the first year, all Trail Commissions calculated by Security Life to be due and payable to the Selling Broker-Dealers under the Selling Agreements. 2. FIRSTLINE Variable Life Policy Form 1191(VUL) Total Gross Dealer Concessions earned by Selling Broker-Dealer pursuant to its Selling Agreement with Security life and SLD Equities (this will be 95% of all premium allocated to the first target, regardless of policy year), plus 10% of all such target premium. All Trail Commissions, including Renewal and Ultimate Commissions, calculated by Security Life to be due and payable to the Selling Broker- Dealers under the Selling Agreements. All commissions shall be paid only on an earned basis, as calculated on the next Commission cycle. 9 EX-1.A(6)(A) 4 RESTATED ARTICLES OF INCORP EXHIBIT 1.A (6) (a) RESTATED ARTICLES OF INCORPORATION OF SECURITY LIFE AND ACCIDENT COMPANY AS PRESENTLY AMENDED KNOW ALL MEN BY THESE PRESENTS, That pursuant to Section 7-2-112 Colorado Revised Statutes (1973), as amended, the following are Restated Articles of Incorporation of Security Life and Accident Company, which correctly set forth without change the corresponding provisions of the Articles of Incorporation as heretofore amended, and these Restated Articles of Incorporation supersede the original Articles of Incorporation and all Amendments thereto: ARTICLE I The corporate name of our said company shall be SECURITY LIFE AND ACCIDENT COMPANY ARTICLE II The objects and said purposes for which our said company is formed and incorporated are: To make insurance or reinsurance upon the lives of persons, and every insurance pertaining thereto or connected therewith, including health and accident insurance, and to grant, purchase or dispose of annuities. ARTICLE III The authorized capital stock of said company is $2,995,200 consisting of 1,497,600 shares of $2.00 par value COMMON STOCK which shall be divided into 1,364,500 shares of SERIES A COMMON STOCK having one (1) vote each, and 133,100 shares of SERIES B COMMON STOCK having eight (8) votes each. In no event shall each share of SERIES A COMMON STOCK have more than one-eighth (1/8th) the number of votes allowed to each share of SERIES B COMMON STOCK. Each share of each series shall share equally with each share of the other series of stock in all types of dividends, distributions and in the assets distributed in liquidation of the company. Any or all of such shares shall be issued by the company from time to time, for such consideration in money, property, or services as may be fixed by the Board of Directors without the necessity of action by the shareholders. All such shares shall be issued fully paid and non-assessable. ARTICLE IV The term of existence of our said company shall be perpetual. ARTICLE V The business and affairs of the company shall be under the control and management of a Board of Directors consisting of not less than five (5) and not more than seven (7) members, the number to be fixed by the bylaws of the company. ARTICLE VI The principal business and operations of our said company shall be conducted and carried on in the City and County of Denver, Sate of Colorado. However, the company shall have the right to conduct its business, carry on its operations, and have officers and exercise the powers granted by the corporation laws of the State of Colorado in any state, territory, district, or possession of the United States, or in any foreign country. The address of the company's registered offices is The Security Life Building, 1616 Glenarm Place, Denver, Colorado 80202, which is located in Denver County, Colorado, and the name of its registered agent is Shelby F. Harper, whose address is the Security Life Building 1616 Glenarm Place, Denver, Colorado 80202. ARTICLE VII The Board of Directors and shareholders of our said company shall have the power to meet and transact any business which they are empowered to transact in any state, territory, district, or possession of the United States, or in any foreign country that may be designated by the bylaws of the company, or by order of the Board of Directors. ARTICLE VIII Cumulative voting shall not be allowed at any stockholders meeting of our said company. ARTICLE IX The Board of Directors shall have the power to enact, alter, amend and repeal such bylaws not inconsistent with the laws of the State of Colorado and these Articles of Incorporation as it may deem best for the management of the corporation. ARTICLE X Shareholders shall not have a preemptive right to subscribe for additional shares of the corporation issued from time to time by the Board of Directors. ARTICLE XI A majority of the votes entitled to be cast by the shareholders, exclusive of any votes attributable to unissued or treasury stock, shall be necessary to constitute a quorum at meetings of shareholders. ARTICLE XII The Board of Directors of the company shall have the powers to indemnify any director or officer or former director or officer of the corporation or any person who may have served at its request as a director or officer of another corporation in which this company owns shares of capital stock or of which this company is a creditor, and the personal representatives of all such persons, against expenses actually and necessarily incurred by him in connection with the defense of any action, suit or proceeding in which he is made a party by reason of being or having been such director or officer, except in relation to matters as to which he shall he adjudged in such action, suit or proceeding to be liable for negligence or misconduct in the performance of duty. "Expenses actually and necessarily incurred" shall be deemed to include the cost to such director or officer of reasonable settlements made with the consent of the company, including amounts paid with such consent upon a plea of nolo contendere or similar plea. Such indemnification shall not be deemed exclusive of any other rights to which such director or officer may be entitled, under any bylaw, agreement, vote of shareholders, or otherwise. ATTEST: SECURITY LIFE AND ACCIDENT COMPANY /s/ Shelby F. Harper By: /s/ Fred A. Deering Shelby F. Harper, Secretary Fred A. Deering STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) I Denise C. Crumbaker, a notary public within and for said city and county, in the state aforesaid, do hereby certify that FRED A. DEERING and SHELBY F. HARPER, known to me to be the persons whose names are subscribed to the annexed and foregoing Restated Articles of Incorporation, appeared before me this day in person, and severally acknowledged that they signed, sealed and delivered the said instrument of writing as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 16th day of February, 1977. My commission expires: My Commission expires Nov. 12, 1977 /s/ Denise C. Crumbaker EX-1.A(6)(B-G) 5 AMENDMENTS TO ARTICLES OF INCORPORATION EXHIBIT 1.A (6) (b) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is SECURITY LIFE AND ACCIDENT COMPANY. SECOND: The following amendment was adopted by the shareholders of the corporation on July 27, 1977, in the manner prescribed by the Colorado Corporation Act: (See the page attached hereto and made a part hereof) THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,375,143 and the number of shares entitled to vote thereon was 1,375,143. FOURTH: The designation and number of outstanding shares of each series entitled to vote thereon as a Series were as follows: SERIES A (1 vote per share) 1,242,043 shares SERIES B (8 votes per share) 133,100 shares FIFTH: The number of shares voted for such amendment was 1,252, 534; and the number of shares voted against such amendment was 986. SIXTH: The number of shares of each series entitled to vote thereon as a series voted for and against such amendment, respectively, was: NUMBER OF SHARES VOTED For Against SERIES A (1 vote per share) 1,119,434 986 SERIES B (8 votes per share) 133,100 - 0 - SEVEN: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: No Change EIGHTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: No Change SECURITY LIFE AND ACCIDENT COMPANY (SEAL) By: /s/ Fred A. Deering President and /s/ Shelby F. Harper Secretary STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Helen M. McCartney, a Notary Public within and for the said County and State, personally appeared FRED A. DEERING and SHELBY F. HARPER, who acknowledged before me that they are the President and Secretary, respectively, of SECURITY LIFE AND ACCIDENT COMPANY, a Colorado corporation and that they signed the foregoing Articles of Amendment as their free and voluntary act and deed for the uses and purposes therein set forth, and that the facts therein contained are true. In Witness Whereof, I have hereunto set my hand and seal this 9th day of August, 1977. My commission expires April 9, 1980 /s/ Helen M. McCartney (NOTARY SEAL) (Notary Public) The next to the last sentence of ARTICLE III is amended by adding an introductory phrase, "Subject to Article XIII," so that it reads: Subject to Article XIII, any or all such shares shall be issued by the company from time to time for such consideration in money, property, or services as may be fixed by the Board of Directors without the necessity of action by the shareholders. A new Article XIII is added: ARTICLE XIII No action shall be taken to issue or authorize the issuance of additional shares of capital stock or any class of securities convertible into capital stock, or issue or authorize the issuance of any other securities in respect of, in lieu of, or in substitution for the company's stock or change any of the terms of the company's outstanding capital stock or effect any merger, consolidation, acquisition of assets, disposition of assets or change in the company's capitalization, or other comparable event not in the ordinary course of its business, without the approval of the holders of a majority (or greater percentage if required by the corporation laws of the State of Colorado) of each series of the company's capital stock. No amendment of these Articles of Incorporation with regard to any action of the character referred to in this Article XIII shall be made without the approval of the holders of shares representing 66-2/3% of the votes represented by the outstanding capital stock. EXHIBIT 1.A (6) (c) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is SECURITY LIFE AND ACCIDENT COMPANY. SECOND: The following amendment was adopted by the shareholders of the corporation on May 14, 1980, in the manner prescribed by the Colorado Corporation Act: Article V is amended to increase the maximum number of Directors from seven (7) to twelve (12) so that it reads: ARTICLE V The business and affairs of the company shall be under the control and management of a Board of Directors consisting of not less than five (5) and not more than twelve (12) members, the number to be fixed by the bylaws of the company. THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,436,737 and the number of shares entitled to vote thereon was 1,436,737. No class voting was required upon the proposed amendment. FOURTH: The number of shares voted for such amendment was 1,324,093, and the number of shares voted against such amendment was 5,413. FIFTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: No Change SIXTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: No Change SECURITY LIFE AND ACCIDENT COMPANY By /s/ Fred A. Deering President (SEAL) and /s/ Shelby F. Harper Secretary STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Bonnie Joy Miller, a Notary Public within and for said city and county, in the State aforesaid, personally appeared FRED A. DEERING and SHELBY F. HARPER, who, being first duly sworn, declared that they are the President and Secretary, respectively, of SECURITY LIFE AND ACCIDENT COMPANY, a Colorado corporation, and severally acknowledged that they signed, sealed and delivered the foregoing Articles of Amendment to the Articles of Incorporation as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 27th day of May, 1980. My commission expires March 12, 1984 /s/ Bonnie Joy Miller (Notary Public) EXHIBIT 1.A (6) (d) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is SECURITY LIFE AND ACCIDENT COMPANY. SECOND: The following amendment was adopted by the shareholders of the corporation on May 13, 1981, in the manner prescribed by the Colorado Corporation Act: Article I is amended to change the corporate name so that it reads: ARTICLE I The corporate name of our said company shall be: SECURITY LIFE OF DENVER INSURANCE COMPANY THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,436,737 and the number of shares entitled to vote thereon was 1,436,737. No class voting was required upon the proposed amendment. FOURTH: The number of shares voted for such amendment was 1,405,505, and the number of shares voted against such amendment was 180. FIFTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: No Change SIXTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: No Change SECURITY LIFE AND ACCIDENT COMPANY By /s/ Fred A. Deering President (SEAL) and /s/ Shelby F. Harper Secretary STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Doris I. Stepudis, a Notary Public within and for said city and county, in the State aforesaid, personally appeared FRED A. DEERING and SHELBY F. HARPER, who, being first duly sworn, declared that they are the President and Secretary, respectively, of SECURITY LIFE AND ACCIDENT COMPANY, a Colorado corporation, and severally acknowledged that they signed, sealed and delivered the foregoing Articles of Amendment to the Articles of Incorporation as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 13th day of May, 1981. My commission expires: My Commission Expires June 30, 1984 /s/ Doris I. Stepudis (Notary Public) EXHIBIT 1.A (6) (e) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION Pursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is SECURITY LIFE OF DENVER INSURANCE COMPANY. SECOND: The following amendment was adopted by the shareholders of the Corporation on April 16, 1982, in the manner prescribed by the Colorado Corporation Act: Article III of the Restated Articles of Incorporation, as amended, is hereby deleted, and the following Article III is inserted in lieu thereof: ARTICLE III The authorized capital stock of said company is $2,980,000 Consisting of 149 shares of $20,000 par value Common Stock having one (l) vote each. Subject to Article XIII, any or all of such shares shall be issued by the company from time to time, for such consideration in money, property, or services as may be fixed by the Board of Directors without the necessity of action by the shareholders. All such shall be issued fully paid and non-assessable. No fractional shares shall be issued. Article XIII is amended by deleting the words "of each series" from the last sentence of the first paragraph. THIRD: The number of shares of the corporation outstanding at the time of such adoption was 1,436,737 and the number of shares entitled to vote thereon was 1,436,737. The number of votes represented by such shares was 2,368,437. FOURTH: The designation and number of outstanding shares of each series entitled to vote thereon as a Series were as follows: SERIES A (1 vote per share) 1,303,637 shares SERIES B (8 votes per share) 133,100 shares (1,064,800 votes) FIFTH: The number of votes for or against such amendment was as follows: For Against SERIES A (1 vote per share) 1,268,665 5,138 SERIES B (8 votes per share) 1,064,800 0 SIXTH: The number of shares of each series entitled to vote thereon as a series voted for and against such amendment, respectively, was: For Against SERIES A (1 vote per share) 1,268,665 5,138 SERIES B (8 votes per share) 133,100 0 SEVENTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: Each 10,000 shares of the present Series A Common Stock is reclassified into one (1) share of New Common Stock. Each 10,000 shares of the present Series B Common Stock is reclassified into one (1) share of New Common Stock. EIGHTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: The stated capital will be decreased by $93,474 SECURITY LIFE OF DENVER INSURANCE COMPANY By /s/ Fred A. Deering President and /s/ Shelby F. Harper Secretary (SEAL) STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Helen M. McCartney, a notary public within and for said city and county, in the state aforesaid, personally appeared FRED A. DEERING and SHELBY F. HARPER, who, being first duly sworn, declared that they are the President and Secretary, respectively, of SECURITY LIFE OF DENVER INSURANCE COMPANY, a Colorado corporation, and severally acknowledged that they signed, sealed and delivered the foregoing Articles of Amendment to the Articles of Incorporation as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 16 day of April, 1982. My commission expires April 9, 1984 /s/ Helen M. McCartney (Notary Public) EXHIBIT 1.A (6) (f) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION SECURITY LIFE OF DENVER INSURANCE COMPANY Pursuant to the provisions of the Colorado Corporation Act, the undersigned corporation adopts the following Articles of Amendment to its Articles of Incorporation: FIRST: The name of the corporation is: SECURITY LIFE OF DENVER INSURANCE COMPANY. SECOND: On May 29, 1985, the Shareholders of the corporation adopted an amendment to the Restated Articles of Incorporation deleting Article XII thereof in its entirety and redesignating Article XIII as Article XII. THIRD: The number of shares of the corporation outstanding at the time of such adoption was 144 and the number of shares entitled to vote thereon was 144. The number of votes represented by such shares was 144. FOURTH: The designation and number of outstanding shares of each class entitled to vote thereon as a class were as follows: Number Class of Shares Common 144 FIFTH: The number of shares for such amendment was 144 and the number of shares voted against such amendment was -0-. SIXTH: The number of shares of each class entitled to vote thereon as a class voted for and against such amendment, respectively, was: Number of Shares Voted Class For Against Common 144 -0- SEVENTH: The manner, if not set forth in such amendment, in which any exchange, reclassification, or cancellation of issued shares provided for in the amendment shall be effected, is as follows: NO CHANGE EIGHTH: The manner in which such amendment effects a change in the amount of stated capital, and the amount of stated capital as changed by such amendment, are as follows: NO CHANGE Dated this 30th day of May, 1985 SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Richard G. Horn President (SEAL) By: /s/ Eugene L. Copeland Secretary STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Irene M. Colorosa, a notary public within and for said city and county, in the State aforesaid, personally appeared Richard G. Horn and Eugene L. Copeland, who, being first duly sworn, declared that they are the President and Secretary, respectively, of SECURITY LIFE OF DENVER INSURANCE COMPANY, a Colorado corporation, and severally acknowledged that they signed, sealed and delivered the foregoing Articles of Amendment to the Articles of Incorporation as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 30th day of May, 1985. /s/ Irene M. Colorosa Notary Public My commission expires: My commission expires Feb. 21, 1987 EXHIBIT 1.A (6) (g) ARTICLES OF AMENDMENT TO THE ARTICLES OF INCORPORATION SECURITY LIFE OF DENVER INSURANCE COMPANY Pursuant to the provisions of the Colorado Corporation Code, the undersigned corporation adopts the following Articles of Amendment to its Restated Articles of Incorporation: FIRST: The name of the corporation is: SECURITY LIFE OF DENVER INSURANCE COMPANY. SECOND: On May 8, 1987 The Shareholder of the corporation adopted an amendment to the Restated Articles of Incorporation adding the following as a new ARTICLE XII and redesignating the existing ARTICLE XII as ARTICLE XIII: ARTICLE III To the fullest extent permitted by the Colorado Corporation Code as it exists or may hereafter be amended, a director of the Company shall not be liable to the Company or its shareholders for monetary damages for breach of fiduciary duty as a director. THIRD: 100% of the issued and outstanding shares voted to approve this amendment. FOURTH: This amendment does not provide for an exchange, reclassification or cancellation of issued shares. FIFTH: This amendment does not effect a change in the amount of stated capital. Dated this 26th day of May, 1987 SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Richard G. Horn Richard G. Horn, President By: /s/ Eugene L. Copeland Eugene L. Copeland, Secretary STATE OF COLORADO ) ) SS. CITY AND COUNTY OF DENVER ) Before me, Josephine S. Ochoa, a notary public within and for said city and county, in the state aforesaid, personally appeared Richard G. Horn and Eugene L. Copeland, who, being first duly sworn, declared that they are the President and Secretary, respectively, of SECURITY LIFE OF DENVER INSURANCE COMPANY, a Colorado corporation, and severally acknowledged that they signed, sealed and delivered the foregoing Articles of Amendment to the Articles of Incorporation as their free and voluntary act and deed for the uses and purposes therein set forth, and that the statements therein contained are true. Given under my hand and notarial seal this 26th day of May, 1987. /s/ Josephine S. Ochoa Notary Public My commission expires: My commission expires May 17, 1988 EX-1.A(6)(H) 6 BYLAWS BYLAWS EXHIBIT 1.A(6)(h) OF SECURITY LIFE OF DENVER INSURANCE COMPANY With Amendments through February 14, 1994 ARTICLE I Officers Section 1. Number. The executive Officers of the corporation shall be the --------- ------ Chairman of the Board, President, and Chief Executive Officer, Secretary, Treasurer and Actuary. As additional Executive Officers, there shall be any number of Executive Vice Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, and General Auditors, who shall be elected by the Board of Directors. The Board of Directors may, in its discretion, designate an Honorary Chairman, honorary members of the Board and emeritus officers, who shall not be Board members, officers or employees of the corporation. The Board of Directors may, in its discretion, designate other officers: Assistant Vice Presidents, Assistant Secretaries, Assistant Treasurers, Assistants to the President and Chief Executive Officer, Associate and the Assistant Actuaries, Controllers, Associate and Assistant Controllers, Assistant Auditors, Directors of Agencies, Medical Directors, General Counsel, Associate and Assistant General Counsel, for such terms of office as it may direct and to perform such acts and carry out duties as the Board of Directors or the President and Chief Executive Officer may determine. Any sales director who has been recognized for his performance of services by being given the honorary title of Regional Vice President shall not be an "officer" of the Company. Any employee who has been recognized for his performance of services by being given the honorary title of Field Vice President shall not be an "officer" of the Company. One person may hold any two of the executive offices of the corporation (except the same person shall not be both President and Secretary) but no such officer shall execute, acknowledge or verify any instrument in more than one capacity if such instrument is required by law or by these Bylaws or by resolution of the Board of Directors to be executed, acknowledged or verified by any two or more officers. Section 2. Election, Term of Office and Qualifications. The Executive --------- ------------------------------------------- Officers of the corporation shall be chosen annually by the Board of Directors. Each officer shall hold his office until a successor shall have been duly chosen and qualified, or until his death, or until he shall resign or shall have been removed in the manner hereinafter provided. Section 3. Removal. The officers designated in Section 1 of this Article --------- ------- may be removed, either with or without cause, by a vote of a majority of the whole Board of Directors at a meeting called for the purpose. -1- Section 4. Resignation. Any officer may resign at any time by giving --------- ----------- written notice to the Board of Directors, to the President and Chief Executive Officer, or to the Secretary of the corporation. Any such resignation shall take effect at the same time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. Vacancies. A vacancy in any office because of death, --------- --------- resignation, removal, disqualification or any other cause, shall be filled for the unexpired portion of the term by the Board of Directors. Section 6. The Chairman of the Board. The Chairman of the Board shall be --------- ------------------------- responsible to the Board of Directors. He shall perform all duties usual and incident to the office of the Chairman of the Board and such other duties as from time to time may be assigned to him by the Board of Directors. Section 7. The President and Chief Executive Officer. The President shall --------- ----------------------------------------- be the chief executive officer of the corporation and shall be responsible to the Board of Directors for the operation of the corporation and the conduct of its business. The President and Chief Executive Officer shall perform such duties as are given to him by these Bylaws and by the Chairman of the Board, and the Board of Directors. In the event of a vacancy in the office of the Chairman of the Board or in the absence of the Chairman of the Board, the President and Chief Executive Officer shall perform all the duties of the Chairman of the Board, and, when so acting, shall have all the powers of, and be subject to all the restrictions upon, the Chairman of the Board. Section 8. Executive Vice Presidents, Senior Vice Presidents, Vice --------- ------------------------------------------------------- Presidents, Second Vice Presidents, and General Auditors. Executive Vice - -------------------------------------------------------- Presidents, Senior Vice Presidents, Vice Presidents, Second Vice Presidents, and General Auditors shall perform such duties as are assigned by these Bylaws and by the Board of Directors, the Chairman of the Board and the President. Section 9. The Secretary. The Secretary shall be sworn to the faithful --------- ------------- discharge of his duty. He shall: A. Keep the minutes of the meetings of the Stockholder and of the Board of Directors in books provided for the purpose. B. See that all notices are duly give in accordance with the provisions of these Bylaws or as required by law. C. Be custodian of the records and seal of the corporation, and see that such seal is affixed to all stock certificates prior to their issue and to all documents the execution of which on behalf of the corporation under its seal is duly authorized in accordance with these Bylaws. D. Have charge of the stock books of the corporation and keep or cause to be kept the stock and transfer books in such manner as to show at any time the amount of the -2- stock of the corporation issued and outstanding, the manner in which and the time when such stock was transferred, the names, alphabetically arranged, and the addresses of the holders of record thereof, the number of shares held by each, and the time when each became such holder of record; and exhibit at all reasonable times to any Director, upon application, the original or duplicate stock ledger. E. Sign, with the President, certificates of stock of the corporation. F. See that the books, reports, statements, certificates and all other documents and records of the corporation required by law are properly kept and filed. G. In general, perform all duties incident to the office of Secretary, and such other duties as, from time to time, may be assigned to him by the Board of Directors, the Chairman of the Board, or the President. Section 10. The Treasurer. The treasurer shall: ---------- ------------- A. Have charge of, and be responsible for, all funds and securities of the corporation. B. From time to time, render a statement of the condition of the finances of the corporation at the request of the Board of Directors. C. Receive, and give receipt for, monies due and payable to the corporation from any source whatsoever. D. In general, perform all the duties incident to the office of Treasurer and such other duties as, from time to time, may be assigned to him by the Board of Directors, the Chairman of the Board, or the President. The Treasurer may be required to give a bond for the faithful performance of his duties in such sum and with such surety as may be determined by the Board of Directors. Section 11. The Actuary. The Actuary shall perform all duties incident to ---------- ----------- the office of the Actuary, and such other duties as, from time to time, may be assigned to him by the Board of Directors, by the Chairman of the Board, or by the President. Section 12. Modification of Policies. The executive officers designated in ---------- ------------------------ Section 1 of this Article, together with any officers designated by the Board of Directors, shall have the authority to sign and modify insurance policies for the company. Section 13. Salaries and Compensation of Officers. Salaries and ---------- ------------------------------------- compensation of all Executive Officers shall be fixed by the Board of Directors. In addition, the Board of Directors may, in its discretion, delegate its authority in whole or part, to the extent permitted by law, to -3- an Executive Officer to approve salaries and compensation for officers as designated in Section 1. ARTICLE II ---------- Directors --------- Section 1. Number and Qualifications. The property, interests, business and --------- ------------------------- transactions of the corporation shall be managed by a Board of Directors consisting of not less than five(5) nor more than twelve (12) persons elected annually by the holder of the capital stock for the term of one (1) year, and shall serve until the election and qualification of their successors, unless they sooner resign. Section 2. Vacancies. Any vacancy occurring in the Board of Directors may --------- --------- be filled for the unexpired term by a majority vote of the remaining members of the Board of Directors. In the event that the membership of the Board of Directors falls below the number necessary for a quorum, a special meeting of the Stockholders shall be called, and such number of Directors shall be elected thereat as may be necessary to restore the membership of the Board to its full number. Section 3. Meetings. Regular meetings of the Board of Directors shall be --------- -------- held three times in each calendar each year. The exact dates for the regular meetings in a calendar year will be set in the preceding year at the last regular meeting of the Board of Directors and included as part of the minutes thereof. The Board of Directors shall meet at such other time as it may, from time to time, determine. No notice need be given of the time of the meeting of any regular meeting of the Board of Directors. Section 4. Place of Meetings. The Board of Directors may hold its meetings --------- ----------------- at such place or places within or without the State of Colorado as the Board may, from time to time, determine, or with respect to its meetings, as shall be specified or fixed in the respective notices or waivers of notice of such meetings. Section 5. Special Meetings; Notice. Special meetings of the Board of --------- ------------------------ Directors shall be held whenever called by the Chairman of the Board or by the President or three (3) of the Directors. Notice of each such meeting shall be mailed to each Director, addressed to him at his address as it appears on the records of the corporation, at least three (3) days before the day on which the meeting is to be held. No notice need be given to any Director of the meeting, either before or after the holding thereof, who waives such notice. No notice need be given of an adjourned meeting of the Board of Directors. As to any Directors who shall sign the minutes of any Directors' meeting, such meeting shall be deemed to have been legally and duly called, noticed, held and conducted, and the action thereof approved, and, for all purposes and as to such persons, the minutes of the Directors' meeting shall be construed as if all the Directors were actually present at said -4- meeting, and all who signed the minutes were duly noticed, and the signature of any Director to the minutes of a meeting shall, for all purposes and as to all persons, be held to be an approval of the actions taken thereat. Section 6. Quorum and Manner of Action. A majority of the number of --------- --------------------------- Directors, determined pursuant to ARTICLE II, Section 1, shall form a quorum for the transaction of business at any regular or special meeting of the Board of Directors. Except as otherwise provided by law, by the charter, or by these Bylaws, the act of a majority of the Directors present at any meeting, at which a quorum is present, shall be the act of the Board of Directors. In the absence of a quorum, the Director present may adjourn the meeting from time to time until a quorum be had. Section 7. Election of Officers. At the first meeting of the Board of --------- -------------------- Directors after the annual election, the Executive Officers named in Section 1 of ARTICLE I of these Bylaws shall be elected to serve for the ensuing year and until the election of their respective successors. In addition, the Board of Directors shall elect their Chairman and may elect an Executive Committee and such other committees, including an Investment Committee, with such membership, duties and authority as the Board may designate. Elections shall be by ballot, and a majority of the votes cast shall be necessary to elect. Any vacancies that occur may be filled by the Board for the unexpired term. All other officers who are not Executive Officers shall serve for such terms as may be determined by the Board of Directors electing them subject, however, to the right of removal with or without cause by any subsequent Board of Directors. Section 8. Chairman. The Board of Directors shall designate a Chairman who --------- -------- shall preside at all meetings of the Board of Directors and Shareholders' meetings. If no Chairman is so designated, or in the absence of the Chairman, the President and Chief Executive Officer of the corporation shall act as Chairman. Section 9. Duties. The Board of Directors shall exercise a general --------- ------ supervision over the affairs of the corporation, and receive and pass upon the reports of the officers. The Board may direct any officer or officers of the corporation to transact any particular branch of business which it may see fit to designate. The Board of Directors may, from time to time, employ such persons as the Board may deem necessary for the carrying on of the business of the corporation, any of whom may also be Officers or Directors of the corporation. Section 10. Removal. Any Director may be removed from office, either with ---------- ------- or without cause, at any time, and another person may be elected to his place, to serve for the remainder of his term, at any special meeting of the Stockholder called for the purpose, by a majority vote of the total number of votes entitled to be cast by the Stockholder. In case any vacancy so created shall not be filled by the Stockholder at such meeting, such vacancy my be filled by the Directors as provided hereinabove. Section 11. Executive Committee. At the first meeting of the Board of ---------- ------------------- Directors after the annual election, an Executive Committee may be elected from the membership of the -5- Board of Directors. Said Committee shall consist of not more than four (4) members, among whom shall be the Chairman of the Board. The Executive Committee may meet at any time or place in or out of the State of Colorado, with or without notice, and a majority of the members of the Committee shall constitute a quorum for the transaction of business. Except when the Board of Directors is in session the Executive Committee shall have an exercise every right, power and authority of the Board of Directors permitted by law. Any act ratified by a majority of the Executive Committee shall be of the same force, effect and validity as if such act had been authorized in advance. The members of the Executive Committee shall hold office until the first meeting of the Board of Directors after the next annual election and until their successors shall have been duly elected and qualified, unless prior thereto they shall have been removed by the Board of Directors. The Board of Director may, at any time, remove any member or all members of the Executive Committee and elect another or others in lieu thereof, excepting the Chairman of the Board. The Executive Committee shall keep a record of all meetings and all business done thereat and the records shall be at all times subject to inspection by the Board of Directors. The Executive Committee may annually designate one member of the Committee as its Chairman, who shall preside at meetings of the Committee. If no Chairman is so designated, or in the absence of the Chairman, the Chairman of the Board of the corporation shall act as Chairman of the Executive Committee. Section 12. Retirement. Mandatory retirement from the Board will occur for ---------- ---------- members of the Board of Directors in office on January 1, 1978 at the first Annual Shareholders' Meeting following the attainment of age 72. Thereafter, Board members will be retired from the Board at the December 31st next following the attainment of age 70. ARTICLE III ----------- Stock ----- Section 1. Certificates. The Stockholder of the corporation whose stock has --------- ------------ been paid for in full shall be entitled to a certificate showing the amount of stock of the corporation standing on the books in his name. Each certificate shall be numbered, shall bear the signatures of the President and of the Secretary or an Assistant Secretary, and shall be manually countersigned by an authorized officer of any transfer agent which has been duly appointed by the corporation. Each certificate shall bear the seal of the corporation and be issued in numerical order. The signatures of the President, the Secretary and any Assistant Secretary may all be facsimiles, and the seal of the corporation may be facsimile reproduction, but the countersignature of any transfer agent shall be manual. Section 2. Transfer. Transfers of all stock shall be made upon the proper --------- -------- stock books of the corporation, and must be accompanied by the surrender of the duly endorsed certificates representing the transferred stock. Surrendered certificates shall be canceled and new certificates issued to the parties entitled thereto. The stock book shall be closed to transfers fifteen (15) days before general elections and fifteen (15) days before dividend dates. -6- Section 3. Lost Certificates. The Board of Directors may order a new --------- ----------------- certificate of stock to be issued in the place of any certificate of the corporation alleged to have been lost or destroyed, but in either such case the owner of the lost certificate shall first cause to be given to the corporation a bond in such sum and with such surety as said Board may direct as indemnity against any loss or claim that the corporation may incur by reason of the issuance of such certificate, but the Board of Directors may, in its discretion, refuse to replace any lost certificate, save upon the order of some court having jurisdiction in such matters. Section 4. Stock and Transfer Books. The stock and transfer books and all --------- ------------------------ other books and records of the corporation shall be kept at its principal office in Denver, Colorado, except that the stock and transfer books may be kept in the office of any duly appointed transfer agent of the corporation. All such books and records shall be open for inspection by the shareholder and judgment creditors of the corporation and their personal representatives, at the principal office of the corporation in Denver, Colorado, or with regard to stock and transfer books at the office of any duly appointed transfer agent of the corporation, and extracts may be made therefrom, as provided by law; provided, however, as permitted by law, the following limitations of such right of inspection and making extracts shall be and is hereby made, to-wit: A. Prior to any such inspection being made, the requesting party first shall give written notice to the Secretary of the corporation of the requesting party's desire to inspect and/or make extracts from such books and records of the corporation, said written notice to identify the particular books desired to be examined and to set forth the purpose or purposes of such examination. Within fifteen (15) days after receipt of such notice, the Secretary, in writing or orally, shall inform the requesting party of the date, time and place the requested books and/or records of the corporation may be examined by the requesting party. B. The requesting party shall not remove any of the requested books and/or records of the corporation from the place of examination indicated by the Secretary, as set forth in paragraph "A" above. C. The Secretary and/or any person designated by the Secretary shall be permitted to remain present with the requesting party at all times during the examination of the books and/or records of the corporation by the requesting party. D. All notes, memoranda, or extracts of books and/or records of the corporation, made and/or taken by the requesting party, shall be made in duplicate by the requesting party, and a copy thereof shall be delivered forthwith by the requesting party to the Secretary or to the designated representative of the Secretary, as the case may be. E. Before making any such examination of said books and/or records of the corporation and upon demand therefor by the Secretary or by the designated representative of the Secretary, the requesting party shall pay the corporation for all -7- reasonable costs and/or expenses, if any, incurred by the corporation in connection with the examination, said costs and/or expenses to be itemized and set forth in a written statement to be furnished by the Secretary or by the Secretary's designated representative to the requesting party at the time of the aforesaid demand for reimbursement therefor. F. The Secretary, in his discretion, may refuse to permit any examination of the books and/or records of the corporation during the fifteen (15) day period referred to in Section 2 of ARTICLE III of these Bylaws, anything hereinabove set forth in this section of the Bylaws to the contrary notwithstanding. ARTICLE IV ---------- Section 1. Annual Meetings. The regular Annual Meeting of the Shareholder --------- --------------- of the corporation shall be held at the office of the corporation in Denver, Colorado, or at such other place, either within or without the State of Colorado, as may be ordered by the Chairman of the Board, President and Chief Executive Officer, or the Board of Directors. The Annual Meeting shall be held immediately preceding the first regular Board of Directors meeting in each calendar year, or at such other time as the Board of Directors in its discretion may determine. At such meeting, the Directors for the ensuing year shall be elected. The officers of the corporation may present their annual reports. Section 2. Special Meetings. Special Shareholders' meetings may be called --------- ---------------- by the Chairman of the Board or the President and Chief Executive Officer, or the Secretary, or by resolution adopted at a meeting of the Board of Directors or on call signed by the corporation's Shareholder. Unless the Board of Directors directs otherwise, said meetings shall be held at the office of the corporation in Denver, Colorado, but may be held at such other place, within or without the State of Colorado, as may be designated by the Board of Directors. Calls for special meetings shall specify the time, place and objects therefor, and no other business than that specified in the call shall be considered in any such meeting. Section 3. Notice of Meetings. Notice of the time and place of all regular --------- ------------------ and special meetings shall be prepared by the Secretary, and may be delivered personally, or deposited in the post office, properly addressed, with postage prepaid, to the Shareholder not less than ten (10) nor more than fifty (50) days before such meeting. If the Shareholder shall fail to furnish the Secretary with its correct post office address, it shall not be entitled to the separate, personal notice referred to herein. Regular and special meetings may be held upon waiver duly signed by the Shareholder of record, without notice thereof being published or mailed. No notice of any Shareholder's meeting shall be required when the Shareholder is present, either in person or by proxy at such meeting. Section 4. Election of Directors. At each annual meeting of the Shareholder --------- --------------------- of the corporation not less than five (5) nor more than fifteen (15) Directors shall be elected who shall -8- serve until their successors are duly elected and qualified, unless they sooner resign. Election of Directors shall be by the Shareholder, either in person or by proxy. Section 5. Proxies. The Shareholder entitled to vote may be represented at --------- ------- any regular or special meeting of the Shareholder by a duly executed proxy. The proxy shall be in writing and properly signed, and no proxy shall be recognized unless executed within eleven (11) months of the date of the meeting at which it is presented unless otherwise provided in the proxy. Section 6. Order of Business. The order of business at the annual meeting --------- ----------------- and, so far as is practicable, at all other meetings of the Shareholder, shall include, but not be limited to, the following: 1. Call of roll. 2. Proof of due notice of meeting. 3. Reading and disposal of any unapproved minutes. 4. Annual reports of officers and committees. 5. Election of Directors. -9- ARTICLE V --------- Dividends --------- Section 1. Dividends. Dividends shall be declared at such times and in such --------- --------- amounts as the Board may direct, but no dividends shall be declared which will violate the statutes of the State of Colorado. ARTICLE VI ---------- Miscellaneous Provisions ------------------------ Section 1. Corporate Seal. The corporate seal of the corporation shall --------- -------------- consist of two concentric circles, between which shall be "Security Life of Denver Insurance Company" and in the center shall be inscribed the word "Seal", which seal, as impressed on the margin hereof, is adopted as the seal of the corporation. Section 2. Depositories and Withdrawals. The Board of the Directors may --------- ---------------------------- designate depositories for the funds of the corporation and funds deposited therein by any officer or other person connected with the corporation shall not place any personal liability upon the person or persons authorized to make such deposits should any loss occur through failure of any such depository. Funds shall not be withdrawn from any depository except upon two authorized signatures unless the instrument for withdrawal of funds bears the authorized facsimile signature produced by a check signing device, the use of which may be authorized by the Board of Directors or the Executive Committee. Section 3. Bonds. Such bond or bonds may be required of the officers and --------- ----- employees of the corporation as the Board of Directors shall require. The corporation may pay the charges for any bond or for bonds that may be otherwise given in favor of the corporation. ARTICLE VII ----------- Section 1. Amendments. Any and all provisions of these Bylaws may be --------- ---------- altered, amended, repealed or added to by the Board of Directors. -10- ARTICLE VIII ------------ Indemnification of Directors, ----------------------------- Officers and Other Personnel ---------------------------- Section 1. Non-Derivative Actions. The corporation shall indemnify any --------- ---------------------- person who was or is a party or is threatened to be made a party to any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative, or investigative (other than an action by or in the right of the corporation), by reason of the fact that he is or was a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation or is or was serving at the request of the corporation (whether or not as a representative of the corporation) as a director, officer, employee, (for example, acting in a fiduciary capacity for welfare benefit plans including but not limited to Employees' Retirement Plan, Savings Incentive Plan, Group Medical Plan, Prescription Drug Program, Group Term Life Insurance, Group Dental Plan, Travel Accident Plan or Deferred Compensation Plan, et al.), or fiduciary of another corporation, partnership, joint venture, trust, or other enterprise, against expenses (including attorney fees), judgments, fines, and amounts paid in settlement actually and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful. The termination of any action, suit, or proceeding by judgement, order, settlement, or conviction or upon a plea of nolo contendere or its equivalent shall not of itself create a presumption that the person did not act in good faith and in a manner which he reasonably believed to be in the best interests of the corporation and, with respect to any original criminal action or proceeding, had reasonable cause to believe that his conduct was unlawful. Section 2. Derivative Actions. The corporation shall indemnify any person --------- ------------------ who was or is a party or is threatened to be made a party to any threatened, pending, or completed action or in suit by or in the right of the corporation to procure a judgment in its favor by reason of the fact that he is or was a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation or is or was serving at the request of the corporation (whether or not as a representative of the corporation) as a director, officer, employee, (for example, acting in a fiduciary capacity for welfare benefit plan including but not limited to Employee's Retirement Plan, Savings Incentive Plan, Group Medical Plan, Prescription Drug Program, Group Term Life Insurance, Group Dental Plan, Travel Accident Plan or Deferred Compensation Plan, et al.), or fiduciary of another corporation, partnership, joint venture, trust or other enterprise against expenses (including attorney fees) actually and reasonably incurred by him in connection with the defense or settlement of such action or suit if he acted in good faith and in a manner he reasonably believed to be in the best interests of the corporation; but no indemnification shall be made in respect of any claim, issue, or matter as to which such person has been adjudged to be liable for the negligence or misconduct in the performance of his duty to the corporation unless and only to the extent that the court in which such action or suit was brought determines upon application that, despite the -11- adjudication of liability, but in view of all circumstances of the case, such person is fairly and reasonably entitled to indemnification for such expenses which such court deems proper. Section 3. Expenses. To the extent that a director, member of a committee --------- -------- appointed by the Board of Directors, officer, salaried employee, or fiduciary of the corporation shall be successful on the merits in defense of any action, suit, or proceeding referred to in Section 1 or Section 2 of this Article VIII or in defense of any claim, issue, or matter therein, he shall be indemnified by the corporation against expenses (including attorney fees) actually and reasonably incurred by him in connection therewith. Section 4. Authorization. Any indemnification under Section 1 or Section 2 --------- ------------- of this Article VIII (unless ordered by a court) shall be made by the corporation only as authorized in the specific case upon a determination that indemnification of the director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary is proper in the circumstances because he has met the applicable standard of conduct set forth in Section 1 or Section 2. Such determination shall be made by the Board of Directors by a majority vote of a quorum consisting of directors who were not parties to such action, suit, or proceeding, or, if such a quorum is not obtainable or even if obtainable a quorum of disinterested directors so directs, by independent legal counsel in a written opinion, or by the Stockholder. Section 5. Advance Payment of Expenses. Expenses (including attorney fees) --------- --------------------------- incurred in defending a civil or criminal action, suit, or proceeding may be paid by the corporation in advance of the final disposition of such action, suit, or proceeding as authorized in Section 4 of this Article VIII upon receipt of an undertaking by or on behalf of the director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary to repay such amount unless it is ultimately determined that he is entitled to be indemnified by the corporation as authorized in this Article VIII. Section 6. Non-Exclusivity and Continuance. The indemnification provided by --------- ------------------------------- this Article VIII shall not be deemed exclusive of any other rights to which any person indemnified may be entitled under the Articles of Incorporation, any agreement, insurance policy, vote of the Stockholder or disinterested directors, or otherwise, and any procedure provided for by any of the foregoing, both as to action in his official capacity and as to action in another capacity while holding such office. Any indemnity otherwise payable under this Article VIII on account of any specific loss or expense shall be reduced by the amount of any insurance proceeds paid or payable to the person to be indemnified on account of the same loss or expense is such insurance is provided by the corporation or any of its affiliates. The indemnification provided by this Article VIII shall continue as to a person who has ceased to be a director, member of a committee appointed by the Board of Directors, officer, salaried employee, or fiduciary with regard to acts or omissions of such person occurring or alleged to have occurred while the person was so engaged, and shall inure to the benefit of heirs, executors, and administrators of such a person. -12- Section 7. Application of this Article. The provisions of this Article VIII --------- --------------------------- shall apply to all actions, suits or proceedings described in Section 1 or Section 2 arising or alleged to arise out of any acts or omissions on the part of any person referred to in Section 1 or Section 2 occurring or alleged to occur prior to the adoption of this Article VIII or at any time while it remains in force. Section 8. Exclusions. No indemnification is provided under this Article --------- ---------- VIII for unsalaried persons under contract with the corporation in sales capacities such as General Agents, Agents and Brokers. Except as expressly provided in this Article VIII no indemnity is provided for persons performing services to the corporation as independent contractors. I certify that the foregoing is a full and complete copy of the Bylaws of Security Life of Denver Insurance Company as amended on January 29, February 18, 1969, October, 1974, May 11, July 27, 1977, February 17, 1978, February 22, 1980, April 28, 1980, May 14, 1980, May 29, 1981, November 10, 1982, May 10, 1984, May 29, 1985, May 5, 1988, November 2, 1989, October 31, 1990, November 8, 1991, and February 14, 1994. Date: February 21, 1995 /s/ Irene M. Colorosa --------------------- Irene M. Colorosa Assistant Secretary -13- EX-1.A(8)(A) 7 ADDENDUM TO SALES AGREEMENT EXHIBIT 1.A(8)(a) Addendum to the Sales Agreement dated August 26, 1994 by and between The Alger American Fund, Fred Alger Management, Inc. and Security Life of Denver Insurance Company Section 2 of the Sales Agreement is hereby amended to read as follows: 2. FUND represents and warrants that all shares of the Portfolios of FUND will be sold only to other insurance companies which have agreed to participate in FUND to fund their Separate Accounts and to such other entities as may be permitted by Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code"), which may include FUND's Distributor or its affiliates. Shares of the Portfolios of FUND will not be sold directly to the general public. Date: May 31, 1995 THE ALGER AMERICAN FUND By: /s/ Gregory Duch SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Frank Wright FRED ALGER MANAGEMENT, INC. By: /s/ Gregory Duch EX-1.A(8)(A)(II) 8 SALES AGMT. - ALGER SALES AGREEMENT EXHIBIT 1.A (8) (a) (ii) THIS AGREEMENT is made by and between The Alger American Fund ("FUND"), a Massachusetts business trust, FRED ALGER MANAGEMENT, INC., a New York corporation ("ADVISER"), and SECURITY LIFE OF DENVER INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized under the laws of the State of Colorado. WHEREAS, FUND is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (" '40 Act") as an open-end diversified management investment company; and WHEREAS, FUND is organized as a series fund, comprised of several Portfolios which are listed on Appendix A hereto; and WHEREAS, FUND was initially organized to act as the funding vehicle for certain variable life insurance and/or variable annuity contracts ("Variable Contracts") offered by life insurance companies through separate accounts of such life insurance companies; and WHEREAS, ADVISER is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 and as a broker-dealer under the Securities Exchange Act of 1934, as amended; and WHEREAS, ADVISER is the investment adviser to FUND and the distributor of the shares of FUND; and WHEREAS, LIFE COMPANY has established or will establish one or more separate accounts ("Separate Accounts") to offer Variable Contracts and is desirous of having FUND as one of the underlying funding vehicles for such Variable Contracts; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, LIFE COMPANY intends to purchase shares of FUND to fund the aforementioned Variable Contracts and FUND is authorized to sell such shares to LIFE COMPANY at net asset value; NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, FUND and ADVISER agree as follows: 1.FUND will make available to the designated Separate Accounts of LIFE COMPANY shares of the selected Portfolios for investment of purchase payments of Variable Contracts allocated to the designated Separate Accounts as provided in FUND's Prospectus. 2.FUND represents and warrants that all shares of the Portfolios of FUND will be sold only to other insurance companies which have agreed to participate in FUND to fund their Separate Accounts, all in accordance with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios of FUND will not be sold directly to the general public. 3.(a)FUND agrees to sell to LIFE COMPANY those shares of the selected Portfolios of FUND which LIFE COMPANY orders, executing such orders on a daily basis at the net asset value next computed after receipt by FUND or its designee of the order for the shares of FUND. For purposes of this Section 3(a), LIFE COMPANY shall be the designee of FUND for receipt of such orders and receipt by such designee shall constitute receipt by FUND; provided that FUND receives notice of such order by 9:30 a.m. New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open f or trading and on which FUND calculates its net asset value pursuant to the rules of the SEC. (b)FUND agrees to redeem for cash, on LIFE COMPANY's request, any full or fractional shares of FUND held by LIFE COMPANY, executing such requests on a daily basis at the net asset value next computed after receipt by FUND or its designee of the request for redemption. For purposes of this Section 3(b), LIFE COMPANY shall be the designee of FUND for receipt of requests for redemption and receipt by such designee shall constitute receipt by FUND; provided that FUND receives notice of such request for redemption by 9:30 a.m. New York time on the next following Business Day. (c)FUND shall make the net asset value per share for the selected Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably practical after the net asset value per share is calculated but shall use its best efforts to make such net asset value available by 6:15 p.m. New York time. If FUND provides LIFE COMPANY with the incorrect share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. Any error in the calculation of net asset value, dividend and capital gain information greater than or equal to $.01 per share of FUND, shall be reported immediately upon discovery to LIFE COMPANY. Any error of a lesser amount shall be corrected in the next Business Day's net asset value per share for FUND. (d)At the end of each Business Day, LIFE COMPANY shall use the information described in Section 3 (c) to calculate Separate Account unit values for the day. Using these unit values, LIFE COMPANY shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of FUND shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase or redemption orders so determined shall be transmitted to FUND by LIFE COMPANY by 9:30 a.m. New York time on the Business Day next following LIFE COMPANY's receipt of such requests and premiums 'in accordance with the terms of Sections 3(a) and 3(b) hereof. (e)If LIFE COMPANY's order requests the purchase of FUND shares, LIFE COMPANY shall pay for such purchase by wiring federal funds to FUND or its designated custodial account on the day the order is transmitted by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a payment of redemption proceeds to LIFE COMPANY, FUND shall wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless doing so would require FUND to dispose of portfolio securities or otherwise incur additional costs, but in such event, proceeds shall be wired to LIFE COMPANY within seven days and FUND shall notify the person designated in writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New York time the same Business Day that LIFE COMPANY transmits the redemption order to FUND. If LIFE COMPANY's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another portfolio managed or distributed by ADVISER, FUND shall so apply such proceeds the same Business Day that LIFE COMPANY transmits such order to FUND. 4.(a) FUND will bear the printing costs (or duplicating costs with respect to the statement of additional information) and mailing costs associated with the delivery of the following FUND (or individual portfolio) documents, and any supplements thereto, to existing Variable Contract owners of LIFE COMPANY whose Variable Contract values are invested in the Fund: (i) prospectuses and statements of additional information; (ii) annual and semi-annual reports; and (iii) proxy materials. LIFE COMPANY will submit any bills for printing, duplicating and/or mailing costs, relating to the FUND documents described above, to FUND for reimbursement by FUND. LIFE COMPANY shall monitor such costs and shall use its best efforts to control these costs. LIFE COMPANY will provide FUND on a semi-annual basis, or more frequently as reasonably requested by FUND, with a current tabulation of the number of existing Variable Contract owners of LIFE COMPANY whose Variable Contract values are invested in FUND. This tabulation will be sent to FUND in the form of a letter signed by a duly authorized officer of LIFE COMPANY attesting to the accuracy of the information contained in the letter. (b)ADVISER will provide, at its expense, LIFE COMPANY with the following FUND (or individual Portfolio) documents, and any supplements thereto, with respect to prospective Variable Contract owners of LIFE COMPANY: (i) camera ready copy of the current prospectus for printing by the LIFE COMPANY; (ii) a copy of the statement of additional information suitable for duplication; (iii) camera ready copy of proxy material suitable for printing; and (iv) camera ready copy of the annual and semiannual reports for printing by the LIFE COMPANY. (c)FUND shall provide LIFE COMPANY with as many copies of the current prospectus of FUND as LIFE COMPANY may reasonably request. Where FUND is not obligated to bear the costs of such prospectuses under Sections 4 (a) and (b) , LIFE COMPANY will reimburse FUND for the cost of providing the requested prospectuses. If requested by LIFE COMPANY, FUND shall provide such documentation (including a final copy of FUND's prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for LIFE COMPANY to print together in one document the current prospectus for the Variable Contracts issued by LIFE COMPANY and the current prospectus for FUND. 5.(a)LIFE COMPANY will furnish, or will cause to be furnished, to FUND and ADVISER, each piece of sales literature or other promotional material in which FUND or ADVISER is named at least fifteen Business Days prior to its intended use. No such material will be used if FUND or ADVISER objects to its use in writing within ten Business Days after receipt of such material. LIFE COMPANY will be responsible for making submissions to the NASD or other regulatory authorities of such sales literature or other promotional materials. (b)FUND and ADVISER will furnish, or will cause to be furnished, to LIFE COMPANY, each piece of sales literature or other promotional material in which LIFE COMPANY is named, at least fifteen Business Days prior to its intended use. No such material will be used if LIFE COMPANY objects to its use in writing within ten Business Days after receipt of such material. FUND or ADVISOR will be responsible for making submissions to the NASD or other regulatory authorities of such sales literature or other promotional materials. (c)FUND and its affiliates and agents shall not give any information or make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY, the Separate Accounts, or the Variable Contracts issued by LIFE COMPANY, other than the information or representations contained in a registration statement or prospectus for such Variable Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports for the Separate Accounts or prepared for distribution to owners of such Variable Contracts, or in sales literature or other promotional material approved by LIFE COMPANY or its designee, except with the permission of LIFE COMPANY. (d)LIFE COMPANY and its affiliates and agents shall not give any information or make any representations on behalf of FUND or concerning FUND or ADVISER other than the information or representations contained in a registration statement or prospectus for FUND, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for FUND which are in the public domain or approved by FUND or ADVISER for distribution, or in sales literature or other promotional material approved by FUND or its designee, except with the permission of FUND. (e)For purposes of this Agreement, the phrase "sales literature or other promotional material,, or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media), sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts or any other advertisement, sales literature, or published article) , educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the 140 Act or the Securities Act of 1933 (11133 Act"). 6.Each Portfolio of FUND will comply with Section 817 (h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulation. In the event FUND becomes aware that any Portfolio of FUND has failed to comply, it will take all reasonable steps (a) to notify LIFE COMPANY of such failure, and (b)to adequately diversify the Portfolio so as to achieve compliance. 7.(a) Except as limited by and in accordance with the provisions of Sections 7 (b) and 7 (c) hereof, LIFE COMPANY agrees to indemnify and hold harmless FUND and ADVISER, each of the officers and members of the Board of Trustees of FUND, each of the directors and officers of ADVISER, and each person, if any, who controls FUND or ADVISER within the meaning of Section 15 of the 133 Act (collectively, the "Indemnified Parties" for purposes of this Section 7) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of LIFE COMPANY) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of FUND's shares or the Variable Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the Variable Contracts or contained in the Variable Contracts or sales literature therefore (or any amendment or supplement to any of the foregoing) , or arise out of or are based upon the omission or the alleged omission of a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of FUND for use in the registration statement or prospectus for the Variable Contract or in the Variable Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or FUND shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of FUND not supplied by LIFE COMPANY, or persons under its contract) or wrongful conduct of LIFE COMPANY or persons under its control, with respect to the sale or distribution of the Variable Contracts or FUND shares; or (iii) arise out of any untrue statement or alleged untrue statement- of a material fact contained in a registration statement, prospectus, or sales literature of FUND or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to FUND or ADVISER by or on behalf of LIFE COMPANY; or (iv) arise as a result of any failure by LIFE COMPANY to substantially provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by LIFE COMPANY in this Agreement or arise out of or result from any other material breach of this Agreement by LIFE COMPANY. (b)LIFE COMPANY shall not be liable under this indemnification provision for any losses, claims, damages, or liabilities incurred or assessed against an Indemnified Party arising from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to FUND, whichever is applicable. (c)LIFE COMPANY shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified LIFE COMPANY in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify LIFE COMPANY of any such claim shall not relieve LIFE COMPANY from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, LIFE COMPANY shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from LIFE COMPANY to such party of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and LIFE COMPANY will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.(a)Except as limited by and in accordance with the provisions of Sections 8(b) and 8(c) hereof, ADVISER agrees to indemnify and hold harmless LIFE COMPANY and each of its directors and officers and each person, if any, who controls LIFE COMPANY within the meaning of Section 15 of the 133 Act (collectively, the "Indemnified Parties" for purposes of this Section 8) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of ADVISER) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of FUND's shares or the Variable Contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of FUND (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to ADVISER or FUND by or on behalf of LIFE COMPANY for use in the registration statement or prospectus for FUND or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Variable Contracts or FUND shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Variable Contracts not supplied by ADVISER or persons under its control) or wrongful conduct of FUND, ADVISER or persons under their control, with respect to the sale or distribution of the Variable Contracts or FUND shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Variable Contracts, or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of FUND; or (iv) arise as a result of (a) a failure by FUND to substantially provide the services and furnish the materials under the terms of this Agreement; (b) a failure by FUND to comply with the diversification requirements of Section 817 (h) of the Code; (c) a failure by FUND to qualify as a Regulated Investment Company under Subchapter M of the Code; or (d) a failure by FUND to register its shares f or sale as required by the laws of the various states. (v) arise out of or result from any material breach of any representation and/or warranty made by ADVISER in this Agreement or arise out of or result from any other material breach of this Agreement by ADVISER. (b)ADVISER shall not be liable under this indemnification provision for any losses, claims, damages, or liabilities incurred or assessed against an Indemnified Party arising from the Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to LIFE COMPANY. (c)ADVISER shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified ADVISER in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent) , but failure to notify ADVISER of any such claim shall not relieve ADVISER from any liability which it may have to the Indemnified Party against whom such action is brought ,otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, ADVISER shall be entitled to participate at its own expense in the defense thereof. ADVISER also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from ADVISER to such party of ADVISER's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and ADVISER will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 9.FUND represents and warrants that FUND Shares sold pursuant to this Agreement shall be registered under the '33 Act and duly authorized for issuance, and shall be issued, in compliance in all material respects with applicable law, and that FUND is and shall remain registered under the 140 Act for so long as required thereunder. FUND further represents and warrants that FUND currently qualifies and will make every effort to continue to qualify as a Regulated Investment Company under Subchapter M of the Code, and to maintain such qualification (under Subchapter M or any successor or similar provisions), and that FUND will notify LIFE COMPANY immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. FUND will register and qualify its shares for sale in accordance with the laws of the various states as may be required by law. 10.FUND will provide LIFE COMPANY with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to the Portfolios promptly after the filing of each such document with the SEC or other regulatory authority. LIFE COMPANY will provide FUND with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to a Separate Account promptly after the filing of each such document with the SEC or other regulatory authority. 11.FUND will disclose in its prospectus that (1) shares of FUND are offered to affiliated or unaffiliated insurance company separate accounts which fund both annuity and life insurance contracts, (2) due to differences in tax treatment or other considerations, the interests of various Variable Contract owners participating in FUND might at some time be in conflict, and (3) the Board of Trustees of FUND will monitor for any material conflicts and determine what action, if any, should be taken. FUND hereby notifies LIFE COMPANY that prospectus disclosure may be appropriate regarding potential risks of offering shares of FUND to separate accounts funding both variable annuity contracts and variable life insurance policies and to separate accounts funding variable contracts of unaffiliated life insurance companies. 12.Each party hereto shall cooperate with each other party and all appropriate governmental authorities having Jurisdiction (including, without limitation, the SEC, the NASD, and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 13.LIFE COMPANY agrees to inform the Board of Trustees of FUND of the existence of or any potential for any material irreconcilable conflict of interest between the interest of the contract owners of the Separate Accounts of LIFE COMPANY investing in FUND and/or any other separate account of any other insurance company investing in FUND upon LIFE COMPANY having knowledge of same. 'FUND agrees to inform LIFE COMPANY of the existence of or any potential for any material irreconcilable conflict of interest between the interests of the contract owners of the Separate Accounts of LIFE COMPANY investing in FUND and/or any other separate account of any other insurance company investing in FUND (upon FUND having knowledge of same). A material irreconcilable conflict may arise for any one of a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no- action or interpretive letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting. instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different life insurance companies utilizing FUND; or (f) a decision by a participating life insurance company to disregard the voting instructions of contract owners. The Board of Trustees of FUND shall promptly inform LIFE COMPANY if it determines that an irreconcilable material conflict exists and the implications thereof. LIFE COMPANY will be responsible for assisting the Board of Trustees of FUND in carrying out its responsibilities by providing the Board with all information reasonably necessary for the Board to consider any issue raised including information as to a decision by LIFE COMPANY to disregard voting instructions of contract owners. It is agreed that if it is determined by a majority of the members of the Board of Trustees of FUND or a majority of its disinterested Trustees that a material irreconcilable conflict exists affecting LIFE COMPANY, LIFE COMPANY shall, at its own expense, to the extent reasonably practicable, take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps may include, but are not limited to, (a) withdrawing the assets allocable to some or all of the Separate Accounts from FUND or any Portfolio and reinvesting such assets in a different investment medium, including another Portfolio of FUND or submitting the questions of whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any particular group (i.e., annuity contract owners or life insurance contract owners) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of LIFE COMPANY' s decision to disregard contract owner voting instructions and that -decision represents a minority position or would preclude a majority vote, the LIFE COMPANY may be required, at FUND's election, to withdraw its Separate Account's investment in FUND. No charge or penalty will be imposed against a Separate Account of LIFE COMPANY as a result of such withdrawal. LIFE COMPANY agrees that any remedial action taken by it in resolving any material conflicts of interest will be carried out in the interests of contract owners. For purposes hereof, a majority of the disinterested members of the Board of Trustees of FUND shall determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event will FUND be required to establish a new funding medium for any Variable Contracts. LIFE COMPANY shall not be required by the terms hereof to establish a new funding medium for any Variable Contracts if an offer to do so has been declined by vote of a majority of affected contract owners. 14.LIFE COMPANY shall provide pass-through voting privileges, as provided in this paragraph, to all Variable Contract owners so long as the SEC or its staff continues to interpret the 140 Act to require such pass-through voting privileges for Variable Contract owners. LIFE COMPANY will vote shares for which it has not received voting instructions as well as shares attributable to it in the same proportion as it votes shares for which it has received instructions. LIFE COMPANY shall be responsible for assuring that each of its Separate Accounts participating in FUND calculates voting privileges in a manner consistent with other life companies utilizing FUND provided that each participating life insurance company enters into an agreement containing a provision or provisions, which do not vary in any material respect, from the terms of Section 13 hereof. 15.(a) This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. (b) This Agreement shall terminate automatically in the event of its assignment unless such assignment is made with the written consent of LIFE COMPANY and FUND. (c) This Agreement shall terminate without penalty at the option of the terminating party in accordance with the following provisions: (i) At the option of LIFE COMPANY or FUND at any time from the date hereof upon 180 days' advance written notice, unless a shorter time is agreed to in writing by the parties; (ii) At the option of LIFE COMPANY if FUND shares are not reasonably available to meet the requirements of the Variable Contracts as determined by LIFE COMPANY. Notice of election to terminate shall be furnished by LIFE COMPANY and termination shall be effective ten days after FUND's receipt of said notice unless FUND makes available a sufficient number of shares, to the satisfaction of LIFE COMPANY, to meet the requirements of the Variable Contracts within said ten-day period; (iii) At the option of LIFE COMPANY, upon the institution of formal proceedings against FUND by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in LIFE COMPANY'S reasonable judgment, materially impair FUND'S ability to meet and perform FUND'S obligations and duties hereunder. Prompt notice of election to terminate under this paragraph shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (iv) At the option of LIFE COMPANY, upon its good faith determination, or at the option of FUND upon a determination by a majority of the Board, or a majority of disinterested Board members, that an irreconcilable material conflict exists among the interests of (i) owners of Variable Contracts issued by participating life insurance companies; or (ii) the interest of participating life insurance companies; (v) At the option of FUND, upon the institution of formal proceedings against LIFE COMPANY by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgement or outcome which would, in FUND'S reasonable judgment, materially impair LIFE COMPANY'S ability to meet and perform its obligations and duties hereunder. Prompt notice of election to terminate under this paragraph shall be furnished by FUND with said termination to be effective upon receipt of notice; (vi) At the option of FUND, if (1) FUND shall determine in its sole judgement reasonably exercised in good faith, that LIFE COMPANY has suffered a material adverse change in its business or financial condition or -is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon the business and operation of FUND and ADVISER, (2) FUND shall have notified LIFE COMPANY in writing of such determination and its intent to terminate this Agreement, and, (3) after consideration of the actions taken by LIFE COMPANY and any other changes in circumstances since the giving of such notice, the determination of FUND shall continue to apply on the sixtieth (60th) day since giving of such notice, then such sixtieth day shall be the effective date of termination; (vii) At the option of LIFE COMPANY after having been notified by FUND of a termination or proposed termination of the Investment Advisory Agreement between FUND and ADVISER or its successors, which notice FUND shall provide promptly to LIFE COMPANY, the effective date of termination of the Agreement to be as determined by LIFE COMPANY; (viii) in the event FUND's shares are not registered, issued or sold in accordance with applicable federal law, or such law precludes the use of such shares as the underlying investment medium of Variable Contracts issued or to be issued by LIFE COMPANY. Termination shall be effective immediately upon such occurrence without notice; (ix) At the option of FUND upon a reasonable determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for FUND to continue to operate pursuant to this Agreement; (x) At the option of FUND if the Variable Contracts cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if FUND reasonably believes that the Variable Contracts may fail to so qualify; (xi) At the option of LIFE COMPANY, upon FUND'S breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of LIFE COMPANY within ten days after written notice of such breach is delivered to FUND; (xii) At the option of FUND, upon LIFE COMPANY's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of FUND within ten days after written notice of such breach is delivered to LIFE COMPANY; (xiii) At the option of FUND, if the Variable Contracts are not registered, issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice; (xiv) At the option of LIFE COMPANY, if LIFE COMPANY shall determine, in its sole judgment reasonably exercised in good faith, that FUND is the subject of material adverse publicity and such material adverse publicity is likely to have a material adverse impact on the sale of the Variable Contracts and/or the operations or business reputation of LIFE COMPANY, the LIFE COMPANY shall have notified FUND in writing of such determination and its intent to terminate this Agreement, and, after consideration of the actions taken by FUND and any other changes in circumstances since the giving of such notice, the determination of the LIFE COMPANY shall continue to apply on the sixtieth (60th) day since giving of such notice, which sixtieth day shall be the effective date of termination; or (xv) Upon requisite vote of the Variable Contract owners having an interest in the Separate Accounts to substitute the shares of another investment company for the corresponding shares of FUND in accordance with the terms of the Variable Contracts f or which those shares had been selected to serve as the underlying investment media. (d)Notwithstanding any termination of this Agreement pursuant to Section 15 (c) hereof, at the election of LIFE COMPANY, FUND shall continue to make available additional FUND shares, as provided below, pursuant to the terms and conditions of this Agreement, for all Variable Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, at the .election of LIFE COMPANY, the owners of the Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do so, shall be permitted to reallocate investments in FUND, redeem investments in FUND and/or invest in FUND upon the payment of additional premiums under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 15(c) hereof, LIFE COMPANY, as promptly as is practicable under the circumstances, shall notify FUND whether LIFE COMPANY shall elect to continue to have FUND make shares available after such termination. If FUND shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either FUND or LIFE COMPANY may terminate the Agreement, as so continued pursuant to this Section 15(d), upon prior written notice to the other party such notice to be for a period that is reasonable under the circumstances but, if given by FUND, need not be for more than six months. In determining whether to elect to continue to make available additional FUND shares, LIFE COMPANY shall act in good faith, giving due consideration to the interests of existing shareholders, including holders of Existing Contracts. 16.This Agreement shall be subject to the provisions of the '40 Act and the rules and regulations thereunder, including any exemptive relief therefrom and the orders of the SEC setting forth such relief. 17.Each party hereto agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations of LIFE COMPANY are being conducted in a manner consistent with the California Insurance Regulations and any other applicable law or regulations. FUND agrees that LIFE COMPANY shall have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement pursuant to the requirements of the California insurance Department. However, FUND and ADVISER shall own and control all the pertinent records pertaining to their performance of services under this Agreement. 18.This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Colorado. 19.It is understood by the parties that this Agreement is not an exclusive arrangement. 20.FUND represents that a copy of its Agreement and Declaration - of Trust, dated April 6, 1988, together with all amendments thereto, is on file in the office of the Secretary of the Commonwealth of Massachusetts. This Agreement has been executed on behalf of FUND by the undersigned officer of FUND in his capacity as an officer of FUND. The obligations of this Agreement shall be binding on the assets and property of FUND only and shall not be binding on any Trustee, officer, or shareholder of FUND individually. Executed this 26th day of August, 1994. THE ALGER AMERICAN FUND ATTEST: Nanci Staple BY: Gregory Duch SECURITY LIFE INSURANCE COMPANY OF DENVER ATTEST: Bonnie C. Dailey BY: Stephan M. Largent FRED ALGER MANAGEMENT, INC. ATTEST: Nanci Staple BY: Gregory Duch APPENDIX A Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio EX-1.A(8)(A)(III) 9 SALES AGMT. - NEUBERGER EXHIBIT 1.A (8) (a) (iii) SALES AGREEMENT THIS AGREEMENT is made by and between NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST ("TRUST") , a Massachusetts business trust, NEUBERGER & BERMAN MANAGEMENT INCORPORATED ("N&B MANAGEMENT"), a New York corporation, and SECURITY LIFE OF DENVER INSURANCE COMPANY ("LIFE COMPANY") , a life insurance company organized under the laws of the State of Colorado. WHEREAS, TRUST is registered with the Securities and Exchange Commission ("SEC") under the Investment Company Act of 1940 (11"40 Act") as an open-end diversified management investment company; and WHEREAS, TRUST is organized as a series fund, comprised of several Portfolios which are listed on Appendix A hereto; and WHEREAS, TRUST was initially organized to act as the funding vehicle for certain variable life insurance and/or variable annuity contracts ("variable contracts") offered by life insurance companies through separate accounts of such life insurance companies and now also offers its shares to certain qualified pension and retirement plans; and WHEREAS, N&B MANAGEMENT is registered with the SEC as an investment adviser under the Investment Advisers Act of 1940 and as a broker-dealer under the Securities Exchange Act of 1934, as amended; and WHEREAS, N&B MANAGEMENT is the investment adviser to TRUST and the distributor of the shares of TRUST; and WHEREAS, LIFE COMPANY has established or will establish one or more separate accounts ("Separate Accounts") to offer variable contracts and is desirous of having TRUST as one of the underlying funding vehicles for such variable contracts; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, LIFE COMPANY intends to purchase shares of TRUST to fund the aforementioned variable contracts and TRUST is authorized to sell such shares to LIFE COMPANY at net asset value; NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, TRUST and N&B MANAGEMENT agree as follows: 1. TRUST will make available to the designated Separate Accounts of LIFE COMPANY shares of the selected Portfolios for investment of purchase payments of variable contracts allocated to the designated Separate Accounts as provided in TRUST's Prospectus. 2. TRUST represents and warrants that all shares of the Portfolios of TRUST will be sold only to other insurance companies which have agreed to participate in TRUST to fund their Separate Accounts and/or to certain qualified pension and other retirement plans, all in accordance with the requirements of Section 817(h) of the Internal Revenue Code of 1986, as amended ("Code") and Treasury Regulation 1.817-5. Shares of the Portfolios of TRUST will not be sold directly to the general public. 3. (a) TRUST agrees to sell to LIFE COMPANY those shares of the selected Portfolios of TRUST which LIFE COMPANY orders, executing such orders on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the order for the shares of TRUST. For purposes of this Section 3(a), LIFE COMPANY shall be the designee of TRUST for receipt of such orders from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such order by 9:30 a.m. New York time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which TRUST calculates its net asset value pursuant to the rules of the SEC. (b) TRUST agrees to redeem for cash, on LIFE COMPANY's request, any full or fractional shares of TRUST held by LIFE COMPANY, executing such requests on a daily basis at the net asset value next computed after receipt by TRUST or its designee of the request for redemption. For purposes of this Section 3(b), LIFE COMPANY shall be the designee of TRUST for receipt of requests for redemption from LIFE COMPANY and receipt by such designee shall constitute receipt by TRUST; provided that TRUST receives notice of such request for redemption by 9:30 a.m. New York time on the next following Business Day. (c) TRUST shall make the net asset value per share for the selected Portfolio(s) available to LIFE COMPANY on a daily basis as soon as reasonably practical after the net asset value per share is calculated but shall use its best efforts to make such net asset value available by 6:15 p.m. New York time. If TRUST provides LIFE COMPANY with the incorrect share net asset value information through no fault of LIFE COMPANY, LIFE COMPANY on behalf of the Separate Accounts, shall be entitled to an adjustment to the number of shares purchased or redeemed to reflect the correct share net asset value. Any error in the calculation of net asset value, dividend and capital gain information greater than or equal to $.01 per share of TRUST, shall be reported immediately upon discovery to LIFE COMPANY. Any error of a lesser amount shall be corrected in the next Business Day's net asset value per share for TRUST. (d) At the end of each Business Day, LIFE COMPANY shall use the information described in Section 3(c) to calculate Separate Account unit values f or the day. Using these unit values, LIFE COMPANY shall process each such Business Day's Separate Account transactions based on requests and premiums received by it by the close of trading on the floor of the New York Stock Exchange (currently 4:00 p.m. New York time) to determine the net dollar amount of TRUST shares which shall be purchased or redeemed at that day's closing net asset value per share. The net purchase or redemption orders so determined shall be transmitted to TRUST by LIFE -2- COMPANY by 9:30 a.m. New York time on the Business Day next following LIFE COMPANY's receipt of such requests and premiums in accordance with the terms of Sections 3(a) and 3(b) hereof. (e) If LIFE COMPANY's order requests the purchase of TRUST shares, LIFE COMPANY shall pay for such purchase by wiring federal funds to TRUST or its designated custodial account on the day the order is transmitted by LIFE COMPANY. If LIFE COMPANY's order requests a net redemption resulting in a payment of redemption proceeds to LIFE COMPANY, TRUST shall wire the redemption proceeds to LIFE COMPANY by the next Business Day, unless doing so would require TRUST to dispose of portfolio securities or otherwise incur additional costs, but in such event, proceeds shall be wired to LIFE COMPANY within seven days and TRUST shall notify the person designated in writing by LIFE COMPANY as the recipient for such notice of such delay by 3:00 p.m. New York time the same Business Day that LIFE COMPANY transmits the redemption order to TRUST. If LIFE COMPANY's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another fund managed or distributed by N&B MANAGEMENT, TRUST shall so apply such proceeds the same Business Day that LIFE COMPANY transmits such order to TRUST. 4. (a) TRUST will bear the printing costs (or duplicating costs with respect to the statement of additional information) and mailing costs associated with the delivery of the following TRUST (or individual portfolio) documents, and any supplements thereto, to existing variable contract owners of LIFE COMPANY: (i) prospectuses and statements of additional information; (ii) annual and semi-annual reports; and (iii) proxy materials. LIFE COMPANY will submit any bills for printing, duplicating and/or mailing costs, relating to the TRUST documents described above, to TRUST for reimbursement by TRUST. LIFE COMPANY shall monitor such costs and shall use its best efforts to control these costs. LIFE COMPANY will provide TRUST on a semi- annual basis, or more frequently as reasonably requested by TRUST, with a current tabulation of the number of existing variable contract owners of LIFE COMPANY whose variable contract values are invested in TRUST. This tabulation will be sent to TRUST in the form of a letter signed by a duly authorized officer of LIFE COMPANY attesting to the accuracy of the information contained in the letter. if requested by LIFE COMPANY, the TRUST shall provide such documentation (including a final copy of the TRUST's prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for LIFE COMPANY to print together in one document the current prospectus for the variable contracts issued by LIFE COMPANY and the current prospectus for the TRUST. -3- (b) TRUST will provide, at its expense, LIFE COMPANY with the following TRUST (or individual Portfolio) documents, and any supplements thereto, with respect to prospective variable contract owners of LIFE COMPANY: (i) camera ready copy of the current prospectus for printing by the LIFE COMPANY; (ii) a copy of the statement of additional information suitable for duplication; (iii) camera ready copy of proxy material suitable for printing; and (iv) camera ready copy of the annual and semiannual reports for printing by the LIFE COMPANY. 5. (a) LIFE COMPANY will furnish, or will cause to be furnished, to TRUST and N&B MANAGEMENT, each piece of sales literature or other promotional material in which TRUST or N&B MANAGEMENT is named at least fifteen days prior to its intended use. No such material will be used if TRUST or N&B MANAGEMENT objects to its use in writing within ten Business Days after receipt of such material. (b) TRUST and N&B MANAGEMENT will furnish, or will cause to be furnished, to LIFE COMPANY, each piece of sales literature or other promotional material in which LIFE COMPANY or its Separate Accounts are named, at least fifteen Business Days prior to its intended use. No such material will be used if LIFE COMPANY objects to its use in writing within ten Business Days after receipt of such material. (c) The TRUST and its affiliates and agents shall not give any information or make any representations on behalf of LIFE COMPANY or concerning LIFE COMPANY, the Separate Accounts, or the variable contracts issued by LIFE COMPANY, other than the information or representations contained in a registration statement or prospectus for such variable contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports for the Separate Accounts or reports prepared for distribution to owners of such variable contracts, or in sales literature or other promotional material approved by LIFE COMPANY or its designee, except with the permission of LIFE COMPANY. (d) LIFE COMPANY and its affiliates and agents shall not give any information or make any representations on behalf of TRUST or concerning TRUST other than the information or representations contained in a registration statement or prospectus for TRUST, as such registration statement and prospectus may be amended or supplemented from time to time, or in sales literature or other promotional material approved by TRUST or its designee, except with the permission of TRUST. -4- (e) For purposes of this Agreement, the phrase "sales literature or other promotional material" or words of similar import include, without limitation, advertisements (such as material published, or designed for use, in a newspaper, magazine or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures or other public media) , sales literature (such as any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, or reprints or excerpts or any other advertisement, sales literature, or published article) , educational or training materials or other communications distributed or made generally available to some or all agents or employees, registration statements, prospectuses, statements of additional information, shareholder reports and proxy materials, and any other material constituting sales literature or advertising under National Association of Securities Dealers, Inc. rules, the 140 Act or the Securities Act of 1933 (11"33 Act"). 6. Each Portfolio of TRUST will comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event TRUST becomes aware that any Portfolio of TRUST has failed to comply, it will take all reasonable steps (a) to notify LIFE COMPANY of such failure, and (b) to adequately diversify t@e Portfolio so as to achieve compliance. 7. (a) Except as limited by and in accordance with the provisions of Sections 7(b) and 7(c) hereof, LIFE COMPANY agrees to indemnify and hold harmless TRUST and N&B MANAGEMENT and each trustee of the Board of Trustees of TRUST and officers and each person, if any, who controls TRUST and each of the directors and officers of N&B MANAGEMENT and each person, if any, who controls N&B MANAGEMENT within the meaning of Section 15 of the 133 Act (collectively, the "Indemnified Parties" for purposes of this Section 7) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of LIFE COMPANY) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of TRUST's shares or the variable contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the variable contracts or contained in the variable contracts (or any amendment or supplement to any of the foregoing) , or arise out of or are based upon the omission or the alleged omission to state therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of -5- TRUST for use in the registration statement or prospectus for the variable contract or in the variable contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the variable contracts or TRUST shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of TRUST not supplied by LIFE COMPANY, or persons under its contract) or wrongful conduct of LIFE COMPANY or persons under its control, with respect to the sale or distribution of the variable contracts or TRUST shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of TRUST or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to TRUST by or on behalf of LIFE COMPANY; or (iv) arise as a result of any failure by LIFE COMPANY to substantially provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by LIFE COMPANY in this Agreement or arise out of or result from any other material breach of this Agreement by LIFE COMPANY. (b)LIFE COMPANY shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to TRUST, whichever is applicable. (c)LIFE COMPANY shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified LIFE COMPANY in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify LIFE COMPANY of any such claim shall not relieve LIFE COMPANY from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against an Indemnified Party, LIFE COMPANY shall be entitled to assume -6- the defense thereof, with counsel satisfactory to the party named in the action. After notice from LIFE COMPANY to such party of LIFE COMPANY's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and LIFE COMPANY will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8. (a) Except as limited by and in accordance with the provisions of sections 8(b) and 8(c) hereof, N&B MANAGEMENT agrees to indemnify and hold harmless LIFE COMPANY and each of its directors and officers and each person, if any, who controls LIFE COMPANY within the meaning of Section 15 of the 133 Act (collectively, the "Indemnified Parties" for purposes of this Section 8) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of N&B MANAGEMENT) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, or regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of TRUST's shares or the variable contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the registration statement or prospectus or sales literature of TRUST (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged. omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to N&B MANAGEMENT or TRUST by or on behalf of LIFE COMPANY for use in the registration statement or prospectus for TRUST or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the variable contracts or TRUST shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the variable contracts not supplied by N&B MANAGEMENT or persons under its control) or wrongful conduct of TRUST, its adviser or N&B MANAGEMENT or persons under their control, with respect to the sale or distribution of the variable contracts or TRUST shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the variable contracts, or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, if such -7- statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to LIFE COMPANY by or on behalf of TRUST; or (iv) arise as a result of (a) a failure by TRUST to substantially provide the services and furnish the materials under the terms of this Agreement; or (b) a failure by TRUST to comply with the diversification requirements of Section 817 (h) of the Code; or (c) a failure by TRUST to qualify as a Regulated Investment Company under Subchapter M of the Code; or (v) arise out of or result from any material breach of any representation and/or warranty made by N&B MANAGEMENT in this Agreement or arise out of or result from any other material breach of this Agreement by N&B MANAGEMENT. (b) N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to LIFE COMPANY. (c) N&B MANAGEMENT shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified N&B MANAGEMENT in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify N&B MANAGEMENT of any such claim shall not relieve N&B MANAGEMENT from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, N&B MANAGEMENT shall be entitled to participate at its own expense in the defense thereof. N&B MANAGEMENT. also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from N&B MANAGEMENT to such party of N&B MANAGEMENT'S election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and N&B MANAGEMENT will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 9. (a) TRUST represents and warrants that TRUST shares sold pursuant to this Agreement shall be registered under the 133 Act and duly authorized for issuance, and shall be issued, in compliance in all material respects with applicable law, and that TRUST is and shall remain registered under the 140 Act for so long as required thereunder. -8- (b) TRUST represents and warrants that it currently qualifies and will make every effort to continue to qualify as a Regulated Investment Company under Subchapter M of the Code, and to maintain such qualification (under Subchapter M or any successor or similar provisions) , and that TRUST will notify LIFE COMPANY immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. (c) TRUST will register and qualify its shares for sale in accordance with the laws of the various states as may be required by law. 10. TRUST will provide LIFE COMPANY with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to the Portfolios promptly after the filing of each such document with the SEC or other regulatory authority. LIFE COMPANY will provide TRUST with at least one complete copy of all prospectuses, statements of additional information, annual and semi-annual reports, proxy statements, exemptive applications and all amendments or supplements to any of the above that relate to a Separate Account promptly after the filing of each such document with the SEC or other regulatory authority. 11. TRUST will disclose in its prospectus that (1) shares of the TRUST are offered to affiliated or unaffiliated insurance company separate accounts and qualified plans which fund both annuity and life insurance contracts, (2) due to differences in tax treatment or other considerations, the interests of various variable contract owners and qualified plans participating in the TRUST might at some time be in conflict, and (3) the Board of Trustees of the TRUST will monitor for any material conflicts and determine what action, if any, should be taken. The TRUST hereby notifies LIFE COMPANY that prospectus disclosure may be appropriate regarding potential risks of offering shares of the TRUST to separate accounts and qualified plans funding both variable annuity contracts and variable life insurance policies and to separate accounts and qualified plans funding variable contracts of unaffiliated life insurance companies. 12. Each party hereto shall cooperate with each other party and all appropriate governmental authorities having Jurisdiction (including, without limitation, the SEC, the NASD, and state insurance regulators) and shall permit each other and such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. TRUST and N&B MANAGEMENT shall own and control all the pertinent records pertaining to their performance of services under this Agreement. 13. LIFE COMPANY agrees to inform the Board of Trustees of TRUST of the existence of or any potential for any material irreconcilable conflict of interest between the interest of the contract owners of the Separate Accounts of LIFE COMPANY investing in TRUST and/or any other separate account of any other insurance company investing in TRUST upon LIFE COMPANY having knowledge of same. -9- A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a-public ruling, private letter ruling, no- action or interpretive letter, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different life insurance companies utilizing TRUST; or (f) a decision by a participating life insurance company to disregard the voting instructions of contract owners. LIFE COMPANY will be responsible for assisting the Board of Trustees of TRUST in carrying out its responsibilities by providing the Board with all information reasonably necessary for the Board to consider any issue raised including information as to a decision by LIFE COMPANY to disregard voting instructions of contract owners. It is agreed that if it is determined by a majority of the members of the Board of Trustees of TRUST or a majority of its disinterested Trustees that an irreconcilable material conflict exists affecting LIFE COMPANY, LIFE COMPANY shall, at its own expense, take whatever steps are necessary to remedy or eliminate the material irreconcilable conflict, which steps may include, but are not limited to, (a) withdrawing the assets allocable to some or all of the Separate Accounts from TRUST or any Portfolio and reinvesting such assets in a different investment medium, including another Portfolio of TRUST or submitting the questions of whether such segregation should be implemented to a vote of all affected contract owners and, as appropriate, segregating the assets of any particular group (i.e., annuity contract owners, life insurance contract owners or qualified contract owners) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a 'change; (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of LIFE COMPANY's decision to disregard contract owner voting instructions and that decision represents a minority position or -10- would preclude a majority vote, the LIFE COMPANY may be required, at TRUST's election, to withdraw its Separate Account's investment in TRUST. No charge or penalty will be imposed against a Separate Account of LIFE COMPANY as a result of such withdrawal. LIFE COMPANY agrees that any remedial action taken by it in resolving any material conflicts of interest will be carried out with a view only to the interest of contract owners. For purposes hereof, a majority of the disinterested members of the Board of Trustees of TRUST shall determine whether or not any proposed action adequately remedies any material irreconcilable conflict. In no event will TRUST be required to establish a new funding medium for any variable contracts. LIFE COMPANY shall not be required by the terms hereof to establish a new funding medium for any variable contracts if an offer to do so has been declined by vote of a majority of affected contract owners. TRUST agrees to inform LIFE COMPANY of the existence of or any potential for any material irreconcilable conflict of interest between the interests of the contract owners of the Separate Accounts of LIFE COMPANY investing in TRUST and/or any other separate account of any other insurance company investing in TRUST (upon TRUST having knowledge of same). A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax,, or securities law or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract owners and variable life insurance contract owners or by contract owners of different Participating life insurance companies utilizing TRUST; or (f) a decision by a participating life insurance company to disregard the voting instructions of contract owners. The Board of Trustees of TRUST shall promptly inform LIFE COMPANY if it determines that an irreconcilable material conflict exists and the implications thereof. 14.LIFE COMPANY shall provide pass-through voting privileges, as provided in this paragraph, to all variable contract owners so long as the SEC or its staff continues to interpret the 140 Act to require such pass-through voting privileges for variable contract owners. LIFE -11- COMPANY will vote shares for which it has not received voting instructions as well as shares attributable to it in the same proportion as it votes shares for which it has received instructions. LIFE COMPANY shall be responsible for assuring that each of its Separate Accounts participating in TRUST calculates voting privileges in a manner consistent with other life companies utilizing TRUST provided that each participating life insurance company enters into an agreement containing a provision or provisions, which do not vary in any material respects, from the terms of Section 13 hereof. 15. (a) This Agreement shall be effective as of the date hereof and shall continue in force until terminated in accordance with the provisions herein. (b) This Agreement shall terminate automatically in the event of its assignment unless such assignment is made with the written consent of LIFE COMPANY and TRUST. (c) This Agreement shall terminate without penalty at the option of the terminating party in accordance with the following provisions: (i) At the option of LIFE COMPANY or TRUST at any time from the date hereof upon 180 days' advance written notice, unless a shorter time is agreed to by the parties; (ii) At the option of LIFE COMPANY, if TRUST shares are not reasonably available to meet the requirements of the variable contracts as determined by LIFE COMPANY. Prompt notice of election to terminate shall be furnished by LIFE COMPANY, said termination to be effective ten days after receipt of notice unless TRUST makes available a sufficient number of shares to reasonably meet the requirements of the variable contracts within said ten-day period; (iii) At the option of LIFE COMPANY, upon the institution of formal proceedings against TRUST by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgment or outcome of which would, in LIFE COMPANY'S reasonable judgment, materially impair TRUST'S ability to meet and perform TRUST'S obligations and duties hereunder. Prompt notice of election to terminate shall be furnished by LIFE COMPANY with said termination to be effective upon receipt of notice; (iv) At the option of LIFE COMPANY, upon its good faith determination, or at the option of TRUST upon a determination by a majority of the Board, or a majority of disinterested Board members, that an irreconcilable material conflict exists among the interests of (i) owners of variable contracts issued by participating life insurance companies; or (ii) the interests of participating life insurance companies. -12- (v) At the option of TRUST, upon the institution of formal proceedings against LIFE COMPANY by the SEC, the National Association of Securities Dealers, Inc., or any other regulatory body, the expected or anticipated ruling, judgement or outcome which would, in TRUST'S reasonable judgment, materially impair LIFE COMPANY'S ability to meet and perform its obligations and duties hereunder. Prompt notice of election to, terminate shall be furnished by TRUST with said termination to be effective upon receipt of notice; (vi) At the option of TRUST, if (i) TRUST shall determine in its sole judgement reasonably exercised in good faith, that LIFE COMPANY has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and such material adverse change or material adverse publicity is likely to have a material adverse impact upon business and operation of TRUST and N&B MANAGEMENT, (ii) TRUST shall have notified LIFE COMPANY in writing of such determination and its intent to terminate this Agreement, and, (iii) after consideration of the actions taken by LIFE COMPANY and any other changes in circumstances since the giving of such notice, the determination of TRUST shall continue to apply on the sixtieth (60th) day since giving of such notice, then such sixtieth day shall be the effective date of termination; (vii) At the option Of LIFE COMPANY after having been notified by TRUST of a termination or proposed termination of the Investment Advisory Agreement between TRUST and N&B MANAGEMENT or its successors, which notice TRUST shall provide promptly to LIFE COMPANY, the effective date of termination of the Agreement to be as determined by LIFE COMPANY; (viii) In the event TRUST's shares are not registered, issued or sold in accordance with applicable state or federal law, or such law precludes the use of such shares of the underlying investment medium of variable contracts issued or to be issued by LIFE COMPANY. Termination shall be effective immediately upon such occurrence without notice; (ix) At the option of TRUST upon a reasonable determination by the Board in good faith that it is no longer advisable and in the best interests of shareholders for TRUST to continue to operate pursuant to this Agreement; (x) At the option of TRUST if the variable contracts cease to qualify as annuity contracts or life insurance contracts, as applicable, under the Code, or if TRUST reasonably believes that the variable contracts may fail to so qualify; (xi) At the option of LIFE COMPANY, upon TRUST'S breach of any material provision of this Agreement, which breach has not been cured to the satisfaction -13- of LIFE COMPANY within ten days after written notice of such breach is delivered to TRUST; (xii) At the option of TRUST, upon LIFE COMPANY's breach of any material provision of this Agreement, which breach has not been cured to the satisfaction of TRUST within ten days after written notice of such breach is delivered to LIFE COMPANY; (xiii) At the option of TRUST, if the variable contracts are not registered, issued or sold in accordance with applicable federal and/or state law. Termination shall be effective immediately upon such occurrence without notice; (xiv) At the option of LIFE COMPANY, if LIFE COMPANY shall determine, in its sole judgment reasonably exercised in good faith, that TRUST is the subject of material adverse publicity and such material adverse publicity is likely to have a material adverse impact on the sale of the variable contracts and/or the operations or business reputation of LIFE COMPANY, the LIFE COMPANY shall have notified TRUST in writing of such determination and its intent to terminate this Agreement, and, after consideration of the actions taken by TRUST and any other changes in circumstances since the giving of such notice, the determination of the LIFE COMPANY shall continue to apply on the sixtieth day since giving of such notice, which sixtieth (60th) day shall be the effective date of termination; or (xv) Upon requisite vote of the variable contract owners having an interest in the Separate Accounts to substitute the shares of another investment company for the corresponding shares of the TRUST in accordance with the terms of the variable contracts for which those shares had been selected to serve as the underlying investment media, such termination to be effective sixty days after notification of TRUST. (d) Notwithstanding any termination of this Agreement pursuant to Section 15(c) hereof, TRUST at its option may elect to continue to make available additional TRUST shares, as provided below, for so long as TRUST desires pursuant to the terms and conditions of this Agreement, for all variable contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, if TRUST so elects to make additional TRUST shares available, the owners of the Existing Contracts or LIFE COMPANY, whichever shall have legal authority to do so, shall be permitted to reallocate investments in TRUST, redeem investments in TRUST and/or invest in TRUST upon the payment of additional premiums under the Existing Contracts. In the event of a termination of this Agreement pursuant to Section 15(c) hereof, TRUST and N&B MANAGEMENT, as promptly as is practicable under the circumstances, shall notify LIFE COMPANY whether TRUST shall elect to continue to make TRUST shares available after such -14- termination. If TRUST shares continue to be made available after such termination, the provisions of this Agreement shall remain in effect and thereafter either TRUST or LIFE COMPANY may terminate the Agreement, as so continued pursuant to this Section 15 (d) , upon prior written notice to the other party such notice to be for a period that is reasonable under the circumstances but, if given by TRUST, need not be for more than six months. In determining whether to elect to continue to make available additional TRUST shares, TRUST shall act in good faith, giving due consideration to the interests of existing shareholders, including holders of Existing Contracts. 16. This Agreement shall be subject to the provisions of the '40 Act and the rules and regulations thereunder, including any exemptive relief therefrom and the orders of the SEC setting forth such relief. 17. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the State of Colorado. 18. It is understood by the parties that this Agreement is not an exclusive arrangement. 19. This Agreement is made by TRUST pursuant to authority granted by the Trustees, and the obligations created hereby are binding on the Trust and its property, but not on any of the Trustees or shareholders of TRUST individually. A copy of the Declaration of Trust is on file with the Secretary of the Commonwealth of Massachusetts and notice is hereby given that the Agreement has been executed by a Trustee on behalf of the TRUST in his or her capacity as Trustee and not individually. Executed this 28th day of September, 1994. NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST ATTEST: /s/ Stacy Cooper BY: /s/ Stanley Egener Stanley Egener, Chairman SECURITY LIFE INSURANCE COMPANY OF DENVER ATTEST: /s/ Bonnie C. Dailey BY: /s/ Steve Largent NEUBERGER & BERMAN MANAGEMENT INCORPORATED ATTEST: /s/ Ellen Metzger BY: /s/ Alan Dynner -15- APPENDIX A Neuberger and Berman Limited Maturity Bond Portfolio Neuberger and Berman Growth Portfolio Neuberger and Berman Partners Portfolio Neuberger and Berman Government Income Portfolio EX-1.A(8)(A)(IV) 10 PARTICIPATION AGMT. - FIDELITY EXHIBIT 1.A (8) (a) (iv) PARTICIPATION AGREEMENT Among VARIABLE INSURANCE PRODUCTS FUND, FIDELITY DISTRIBUTORS CORPORATION and SECURITY LIFE OF DENVER INSURANCE COMPANY THIS AGREEMENT, made and entered into as of the 10th day of August, 1994 by and among SECURITY LIFE OF DENVER INSURANCE COMPANY, (hereinafter the "Company"), a Colorado corporation, on its own behalf and on behalf of each segregated asset account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts corporation. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts (collectively, the "Variable Insurance Products") to be offered by insurance companies which have entered into participation agreements with the Fund and the Underwriter (hereinafter "Participating Insurance Companies"); and WHEREAS, the beneficial interest in the Fund is divided into several series of shares, each designated a "Portfolio" and representing the interest in a particular managed portfolio of securities and other assets (a list of the Portfolios of the Fund to which this Agreement applies is included in Schedule D hereto, as may be amended from time to time); and WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting, Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive Order"); and 1 WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly registered as an investment adviser under the federal Investment Advisers Act of 1940 and any applicable state securities law; and WHEREAS, the Company has registered or will register certain variable life insurance and variable annuity contracts under the 1933 Act; and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution of the Board of Directors of the Company, on the date shown for such Account on Schedule A hereto, to set aside and invest assets attributable to the aforesaid variable annuity contracts; and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, the Underwriter is registered as a broker dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, (hereinafter the " 1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios on behalf of each Account to fund certain of the aforesaid variable life and variable annuity contracts and the Underwriter is authorized to sell such shares to unit investment trusts such as each Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree as follows: ARTICLE I. Sale of Fund Shares 1.1. The Underwriter agrees to sell to the Company those shares of the Fund which each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 9:00 a.m. Boston time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 2 1.2. The Fund agrees to make its shares available indefinitely for purchase at the applicable net asset value per share by the Company and its Accounts on those days on which the Fund calculates its net asset value pursuant to rules of the Securities and Exchange Commission and the Fund shall use reasonable efforts to calculate such net asset value on each day which the New York Stock Exchange is open for trading. Notwithstanding the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.3. The Fund and the Underwriter agree that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts. No shares of any Portfolio will be sold to the general public. 1.4. The Fund and the Underwriter will not sell Fund shares to any insurance company or separate account unless an agreement containing provisions substantially the same as Articles I, III, V, VII and Section 2.5 of Article II of this Agreement is in effect to govern such sales. 1.5. The Fund agrees to redeem for cash, on the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the request for redemption. For purposes of this Section 1.5, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such request for redemption on the next following Business Day. Proceeds of any net redemption are normally wired to the Company on the Business Day immediately following receipt of the redemption order. 1.6. The Company agrees to purchase and redeem the shares of each Portfolio offered by the then current prospectus of the Fund and in accordance with the provisions of such prospectus. The Company agrees that all net amounts available under the variable annuity contracts with the form number(s) which are listed on Schedule A attached hereto and incorporated herein by this reference, as such Schedule A may be amended from time to time hereafter by mutual written agreement of all the parties hereto, (the "Contracts") shall be invested in the Fund, in such other Funds advised by the Adviser as may be mutually agreed to in writing by the parties hereto, or in the Company's general account, provided that such amounts may also be invested in an investment company other than the Fund if (a) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of all the Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter 45 days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (c) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund and Underwriter prior to their signing this Agreement (a list of such funds appearing on 3 Schedule C to this Agreement); or (d) the Fund or Underwriter consents to the use of such other investment company. 1.7. The Company shall pay for Fund shares on the next Business Day after an order to purchase Fund shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Fund. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Shares ordered from the Fund will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Company of any income, dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on the Portfolio shares in additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.10. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 7 p.m. Boston time. ARTICLE II. Representations and Warranties 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act; that the Contracts will be issued and sold in compliance in all material respects with all applicable Federal and State laws and that the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account prior to any issuance or sale thereof as a segregated asset account under Section 10-7-402 of the Colorado Insurance Laws and has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 2.2. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in compliance with 4 the laws of the State of Colorado and all applicable federal and state securities laws and that the Fund is and shall remain registered under the 1940 Act. The Fund shall amend the Registration Statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund or the Underwriter. 2.3. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.4. The Company represents that the Contracts are currently treated as life insurance or annuity contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Fund and the Underwriter immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. The Fund has adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for distribution expenses. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of trustees, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.6. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of the various states except that the Fund represents that the Fund's investment policies, fees and expenses are and shall at all times remain in compliance with the laws of the State of Colorado and the Fund and the Underwriter represent that their respective operations are and shall at all times remain in material compliance with the laws of the State of Colorado to the extent required to perform this Agreement. 2.7. The Underwriter represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the SEC. The Underwriter further represents that it will sell and distribute the Fund shares in accordance with the laws of the State of Colorado and all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.8. The Fund represents that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with the 1940 Act. 5 2.9. The Underwriter represents and warrants that the Adviser is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that the Adviser shall perform its obligations for the Fund in compliance in all material respects with the laws of the State of Colorado and any applicable state and federal securities laws. 2.10. The Fund and Underwriter represent and warrant that all of their directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(l) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11. The Company represents and warrants that all of the persons affiliated with it who are described in Rule 17g-(1) under the 1940 Act are covered by a blanket fidelity bond or similar coverage for the benefit of the Fund, in an amount not less $5 million. The aforesaid includes coverage for larceny and embezzlement is issued by a reputable bonding company. The Company agrees to make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and agrees to notify the Fund and the Underwriter in the event that such coverage no longer applies. 2.12 The Fund and the Underwriter represent that they will own and control all the pertinent records pertaining to their performance of services under this Agreement. ARTICLE III. Prospectuses and Proxy Statements, Voting 3.1. The Underwriter shall provide the Company (at the Company's expense) with as many copies of the Fund's current prospectus as the Company may reasonably request. If requested by the Company in lieu thereof, the Fund shall provide such documentation (including a final copy of the new prospectus as set in type at the Fund's expense) and other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus for the Fund is amended) to have the prospectus for the Contracts and the Fund's prospectus printed together in one document (such printing to be at the Company's expense). 3.2. The Fund's prospectus shall state that the Statement of Additional Information for the Fund is available from the Underwriter (or in the Fund's discretion, the Prospectus shall state that such Statement is available from the Fund), and the Underwriter (or the Fund), at its expense, shall print and provide such Statement free of charge to the Company and to any owner of a Contract or prospective owner who requests such Statement. 3.3. The Fund, at its expense, shall provide the Company with copies of its proxy material, reports to shareholders, and other communications to shareholders in such quantity as the Company shall reasonably require for distributing to Contract owners. 6 3.4. If and to the extent required by law the Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Fund shares in accordance with instructions received from Contract owners; and (iii) vote Fund shares for which no instructions have been received in the same proportion as Fund shares of such portfolio for which instructions have been received, so long as and to the extent that the Securities and Exchange Commission continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. Participating Insurance Companies shall be responsible for assuring that each of their separate accounts participating in the Fund calculates voting privileges in a manner consistent with the standards set forth on Schedule B attached hereto and incorporated herein by this reference, which standards will also be provided to the other Participating Insurance Companies. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the Securities and Exchange Commission's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the Commission may promulgate with respect thereto. ARTICLE IV. Sales Material and Information 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or its investment adviser or the Underwriter is named, at least fifteen Business Days prior to its use. No such material shall be used if the Fund or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee or by the Underwriter, except with the permission of the Fund or the Underwriter or the designee of either. 4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which 7 the Company and/or its separate account(s), is named at least fifteen Business Days prior to its use. No such material shall be used if the Company or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.4. The Fund and the Underwriter shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Securities and Exchange Commission or other regulatory authorities. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, and registration statements, prospectuses, Statements of Additional Information, shareholder reports, and proxy materials. ARTICLE V. Fees and Expenses 5.1. The Fund and Underwriter shall pay no fee or other compensation to the Company under this agreement, except that if the Fund or any Portfolio adopts and implements a plan 8 pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing and such payments will be made out of existing fees otherwise payable to the Underwriter, past profits of the Underwriter or other resources available to the Underwriter. No such payments shall be made directly by the Fund. Currently, no such payments are contemplated. 5.2. All expenses incident to performance by the Fund under this Agreement shall be paid by the Fund. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Fund, in accordance with applicable state laws prior to their sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type and printing the proxy materials and reports to shareholders (including the costs of printing a prospectus that constitutes an annual report), the preparation of all statements and notices required by any federal or state law, all taxes on the issuance or transfer of the Fund's shares. 5.3. The Company shall bear the expenses of printing and distributing the Fund's prospectus to owners of Contracts issued by the Company and of distributing the Fund's proxy materials and reports to such Contract owners. ARTICLE VI. Diversification 6.1. The Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will at all times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps (a) to notify Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance with the grace period afforded by Regulation 817-5. ARTICLE VII. Potential Conflicts 7.1. The Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action 9 or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Board, or a majority of its disinterested trustees, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested trustees), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1), withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2), establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of that six month period the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and 10 terminate this Agreement with respect to such Account within six months after the Board informs the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Until the end of the foregoing six month period, the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within six (6) months after the Board informs the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Board. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7. 1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. Indemnification 8.1. Indemnification By The Company 8.1 (a). The Company agrees to indemnify and hold harmless the Fund and each trustee of the Board and officers and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at 11 common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the Contracts or contained in the Contracts or sales literature for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Fund for use in the Registration Statement or prospectus for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature of the Fund not supplied by the Company, or persons under its control) or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund Shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company, as limited by and in accordance with the provisions of Sections 8.1 (b) and 8. 1(c) hereof. 12 8.l(b). The Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Fund, whichever is applicable. 8.1 (c). The Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve the Company from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Company shall be entitled to participate, at its own expense, in the defense of such action. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Company to such party of the Company's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Company will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.1 (d). The Indemnified Parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund Shares or the Contracts or the operation of the Fund. 8.2. Indemnification by the Underwriter 8.2(a). The Underwriter agrees to indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or sales literature of the Fund (or any amendment or 13 supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Underwriter or Fund by or on behalf of the Company for use in the Registration Statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature for the Contracts not supplied by the Underwriter or persons under its control) or wrongful conduct of the Fund, Adviser or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Company by or on behalf of the Fund; or (iv) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements specified in Article VI of this Agreement); or (v) arise out of or result from any material breach of any representation and/or warranty made by the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter; as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. 8.2(b). The Underwriter shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to each Company or the Account, whichever is applicable. 14 8.2(c). The Underwriter shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Underwriter of any such claim shall not relieve the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Underwriter will be entitled to participate, at its own expense, in the defense thereof. The Underwriter also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Underwriter to such party of the Underwriter's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Underwriter will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.2(d). The Company agrees promptly to notify the Underwriter of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of each Account. 8.3. Indemnification By the Fund 8.3(a). The Fund agrees to indemnify and hold harmless the Company, and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Fund and: (i) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure to comply with the diversification requirements specified in Article VI of this Agreement);or (ii) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund; as limited by and in accordance with the provisions of Sections 8.3(b) and 8.3(c) hereof. 15 8.3(b). The Fund shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Company, the Fund, the Underwriter or each Account, whichever is applicable. 8.3(c). The Fund shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve the Fund from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.3(d). The Company and the Underwriter agree promptly to notify the Fund of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of either Account, or the sale or acquisition of shares of the Fund. ARTICLE IX. Applicable Law 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the Securities and Exchange Commission may grant (including, but not limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. 16 ARTICLE X. Termination 10.1. This Agreement shall continue in full force and effect until the first to occur of: (a) termination by any party for any reason by sixty (60) days advance written notice delivered to the other parties; or (b) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio based upon the Company's determination that shares of such Portfolio are not reasonably available to meet the requirements of the Contracts; or (c) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (d) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (e) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio fails to meet the diversification requirements specified in Article VI hereof, or (f) termination by either the Fund or the Underwriter by written notice to the Company, if either one or both of the Fund or the Underwriter respectively, shall determine, in their sole judgment exercised in good faith, that the Company and/or its affiliated companies has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (g) termination by the Company by written notice to the Fund and the Underwriter, if the Company shall determine, in its sole judgment exercised in good faith, that either the Fund or the Underwriter has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or 17 (h) termination by the Fund or the Underwriter by written notice to the Company, if the Company gives the Fund and the Underwriter the written notice specified in Section 1.6(b) hereof and at the time such notice was given there was no notice of termination outstanding under any other provision of this Agreement; provided, however any termination under this Section 10.1(h) shall be effective forty five (45) days after the notice specified in Section 1.6(b) was given. 10.2. Effect of Termination. Notwithstanding any termination of this Agreement, the Fund and the Underwriter shall at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts shall be permitted to reallocate investments in the Fund, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.2 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. 10.3 The Company shall not redeem Fund shares attributable to the Contracts (as opposed to Fund shares attributable to the Company's assets held in the Account) except (i) as necessary to implement Contract Owner initiated or approved transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption"). Upon request, the Company will promptly furnish to the Fund and the Underwriter the opinion of counsel for the Company (which counsel shall be reasonably satisfactory to the Fund and the Underwriter) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, the Company shall not prevent Contract Owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving the Fund or the Underwriter 90 days notice of its intention to do so. ARTICLE XI. Notices Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer 18 If to the Company: Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Attention: Bonnie Dailey If to the Underwriter: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer ARTICLE XII. Miscellaneous 12.1 All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Board, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 12.2 Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information until such time as it may come into the public domain without the express written consent of the affected party. 12.3 The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4 This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5 If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.6 Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Notwithstanding the generality of the foregoing, each party hereto further agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations of the Company are being conducted in a 19 manner consistent with the California Insurance Regulations and any other applicable law or regulations. The Fund agrees that the Company shall have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement to the requirements of the California Insurance Department. 12.7 The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 12.8. This Agreement or any of the rights and obligations hereunder may not be assigned by any party without the prior written consent of all parties hereto; provided, however, that the Underwriter may assign this Agreement or any rights or obligations hereunder to any affiliate of or company under common control with the Underwriter, if such assignee is duly licensed and registered to perform the obligations of the Underwriter under this Agreement. 12.9. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee copies of the following reports: (a) the Company's annual statement prepared under statutory accounting principles) and annual report (prepared under generally accepted accounting principles ("GAAP")), as soon as practical and in any event within 90 days after the end of each fiscal year; (b) the Company's quarterly statements (statutory and GAAP), as soon as practical and in any event within 45 days after the end of each quarterly period: (c) any financial statement, proxy statement, notice or report of the Company sent to stockholders and/or policyholders, as soon as practical after the delivery thereof to stockholders; (d) any registration statement (without exhibits) and financial reports of the Company filed with the Securities and Exchange Commission or any state insurance regulator, as soon as practical after the filing thereof; (e) any other report submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, as soon as practical after the receipt thereof. 20 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified below. SECURITY LIFE OF DENVER INSURANCE COMPANY By its authorized officer, By: /s/ Steve Largent Name: Stephan M. Largent Title: Vice President VARIABLE INSURANCE PRODUCTS FUND By its authorized officer, By: /s/ J. Gary Burkhead Name: J. Gary Burkhead Title: Senior Vice President FIDELITY DISTRIBUTORS CORPORATION By its authorized officer, By: /s/ Kurt A. Lange Name: Kurt A. Lange Title: President 21 Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account Security Life Separate Account Al The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) Security Life Separate Account L1 First Line (Flexible Premium Variable Life Insurance Policy) 22 SCHEDULE B PROXY VOTING PROCEDURE The following is a list of procedures and corresponding responsibilities for the handling of proxies relating to the Fund by the Underwriter, the Fund and the Company. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Company" shall also include the department or third party assigned by the Insurance Company to perform the steps delineated below. 1. The number of proxy proposals is given to the Company by the Underwriter as early as possible before the date set by the Fund for the shareholder meeting to facilitate the establishment of tabulation procedures. At this time the Underwriter will inform the Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before meeting. 2. Promptly after the Record Date, the Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each contract owner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts as of the Record Date. Note: The number of proxy statements is determined by the activities described in Step #2. The Company will use its best efforts to call in the number of Customers to Fidelity, as soon as possible, but no later than two weeks after the Record Date. 3. The Fund's Annual Report must be sent to each Customer by the Company either before or together with the Customers' receipt of a proxy statement. Underwriter will provide at least one copy of the last Annual Report to the Company. 4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Company by the Fund. The Company, at its expense, shall produce and personalize the Voting Instruction Cards. The Legal Department of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card before it is printed. Allow approximately 2-4 business days for printing information on the Cards. Information commonly found on the Cards includes: a. name (legal name as found on account registration) b. address c. Fund or account number d. coding to state number of units e. individual Card number for use in tracking and verification of votes (already on Cards as printed by the Fund) (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) 23 5. During this time, Fidelity Legal will develop, produce, and the Fund will pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Insurance Company). Contents of envelope sent to Customers by Company will include: a. Voting Instruction Card(s) b. One proxy notice and statement (one document) c. return envelope (postage pre-paid by Company) addressed to the Company or its tabulation agent d. "urge buckslip" - optional, but recommended. (This is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important. One copy will be supplied by the Fund.) e. cover letter - optional, supplied by Company and reviewed and approved in advance by Fidelity Legal. 6. The above contents should be received by the Company approximately 3-5 business days before mail date. Individual in charge at Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to Fidelity Legal. 7. Package mailed by the Company. * The Fund must allow at least a 15-day solicitation time to the Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but not including) the meeting, counting backwards. 8. Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used procedure is to sort Cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. Note: Postmarks are not generally needed. A need for postmark information would be-due to an insurance company's internal procedure and has not been required by Fidelity in the past. 9. Signatures on Card checked against legal name on account registration which was printed on the Card. Note: For Example, If the account registration is under "Bertram C. Jones, Trustee," then that is the exact legal name to be printed on the Card and is the signature needed on the Card. 24 10. If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to Customer with an explanatory letter, a new Card and return envelope. The mutilated or illegible Card is disregarded and considered to be not received for purposes of vote tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cards are usually remedied individually. 11. There are various control procedures used to ensure proper tabulation of votes and accuracy of that tabulation. The most prevalent is to sort the Cards as they first arrive into categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. 12. The actual tabulation of votes is done in units which is then converted to shares. (It is very important that the Fund receives the tabulations stated in terms of a percentage and the number of shares.) Fidelity Legal must review and approve tabulation format. 13. Final tabulation in shares is verbally given by the Company to Fidelity Legal on the morning of the meeting not later than 10:00 a.m. Boston time. Fidelity Legal may request an earlier deadline if required to calculate the vote in time for the meeting. 14. A Certification of Mailing and Authorization to Vote Shares will be required from the Company as well as an original copy of the final vote. Fidelity Legal will provide a standard form for each Certification. 15. The Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, Fidelity Legal will be permitted reasonable access to such Cards. 16. All approvals and "signing-off" may be done orally, but must always be followed up in writing. 25 SCHEDULE C Other investment companies currently available under variable annuities or variable life insurance issued by the Company: Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF Total Return Portfolio INVESCO VIF Utilities Portfolio Neuberger and Berman Government Income Portfolio Neuberger and Berman Growth Portfolio Neuberger and Berman Limited Maturity Bond Portfolio Neuberger and Berman Partners Portfolio Van Eck Gold and Natural Resources Portfolio Van Eck Worldwide Balanced Portfolio Fidelity Investments Variable Insurance Products Fund II Asset Manager Portfolio Index 500 Portfolio 26 SCHEDULE D Portfolios of the Fund available as funding vehicles under the Contracts: Growth Portfolio Money Market Portfolio Overseas Portfolio 27 EX-1.A(8)(A)(V) 11 PARTICIPATION AGMT. - FIDELITY II EXHIBIT 1.A (8) (a) (v) PARTICIPATION AGREEMENT Among VARIABLE INSURANCE PRODUCTS FUND II, FIDELITY DISTRIBUTORS CORPORATION and SECURITY LIFE OF DENVER INSURANCE COMPANY THIS AGREEMENT, made and entered into as of the 10th day of August, 1994 by and among, SECURITY LIFE OF DENVER INSURANCE COMPANY, (hereinafter the "Company"), a Colorado corporation, on its own behalf and on behalf of each segregated asset account of the Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), and the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (hereinafter the "Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter"), a Massachusetts corporation. WHEREAS, the Fund engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable life insurance policies and variable annuity contracts (collectively, the "Variable Insurance Products") to be offered by insurance companies which have entered into participation agreements with the Fund and the Underwriter (hereinafter "Participating Insurance Companies"); and WHEREAS, the beneficial interest in the Fund is divided into several series of shares, each designated a "Portfolio" and representing the interest in a particular managed portfolio of securities and other assets (a list of the Portfolios of the Fund to which this Agreement applies is included in Schedule D hereto, as may be amended from time to time); and WHEREAS, the Fund has obtained an order from the Securities and Exchange Commission, dated September 17, 1986 (File No. 812-6422), granting Participating Insurance Companies and variable annuity and variable life insurance separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to permit shares of the Fund to be sold to and held by variable annuity and variable life insurance separate accounts of both affiliated and unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive Order"); and 1 WHEREAS, the Fund is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly registered as an investment adviser under the federal Investment Advisers Act of 1940 and any applicable state securities law; and WHEREAS, the Company has registered or will register certain variable life insurance and variable annuity contracts under the 1933 Act; and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution of the Board of Directors of the Company, on the date shown for such Account on Schedule A hereto, to set aside and invest assets attributable to the aforesaid variable annuity contracts; and WHEREAS, the Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, the Underwriter is registered as a broker dealer with the Securities and Exchange Commission ("SEC") under the Securities Exchange Act of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (hereinafter "NASD"); and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Company intends to purchase shares in the Portfolios on behalf of each Account to fund certain of the aforesaid variable life and variable annuity contracts and the Underwriter is authorized to sell such shares to unit investment trusts such as each Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Company, the Fund and the Underwriter agree as follows: ARTICLE 1. Sale of Fund Shares 1.1. The Underwriter agrees to sell to the Company those shares of the Fund which each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the order for the shares of the Fund. For purposes of this Section 1.1, the Company shall be the designee of the Fund for receipt of such orders from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such order by 9:00 a.m. Boston time on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Fund calculates its net asset value pursuant to the rules of the Securities and Exchange Commission. 2 1.2. The Fund agrees to make its shares available indefinitely for purchase at the applicable net asset value per share by the Company and its Accounts on those days on which the Fund calculates its net asset value pursuant to rules of the Securities and Exchange Commission and the Fund shall use reasonable efforts to calculate such net asset value on each day which the New York Stock Exchange is open for trading. Notwithstanding the foregoing, the Board of Trustees of the Fund (hereinafter the "Board") may refuse to sell shares of any Portfolio to any person, or suspend or terminate the offering of shares of any Portfolio if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of such Portfolio. 1.3. The Fund and the Underwriter agree that shares of the Fund will be sold only to Participating Insurance Companies and their separate accounts. No shares of any Portfolio will be sold to the general public. 1.4. The Fund and the Underwriter will not sell Fund shares to any insurance company or separate account unless an agreement containing provisions substantially the same as Articles I, III, V, VII and Section 2.5 of Article II of this Agreement is in effect to govern such sales. 1.5. The Fund agrees to redeem for cash, on the Company's request, any full or fractional shares of the Fund held by the Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Fund or its designee of the request for redemption. For purposes of this Section 1.5, the Company shall be the designee of the Fund for receipt of requests for redemption from each Account and receipt by such designee shall constitute receipt by the Fund; provided that the Fund receives notice of such request for redemption on the next following Business Day. Proceeds of any net redemption are normally wired to the Company on the Business Day immediately following receipt of the redemption order. 1.6. The Company agrees to purchase and redeem the shares of each Portfolio offered by the then current prospectus of the Fund and in accordance with the provisions of such prospectus. The Company agrees that all net amounts available under the variable annuity contracts with the form number(s) which are listed on Schedule A attached hereto and incorporated herein by this reference, as such Schedule A may be amended from time to time hereafter by mutual written agreement of all the parties hereto, (the "Contracts") shall be invested in the Fund, in such other Funds advised by the Adviser as may be mutually agreed to in writing by the parties hereto, or in the Company's general account, provided that such amounts may also be invested in an investment company other than the Fund if (a) such other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of all the Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter 45 days written notice of its intention to make such other investment company available as a funding vehicle for the Contracts; or (c) such other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Company so informs the Fund and Underwriter prior to their signing this Agreement (a list of such funds appearing on 3 Schedule C to this Agreement); or (d) the Fund or Underwriter consents to the use of such other investment company. 1.7. The Company shall pay for Fund shares on the next Business Day after an order to purchase Fund shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For purpose of Section 2.10 and 2.11, upon receipt by the Fund of the federal funds so wired, such funds shall cease to be the responsibility of the Company and shall become the responsibility of the Fund. 1.8. Issuance and transfer of the Fund's shares will be by book entry only. Stock certificates will not be issued to the Company or any Account. Shares ordered from the Fund will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Fund shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Company of any income, dividends or capital gain distributions payable on the Fund's shares. The Company hereby elects to receive all such income dividends and capital gain distributions as are payable on the Portfolio shares in additional shares of that Portfolio. The Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Fund shall notify the Company of the number of shares so issued as payment of such dividends and distributions. 1.10. The Fund shall make the net asset value per share for each Portfolio available to the Company on a daily basis as soon as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make such net asset value per share available by 7 p.m. Boston time. ARTICLE II. Representations and Warranties 2.1. The Company represents and warrants that the Contracts are or will be registered under the 1933 Act; that the Contracts will be issued and sold in compliance in all material respects with all applicable Federal and State laws and that the sale of the Contracts shall comply in all material respects with state insurance suitability requirements. The Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established each Account prior to any issuance or sale thereof as a segregated asset account under Section 10-7-402 of the Colorado Insurance Laws and has registered or, prior to any issuance or sale of the Contracts, will register each Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 2.2. The Fund represents and warrants that Fund shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sold in 4 compliance with the laws of the State of Colorado and all applicable federal and state securities laws and that the Fund is and shall remain registered under the 1940 Act. The Fund shall amend the Registration Statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Fund shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Fund or the Underwriter. 2.3. The Fund represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") and that it will make every effort to maintain such qualification (under Subchapter M or any successor or similar provision) and that it will notify the Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.4. The Company represents that the Contracts are currently treated as life insurance or annuity contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Fund and the Underwriter immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5. The Fund currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. The Fund has adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no payments for distribution expenses. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a board of trustees, a majority of whom are not interested persons of the Fund, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.6. The Fund makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of the various states except that the Fund represents that the Fund's investment policies, fees and expenses are and shall at all times remain in compliance with the laws of the State of Colorado and the Fund and the Underwriter represent that their respective operations are and shall at all times remain in material compliance with the laws of the State of Colorado to the extent required to perform this Agreement. 2.7. The Underwriter represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the SEC. The Underwriter further represents that it will sell and distribute the Fund shares in accordance with the laws of the State of Colorado and all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.8. The Fund represents that it is lawfully organized and validly existing under the laws of the Commonwealth of Massachusetts and that it does and will comply in all material respects with the 1940 Act. 5 2.9. The Underwriter represents and warrants that the Adviser is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that the Adviser shall perform its obligations for the Fund in compliance in all material respects with the laws of the State of Colorado and any applicable state and federal securities laws. 2.10. The Fund and Underwriter represent and warrant that all of their directors, officers, employees, investment advisers, and other individuals/entities dealing with the money and/or securities of the Fund are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Fund in an amount not less than the minimal coverage as required currently by Rule 17g-(1) of the 1940 Act or related provisions as may be promulgated from time to time. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11. The Company represents and warrants that all of the persons affiliated with it who are described in Rule 17g-(1) under the 1940 Act are covered by a blanket fidelity bond or similar coverage for the benefit of the Fund, in an amount not less $5 million. The aforesaid includes coverage for larceny and embezzlement is issued by a reputable bonding company. The Company agrees to make all reasonable efforts to see that this bond or another bond containing these provisions is always in effect, and agrees to notify the Fund and the Underwriter in the event that such coverage no longer applies. 2.12 The Fund and the Underwriter represent that they will own and control all the pertinent records pertaining to their performance of services under this Agreement. ARTICLE III. Prospectuses and Proxy Statements; Voting 3.1. The Underwriter shall provide the Company (at the Company's expense) with as many copies of the Fund's current prospectus as the Company may reasonably request. If requested by the Company in lieu thereof, the Fund shall provide such documentation (including a final copy of the new prospectus as set in type at the Fund's expense) and other assistance as is reasonably necessary in order for the Company once each year (or more frequently if the prospectus for the Fund is amended) to have the prospectus for the Contracts and the Fund's prospectus printed together in one document (such printing to be at the Company's expense). 3.2. The Fund's prospectus shall state that the Statement of Additional Information for the Fund is available from the Underwriter (or in the Fund's discretion, the Prospectus shall state that such Statement is available from the Fund), and the Underwriter (or the Fund), at its expense, shall print and provide such Statement free of charge to the Company and to any owner of a Contract or prospective owner who requests such Statement. 3.3. The Fund, at its expense, shall provide the Company with copies of its proxy material, reports to shareholders, and other communications to shareholders in such quantity as the Company shall reasonably require for distributing to Contract owners. 6 3.4. If and to the extent required by law the Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Fund shares in accordance with instructions received from Contract owners; and (iii) vote Fund shares for which no instructions have been received in the same proportion as Fund shares of such portfolio for which instructions have been received, so long as and to the extent that the Securities and Exchange Commission continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Company reserves the right to vote Fund shares held in any segregated asset account in its own right, to the extent permitted by law. Participating Insurance Companies shall be responsible for assuring that each of their separate accounts participating in the Fund calculates voting privileges in a manner consistent with the standards set forth on Schedule B attached hereto and incorporated herein by this reference, which standards will also be provided to the other Participating Insurance Companies. 3.5. The Fund will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Fund will either provide for annual meetings or comply with Section 16(c) of the 1940 Act (although the Fund is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund will act in accordance with the Securities and Exchange Commission's interpretation of the requirements of Section 16(a) with respect to periodic elections of trustees and with whatever rules the Commission may promulgate with respect thereto. ARTICLE IV. Sales Material and Information 4.1. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee, each piece of sales literature or other promotional material in which the Fund or its investment adviser or the Underwriter is named, at least fifteen Business Days prior to its use. No such material shall be used if the Fund or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.2. The Company shall not give any information or make any representations or statements on behalf of the Fund or concerning the Fund in connection with the sale of the Contracts other than the information or representations contained in the registration statement or prospectus for the Fund shares, as such registration statement and prospectus may be amended or supplemented from time to time, or in reports or proxy statements for the Fund, or in sales literature or other promotional material approved by the Fund or its designee or by the Underwriter, except with the permission of the Fund or the Underwriter or the designee of either. 4.3. The Fund, Underwriter, or its designee shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which 7 the Company and/or its separate account(s), is named at least fifteen Business Days prior to its use. No such material shall be used if the Company or its designee reasonably objects to such use within fifteen Business Days after receipt of such material. 4.4. The Fund and the Underwriter shall not give any information or make any representations on behalf of the Company or concerning the Company, each Account, or the Contracts other than the information or representations contained in a registration statement or prospectus for the Contracts, as such registration statement and prospectus may be amended or supplemented from time to time, or in published reports for each Account which are in the public domain or approved by the Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Company or its designee, except with the permission of the Company. 4.5. The Fund will provide to the Company at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, proxy statements, sales literature and other promotional materials, applications for exemptions, requests for no-action letters, and all amendments to any of the above, that relate to the Fund or its shares, contemporaneously with the filing of such document with the Securities and Exchange Commission or other regulatory authorities. 4.6. The Company will provide to the Fund at least one complete copy of all registration statements, prospectuses, Statements of Additional Information, reports, solicitations for voting instructions, sales literature and other promotional materials, applications for exemptions, requests for no action letters, and all amendments to any of the above, that relate to the Contracts or each Account, contemporaneously with the filing of such document with the SEC or other regulatory authorities. 4.7. For purposes of this Article IV, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements (such as material published, or designed for use in, a newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media), sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, and registration statements, prospectuses, Statements of Additional Information, shareholder reports, and proxy materials. ARTICLE V. Fees and Expenses 5.1. The Fund and Underwriter shall pay no fee or other compensation to the Company under this agreement, except that if the Fund or any Portfolio adopts and implements a plan 8 pursuant to Rule 12b-1 to finance distribution expenses, then the Underwriter may make payments to the Company or to the underwriter for the Contracts if and in amounts agreed to by the Underwriter in writing and such payments will be made out of existing fees otherwise payable to the Underwriter, past profits of the Underwriter or other resources available to the Underwriter. No such payments shall be made directly by the Fund. Currently, no such payments are contemplated. 5.2. All expenses incident to performance by the Fund under this Agreement shall be paid by the Fund. The Fund shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Fund, in accordance with applicable state laws prior to their sale. The Fund shall bear the expenses for the cost of registration and qualification of the Fund's shares, preparation and filing of the Fund's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type and printing the proxy materials and reports to shareholders (including the costs of printing a prospectus that constitutes an annual report), the preparation of all statements and notices required by any federal or state law, all taxes on the issuance or transfer of the Fund's shares. 5.3. The Company shall bear the expenses of printing and distributing the Fund's prospectus to owners of Contracts issued by the Company and of distributing the Fund's proxy materials and reports to such Contract owners. ARTICLE VI. Diversification 6.1. The Fund will at all times invest money from the Contracts in such a manner as to ensure that the Contracts will be treated as variable contracts under the Code and the regulations issued thereunder. Without limiting the scope of the foregoing, the Fund will at all times comply with Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the diversification requirements for variable annuity, endowment, or life insurance contracts and any amendments or other modifications to such Section or Regulations. In the event of a breach of this Article VI by the Fund, it will take all reasonable steps (a) to notify Company of such breach and (b) to adequately diversify the Fund so as to achieve compliance with the grace period afforded by Regulation 817-5. ARTICLE VII. Potential Conflicts 7.1. The Board will monitor the Fund for the existence of any material irreconcilable conflict between the interests of the contract owners of all separate accounts investing in the Fund. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action 9 or interpretative letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by an insurer to disregard the voting instructions of contract owners. The Board shall promptly inform the Company if it determines that an irreconcilable material conflict exists and the implications thereof. 7.2. The Company will report any potential or existing conflicts of which it is aware to the Board. The Company will assist the Board in carrying out its responsibilities under the Shared Funding Exemptive Order, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Company to inform the Board whenever contract owner voting instructions are disregarded. 7.3. If it is determined by a majority of the Board, or a majority of its disinterested trustees, that a material irreconcilable conflict exists, the Company and other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the disinterested trustees), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1), withdrawing the assets allocable to some or all of the separate accounts from the Fund or any Portfolio and reinvesting such assets in a different investment medium, including (but not limited to) another Portfolio of the Fund, or submitting the question whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any appropriate group (i.e., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected contract owners the option of making such a change; and (2), establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Company to disregard contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Company may be required, at the Fund's election, to withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Any such withdrawal and termination must take place within six (6) months after the Fund gives written notice that this provision is being implemented, and until the end of that six month period the Underwriter and Fund shall continue to accept and implement orders to the Company for the purchase (and redemption) of shares of the Fund. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Company conflicts with the majority of other state regulators, then the Company will withdraw the affected Account's investment in the Fund and terminate this Agreement with respect to such Account within six months after the Board informs 10 the Company in writing that it has determined that such decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the disinterested members of the Board. Until the end of the foregoing six month period, the Underwriter and Fund shall continue to accept and implement orders by the Company for the purchase (and redemption) of shares of the Fund. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the disinterested members of the Board shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Fund be required to establish a new funding medium for the Contracts. The Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Company will withdraw the Account's investment in the Fund and terminate this Agreement within six (6) months after the Board informs the Company in writing of the foregoing determination, provided, however, that such withdrawal and termination shall be limited to the extent required by any such material irreconcilable conflict as determined by a majority of the disinterested members of the Board. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding, (as defined in the Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Shared Funding Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to such Sections are contained in such Rule(s) as so amended or adopted. ARTICLE VIII. Indemnification 8.1. Indemnification By The Company 8.1 (a). The Company agrees to indemnify and hold harmless the Fund and each trustee of the Board and officers and each person, if any, who controls the Fund within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8. 1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including legal and other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or 11 actions in respect thereof) or settlements are related to the sale or acquisition of the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the Registration Statement or prospectus for the Contracts or contained in the Contracts or sales literature for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Company by or on behalf of the Fund for use in the Registration Statement or prospectus for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature of the Fund not supplied by the Company, or persons under its control) or wrongful conduct of the Company or persons under its control, with respect to the sale or distribution of the Contracts or Fund Shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature of the Fund or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon information furnished to the Fund by or on behalf of the Company; or (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company, as limited by and in accordance with the provisions of Sections 8.1(b) and 8.1(c) hereof. 8.l(b). The Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified 12 Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Fund, whichever is applicable. 8.1(c). The Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Company of any such claim shall not relieve the Company from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Company shall be entitled to participate, at its own expense, in the defense of such action. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Company to such party of the Company's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Company will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.1 (d). The Indemnified Parties will promptly notify the Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Fund Shares or the Contracts or the operation of the Fund. 8.2. Indemnification by the Underwriter 8.2(a). The Underwriter agrees to indemnify and hold harmless the Company and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Underwriter) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Fund's shares or the Contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or sales literature of the Fund (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to 13 be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished to the Underwriter or Fund by or on behalf of the Company for use in the Registration Statement or prospectus for the Fund or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Fund shares; or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the Registration Statement, prospectus or sales literature for the Contracts not supplied by the Underwriter or persons under its control) or wrongful conduct of the Fund, Adviser or Underwriter or persons under their control, with respect to the sale or distribution of the Contracts or Fund shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a Registration Statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished to the Company by or on behalf of the Fund; or (iv) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements specified in Article VI of this Agreement); or (v) arise out of or result from any material breach of any representation and/or warranty made by the Underwriter in this Agreement or arise out of or result from any other material breach of this Agreement by the Underwriter; as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. 8.2(b). The Underwriter shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation to which an Indemnified Party would otherwise be subject by reason of such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to each Company or the Account, whichever is applicable. 8.2(c). The Underwriter shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have 14 notified the Underwriter in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Underwriter of any such claim shall not relieve the Underwriter from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Underwriter will be entitled to participate, at its own expense, in the defense thereof. The Underwriter also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Underwriter to such party of the Underwriter's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Underwriter will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.2(d). The Company agrees promptly to notify the Underwriter of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of each Account. 8.3. Indemnification By the Fund 8.3(a). The Fund agrees to indemnify and hold harmless the Company, and each of its directors and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Fund) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Fund and: (i) arise as a result of any failure by the Fund to provide the services and furnish the materials under the terms of this Agreement (including a failure to comply with the diversification requirements specified in Article VI of this Agreement);or (ii) arise out of or result from any material breach of any representation and/or warranty made by the Fund in this Agreement or arise out of or result from any other material breach of this Agreement by the Fund; as limited by and in accordance with the provisions of Sections 8.3(b) and 8.3(c) hereof. 8.3(b). The Fund shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified 15 Party as such may arise from such Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of such Indemnified Party's duties or by reason of such Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Company, the Fund, the Underwriter or each Account, whichever is applicable. 8.3(c). The Fund shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless such Indemnified Party shall have notified the Fund in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon such Indemnified Party (or after such Indemnified Party shall have received notice of such service on any designated agent), but failure to notify the Fund of any such claim shall not relieve the Fund from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Fund will be entitled to participate, at its own expense, in the defense thereof. The Fund also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action. After notice from the Fund to such party of the Fund's election to assume the defense thereof, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Fund will not be liable to such party under this Agreement for any legal or other expenses subsequently incurred by such party independently in connection with the defense thereof other than reasonable costs of investigation. 8.3(d). The Company and the Underwriter agree promptly to notify the Fund of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, with respect to the operation of either Account, or the sale or acquisition of shares of the Fund. ARTICLE IX. Applicable Law 9.1. This Agreement shall be construed and the provisions hereof interpreted under and in accordance with the laws of the Commonwealth of Massachusetts. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934 and 1940 acts, and the rules and regulations and rulings thereunder, including such exemptions from those statutes, rules and regulations as the Securities and Exchange Commission may grant (including, but not limited to, the Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. Termination 10.1. This Agreement shall continue in full force and effect until the first to occur of: 16 (a) termination by any party for any reason by sixty (60) days advance written notice delivered to the other parties; or (b) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio based upon the Company's determination that shares of such Portfolio are not reasonably available to meet the requirements of the Contracts; or (c) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event any of the Portfolio's shares are not registered, issued or sold in accordance with applicable state and/or federal law or such law precludes the use of such shares as the underlying investment media of the Contracts issued or to be issued by the Company; or (d) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio ceases to qualify as a Regulated Investment Company under Subchapter M of the Code or under any successor or similar provision, or if the Company reasonably believes that the Fund may fail to so qualify; or (e) termination by the Company by written notice to the Fund and the Underwriter with respect to any Portfolio in the event that such Portfolio fails to meet the diversification requirements specified in Article VI hereof; or (f) termination by either the Fund or the Underwriter by written notice to the Company, if either one or both of the Fund or the Underwriter respectively, shall determine, in their sole judgment exercised in good faith, that the Company and/or its affiliated companies has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (g) termination by the Company by written notice to the Fund and the Underwriter, if the Company shall determine, in its sole judgment exercised in good faith, that either the Fund or the Underwriter has suffered a material adverse change in its business, operations, financial condition or prospects since the date of this Agreement or is the subject of material adverse publicity; or (h) termination by the Fund or the Underwriter by written notice to the Company, if the Company gives the Fund and the Underwriter the written notice specified in Section 1.6(b) hereof and at the time such notice was given there was no notice of termination outstanding under any other provision of this Agreement; provided, however any termination under this Section 10.1 (h) shall be effective forty-five (45) days after the notice specified in Section 1.6(b) was given. 17 10.2. Effect of Termination. Notwithstanding any termination of this Agreement, the Fund and the Underwriter shall at the option of the Company, continue to make available additional shares of the Fund pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts shall be permitted to reallocate investments in the Fund, redeem investments in the Fund and/or invest in the Fund upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.2 shall not apply to any terminations under Article VII and the effect of such Article VII terminations shall be governed by Article VII of this Agreement. 10.3. The Company shall not redeem Fund shares attributable to the Contracts (as opposed to Fund shares attributable to the Company's assets held in the Account) except (i) as necessary to implement Contract Owner initiated or approved transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (hereinafter referred to as a "Legally Required Redemption"). Upon request, the Company will promptly furnish to the Fund and the Underwriter the opinion of counsel for the Company (which counsel shall be reasonably satisfactory to the Fund and the Underwriter) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. Furthermore, except in cases where permitted under the terms of the Contracts, the Company shall not prevent Contract Owners from allocating payments to a Portfolio that was otherwise available under the Contracts without first giving the Fund or the Underwriter 90 days notice of its intention to do so. ARTICLE XI. Notices Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of such party set forth below or at such other address as such party may from time to time specify in writing to the other party. If to the Fund: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer If to the Company: Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Attention: Bonnie Dailey If to the Underwriter: 82 Devonshire Street Boston, Massachusetts 02109 Attention: Treasurer 18 ARTICLE XII. Miscellaneous 12.1. All persons dealing with the Fund must look solely to the property of the Fund for the enforcement of any claims against the Fund as neither the Board, officers, agents or shareholders assume any personal liability for obligations entered into on behalf of the Fund. 12.2. Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing, by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information until such time as it may come into the public domain without the express written consent of the affected party. 12.3. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.4. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.5. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.6. Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the SEC, the NASD and state insurance regulators) and shall permit such authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. Notwithstanding the generality of the foregoing, each party hereto further agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations of the Company are being conducted in a manner consistent with the California Insurance Regulations and any other applicable law or regulations. The Fund agrees that the Company shall have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement to the requirements of the California Insurance Department. 12.7. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 12.8. This Agreement or any of the rights and obligations hereunder may not be assigned by any party without the prior written consent of all parties hereto; provided, however, that the Underwriter may assign this Agreement or any rights or obligations hereunder to any affiliate of 19 or company under common control with the Underwriter, if such assignee is duly licensed and registered to perform the obligations of the Underwriter under this Agreement. 12.9. The Company shall furnish, or shall cause to be furnished, to the Fund or its designee copies of the following reports: (a) the Company's annual statement prepared under statutory accounting principles) and annual report (prepared under generally accepted accounting principles ("GAAP")), as soon as practical and in any event within 90 days after the end of each fiscal year; (b) the Company's quarterly statements (statutory and GAAP), as soon as practical and in any event within 45 days after the end of each quarterly period; (c) any financial statement, proxy statement, notice or report of the Company sent to stockholders and/or policyholders, as soon as practical after the delivery thereof to stockholders; (d) any registration statement (without exhibits) and financial reports of the Company filed with the Securities and Exchange Commission or any state insurance regulator, as soon as practical after the filing thereof; (e) any other report submitted to the Company by independent accountants in connection with any annual, interim or special audit made by them of the books of the Company, as soon as practical after the receipt thereof. 20 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified below. SECURITY LIFE OF DENVER INSURANCE COMPANY By its authorized officer, By: /s/ Steve Largent Name: Stephan M. Largent Title: Vice President VARIABLE INSURANCE PRODUCTS FUND II By its authorized officer, By: /s/ J. Gary Burkhead Name: J. Gary Burkhead Title: Senior Vice President FIDELITY DISTRIBUTORS CORPORATION By its authorized officer, By: /s/ Kurt A. Lange Name: Kurt A. Lange Title: President 21 Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account Security Life Separate Account Al The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract Security Life Separate Account L1 First Line (Flexible Premium Variable Life Insurance Policy) 22 SCHEDULE B PROXY VOTING PROCEDURE The following is a list of procedures and corresponding responsibilities for the handling of proxies relating to the Fund by the Underwriter, the Fund and the Company. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Company" shall also include the department or third party assigned by the Insurance Company to perform the steps delineated below. 1. The number of proxy proposals is given to the Company by the Underwriter as early as possible before the date set by the Fund for the shareholder meeting to facilitate the establishment of tabulation procedures. At this time the Underwriter will inform the Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before meeting. 2. Promptly after the Record Date, the Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each contract owner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts as of the Record Date. Note: The number of proxy statements is determined by the activities described in Step #2. The Company will use its best efforts to call in the number of Customers to Fidelity, as soon as possible, but no later than two weeks after the Record Date. 3. The Fund's Annual Report must be sent to each Customer by the Company either before or together with the Customers' receipt of a proxy statement. Underwriter will provide at least one copy of the last Annual Report to the Company. 4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Company by the Fund. The Company, at its expense, shall produce and personalize the Voting Instruction Cards. The Legal Department of the Underwriter or its affiliate ("Fidelity Legal") must approve the Card before it is printed. Allow approximately 2-4 business days for printing information on the Cards. Information commonly found on the Cards includes: a. name (legal name as found on account registration) b. address c. Fund or account number d. coding to state number of units e. individual Card number for use in tracking and verification of votes (already on Cards as printed by the Fund) (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) 23 5. During this time, Fidelity Legal will develop, produce, and the Fund will pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Insurance Company). Contents of envelope sent to Customers by Company will include: a. Voting Instruction Card(s) b. One proxy notice and statement (one document) c. return envelope (postage pre-paid by Company) addressed to the Company or its tabulation agent d. "urge buckslip" - optional, but recommended. (This is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important. One copy will be supplied by the Fund.) e. cover letter - optional, supplied by Company and reviewed and approved in advance by Fidelity Legal. 6. The above contents should be received by the Company approximately 3-5 business days before mail date. Individual in charge at Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to Fidelity Legal. 7. Package mailed by the Company. * The Fund must allow at least a 15-day solicitation time to the Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but not including) the meeting, counting backwards. 8. Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used procedure is to sort Cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. Note: Postmarks are not generally needed. A need for postmark information would be due to an insurance company's internal procedure and has not been required by Fidelity in the past. 9. Signatures on Card checked against legal name on account registration which was printed on the Card. Note: For Example, If the account registration is under "Bertram C. Jones, Trustee," then that is the exact legal name to be printed on the Card and is the signature needed on the Card. 10. If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to Customer with an explanatory letter, a new Card and return envelope. The 24 mutilated or illegible Card is disregarded and considered to be not received for purposes of vote tabulation. Any Cards that have "kicked out" (e.g. mutilated, illegible) of the procedure are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cards are usually remedied individually. 11. There are various control procedures used to ensure proper tabulation of votes and accuracy of that tabulation. The most prevalent is to sort the Cards as they first arrive into categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. 12. The actual tabulation of votes is done in units which is then converted to shares. (It is very important that the Fund receives the tabulations stated in terms of a percentage and the number of shares.) Fidelity Legal must review and approve tabulation format. 13. Final tabulation in shares is verbally given by the Company to Fidelity Legal on the morning of the meeting not later than 10:00 a.m. Boston time. Fidelity Legal may request an earlier deadline if required to calculate the vote in time for the meeting. 14. A Certification of Mailing and Authorization to Vote Shares will be required from the Company as well as an original copy of the final vote. Fidelity Legal will provide a standard form for each Certification. 15. The Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, Fidelity Legal will be permitted reasonable access to such Cards. 16. All approvals and "signing-off" may be done orally, but must always be followed up in writing. 25 SCHEDULE C Other investment companies currently available under variable annuities or variable life insurance issued by the Company: Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF Total Return Portfolio INVESCO VIF Utilities Portfolio Neuberger and Berman Government Income Portfolio Neuberger and Berman Growth Portfolio Neuberger and Berman Limited Maturity Bond Portfolio Neuberger and Berman Partners Portfolio Van Eck Gold and Natural Resources Portfolio Van Eck Worldwide Balanced Portfolio Fidelity Investments Variable Insurance Products Fund Growth Portfolio Money Market Portfolio Overseas Portfolio 26 SCHEDULE D Portfolios of the Fund available. as funding vehicles under the Contracts: Asset Manager Portfolio Index 500 Portfolio 27 EX-1.A(8)(A)(VI) 12 PARTICIPATION AGMT. - INVESCO EXHIBIT 1.A (8) (a) (vi) PARTICIPATION AGREEMENT Among INVESCO VARIABLE INVESTMENT FUNDS, INC. INVESCO FUNDS GROUP, INC. and SECURITY LIFE OF DENVER INSURANCE COMPANY THIS AGREEMENT, made and entered into this 26th day of August 1994 by and among SECURITY LIFE OF DENVER INSURANCE COMPANY, (hereinafter the "Insurance Company"), a Colorado corporation, on its own behalf and on behalf of each segregated asset account of the Insurance Company set forth on Schedule A hereto as may be amended from time to time (each such account hereinafter referred to as the "Account"), INVESCO VARIABLE INVESTMENT FUNDS, INC., a Maryland corporation (the "Company") and INVESCO FUNDS GROUP, INC. ("INVESCO"), a Delaware corporation. WHEREAS, the Company engages in business as an open-end management investment company and is available to act as the investment vehicle for separate accounts established for variable annuity and life insurance contracts to be offered by insurance companies which have entered into participation agreements substantially identical to this Agreement ("Participating Insurance Companies"); and WHEREAS, the beneficial interest in the Company is divided into several series of shares, each designated a "Fund" and representing the interest in a particular managed portfolio of securities and other assets; and WHEREAS, the Company has obtained an order from the Securities and Exchange Commission (the "Commission"), dated December 29, 1993 (File No. 812-8590), granting Participating Insurance Companies and their separate accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended, (the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent necessary to permit shares of the Company to be sold to and held by variable annuity and variable life insurance separate accounts of life insurance companies that may or may not be affiliated with one another (the "Mixed and Shared Funding Exemptive Order"); and WHEREAS, the Company is registered as an open-end management investment company under the 1940 Act and its shares are registered under the Securities Act of 1933, as amended (hereinafter the "1933 Act"); and WHEREAS, INVESCO is duly registered as an investment adviser under the Investment Advisers Act of 1940 and any applicable state securities law and as a broker dealer under the Securities Exchange Act of 1934, as amended, (the "1934 Act"), and is a member in good standing of the National Association of Securities Dealers, Inc. (the "NASD"); and 1 WHEREAS, the Insurance Company has registered under the 1933 Act, or will register under the 1933 Act, certain variable annuity and variable life insurance contracts identified by the form number(s) listed on Schedule B to this Agreement, as amended from time to time hereafter by mutual written agreement of all the parties hereto (the "Contracts"); and WHEREAS, each Account is a duly organized, validly existing segregated asset account, established by resolution of the board of directors of the Insurance Company on the date shown for that Account on Schedule A hereto, to set aside and invest assets attributable to the Contracts; and WHEREAS, the Insurance Company has registered or will register each Account as a unit investment trust under the 1940 Act; and WHEREAS, to the extent permitted by applicable insurance laws and regulations, the Insurance Company intends to purchase shares in the Funds on behalf of the Accounts to fund the Contracts and INVESCO is authorized to sell such shares to unit investment trusts such as the Account at net asset value; NOW, THEREFORE, in consideration of their mutual promises, the Insurance Company, the Company and INVESCO agree as follows: ARTICLE I. Sale of Company Shares 1.1. INVESCO agrees to sell to the Insurance Company those shares of the Company which each Account orders, executing such orders on a daily basis at the net asset value next computed after receipt by the Company or its designee of the order for the shares of the Company. For purposes of this Section 1.1, the Insurance Company shall be the designee of the Company for receipt of such orders from the Accounts and receipt by such designee shall constitute receipt by the Company; provided, that the Company receives notice of such order by 8:00 a.m., Mountain Time, on the next following Business Day. "Business Day" shall mean any day on which the New York Stock Exchange is open for trading and on which the Company calculates its net asset value pursuant to the rules of the Commission. 1.2. The Company agrees to make its shares available for purchase at the applicable net asset value per share by the Insurance Company and its Accounts on those days on which the Company calculates its Funds' net asset values pursuant to rules of the Commission and the Company shall use reasonable efforts to calculate its Funds' net asset values on each day on which the New York Stock Exchange is open for trading. Notwithstanding the foregoing, the board of directors of the Company (hereinafter the "Board") may refuse to sell shares of any Fund to any person, or suspend or terminate the offering of shares of any Fund if such action is required by law or by regulatory authorities having jurisdiction or is, in the sole discretion of the Board acting in good faith and in light of their fiduciary duties under federal and any applicable state laws, necessary in the best interests of the shareholders of that Fund. 2 1.3. The Company and INVESCO agree that shares of the Company will be sold only to Participating Insurance Companies and their separate accounts. No shares of any Fund will be sold to the general public. 1.4. The Company and INVESCO will not sell Company shares to any insurance company or separate account unless an agreement containing provisions substantially the same as Sections 2.1, 3.4, 3.5 and Article VII of this Agreement is in effect to govern such sales. 1.5. The Company agrees to redeem, on the Insurance Company's request, any full or fractional shares of the Company held by the Insurance Company, executing such requests on a daily basis at the net asset value next computed after receipt by the Company or its designee of the request for redemption. For purposes of this Section 1.5, the Insurance Company shall be the designee of the Company for receipt of requests for redemption from each Account and receipt by that designee shall constitute receipt by the Company; provided that the Company receives notice of the request for redemption by 8:00 a.m., Mountain Time, on the next following Business Day. 1.6. The Insurance Company agrees to purchase and redeem the shares of each Fund offered by the then-current prospectus of the Company in accordance with the provisions of that prospectus. The Insurance Company agrees that all net amounts available under the Contracts shall be invested in the Company, in such other Funds advised by INVESCO as may be mutually agreed to in writing by the parties hereto, or in the Insurance Company's general account, provided that such amounts may also be invested in an investment company other than the Company if (a) the other investment company, or series thereof, has investment objectives or policies that are substantially different from the investment objectives and policies of all the Funds of the Company; or (b) the Insurance Company gives the Company and INVESCO 45 days written notice of its intention to make the other investment company available as a funding vehicle for the Contracts; or (c) the other investment company was available as a funding vehicle for the Contracts prior to the date of this Agreement and the Insurance Company so informs the Company and INVESCO prior to their signing this Agreement; or (d) the Company or INVESCO consents to the use of the other investment company. 1.7. The Insurance Company shall pay for Company shares by 9:00 a.m., Mountain Time, on the next Business Day after an order to purchase Company shares is made in accordance with the provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire. For the purpose of Sections 2.10 and 2.11, upon receipt by the Company of the federal funds so wired, such funds shall cease to be the responsibility of the Insurance Company and shall become the responsibility of the Company. Payment of net redemption proceeds (aggregate redemptions of a Fund's shares by an Account minus aggregate purchases of that Fund's shares by that Account) of less than $1 million for a given Business Day will be made by wiring federal funds to the Insurance Company on the next Business Day after receipt of the redemption request. Payment of net redemption proceeds of $1 million or more will be by wiring federal funds within seven days after receipt of the redemption request. Notwithstanding the foregoing, in the event that one or more Funds has insufficient cash on hand to pay net redemptions on the next Business 3 Day, and if such Fund has determined to settle redemption transactions for all of its shareholders on a delayed basis (more than one Business Day, but in no event more than seven calendar days, after the date on which the redemption order is received, unless otherwise permitted by an order of the Commission under Section 22(e) of the 1940 Act), the Company shall be permitted to delay sending redemption proceeds to the Insurance Company by the same number of days that the Company is delaying sending redemption proceeds to the other shareholders of the Fund. Redemptions of up to the lesser of $250,000 or 1% of the net asset value of the Fund whose shares are to be redeemed in any 90-day period will be made in cash. Redemptions in excess of that amount in any 90-day period may, in the sole discretion of the Company, be in-kind redemptions, with the securities to be delivered in payment of redemptions selected by the Company and valued at the value assigned to them in computing the Fund's net asset value per share. 1.8. Issuance and transfer of the Company's shares will be by book entry only. Stock certificates will not be issued to the Insurance Company or any Account. Shares ordered from the Company will be recorded in an appropriate title for each Account or the appropriate subaccount of each Account. 1.9. The Company shall furnish same day notice (by wire or telephone, followed by written confirmation) to the Insurance Company of any income, dividends or capital gain distributions payable on the Funds' shares. The Insurance Company hereby elects to receive all income dividends and capital gain distributions payable on a Fund's shares in additional shares of that Fund. The Insurance Company reserves the right to revoke this election and to receive all such income dividends and capital gain distributions in cash. The Company shall notify the Insurance Company of the number of shares issued as payment of dividends and distributions. 1.10. The Company shall make the net asset value per share for each Fund available to the Insurance Company on a daily basis as soon, as reasonably practical after the net asset value per share is calculated and shall use its best efforts to make those per-share net asset values available by 6:00 p.m., Mountain Time. ARTICLE II. Representations and Warranties 2.1. The Insurance Company represents and warrants that the Contracts are, or will be, registered under the 1933 Act; that the Contracts will be issued and sold in compliance in all material respects with all applicable federal and state laws and that the sale of the Contracts shall comply in all material respects with applicable state insurance suitability requirements. The Insurance Company further represents and warrants that it is an insurance company duly organized and in good standing under applicable law and that it has legally and validly established the Account prior to any issuance or sale thereof as a segregated asset account under Colorado Revised Statutes Section 10-7-402 and has registered, or prior to any issuance or sale of the Contracts will register, the Account as a unit investment trust in accordance with the provisions of the 1940 Act to serve as a segregated investment account for the Contracts. 4 2.2. The Company represents and warrants that Company shares sold pursuant to this Agreement shall be registered under the 1933 Act, duly authorized for issuance and sale in compliance with the laws of the State of Maryland and all applicable federal securities laws and that the Company is and shall remain registered under the 1940 Act. The Company shall amend the registration statement for its shares under the 1933 Act and the 1940 Act from time to time as required in order to effect the continuous offering of its shares. The Company shall register and qualify the shares for sale in accordance with the laws of the various states only if and to the extent deemed advisable by the Company or INVESCO. 2.3. The Company represents that it is currently qualified as a Regulated Investment Company under Subchapter M of the Internal Revenue Code of 1986, as amended, (the "Code") and that it will make every effort to maintain that qualification (under Subchapter M or any successor or similar provision) and that it will notify the Insurance Company immediately upon having a reasonable basis for believing that it has ceased to so qualify or that it might not so qualify in the future. 2.4. The Insurance Company represents and warrants that the Contracts are currently treated as annuity or life insurance contracts, under applicable provisions of the Code and that it will make every effort to maintain such treatment and that it will notify the Company and INVESCO immediately upon having a reasonable basis for believing that the Contracts have ceased to be so treated or that they might not be so treated in the future. 2.5. The Company currently does not intend to make any payments to finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or otherwise, although it may make such payments in the future. To the extent that it decides to finance distribution expenses pursuant to Rule 12b-1, the Company undertakes to have a board of directors, a majority of whom are not interested persons of the Company, formulate and approve any plan under Rule 12b-1 to finance distribution expenses. 2.6. The Company makes no representation as to whether any aspect of its operations (including, but not limited to, fees and expenses and investment policies) complies with the insurance laws or regulations of the various states. 2.7. INVESCO represents and warrants that it is a member in good standing of the NASD and is registered as a broker-dealer with the Commission. INVESCO further represents that it will sell and distribute the Company shares in accordance with the laws of the State of Maryland and all applicable state and federal securities laws, including without limitation the 1933 Act, the 1934 Act, and the 1940 Act. 2.8. The Company represents that it is lawfully organized and validly existing under the laws of the State of Maryland and that it does and will comply in all material respects with the 1940 Act. 5 2.9. INVESCO represents and warrants that it is and shall remain duly registered in all material respects under all applicable federal and state securities laws and that it shall perform its obligations for the Company in compliance in all material respects with the laws of the State of Colorado and any applicable state and federal securities laws. 2.10. The Company and INVESCO represent and warrant that all of their officers, employees, investment advisers, investment sub-advisers, and other individuals or entities described in Rule 17g-1 under the 1940 Act are, and shall continue to be at all times, covered by a blanket fidelity bond or similar coverage for the benefit of the Company in an amount not less than the minimum coverage required currently by Rule 17g-1 under the 1940 Act or related provisions as may be promulgated from time to time. That fidelity bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.11. The Insurance- Company represents and warrants that all of its officers, employees, investment advisers, and other individuals or entities described in Rule 17g-1 under the 1940 Act are and shall continue to be at all times covered by a blanket fidelity bond or similar coverage for the benefit of the Company, in an amount not less than the minimum coverage required currently for entities subject to the requirements of Rule 17g-1 under the 1940 Act or related provisions or may be promulgated from time to time. The aforesaid Bond shall include coverage for larceny and embezzlement and shall be issued by a reputable bonding company. 2.12. The Insurance Company represents and warrants that it will not purchase Company shares with Account assets derived from tax-qualified retirement plans except indirectly, through Contracts purchased in connection with such plans. 2.13. The Insurance Company represents and warrants that the allocation of expenses between the Insurance Company and the Company and/or INVESCO in this Agreement is substantially similar to the allocation provisions in the majority of the Insurance Company's current participation agreements with other funds. ARTICLE III. Prospectuses and Proxy Statements; Voting 3.1. The Company will bear the printing costs (or duplicating costs with respect to the statement of additional information) and mailing costs associated with the delivery of the following Company (or individual Fund) documents, and any supplements thereto, to existing Contract owners of the Insurance Company whose Contract values are invested in the Company: (i) prospectuses and statements of additional information; (ii) annual and semi-annual reports; and (iii) proxy materials. 6 3.2. The Insurance Company will submit any bills for printing, duplicating and/or mailing costs, relating to the Company documents described above, to Company for reimbursement by the Company. The Insurance Company shall monitor such costs and shall use its best efforts to control these costs. The Insurance Company will provide the Company (or INVESCO) on a semi-annual basis, or more frequently as reasonably requested by the Company (or INVESCO), with a current tabulation of the number of existing Contract owners of the Insurance Company whose Contract values are invested in the Company. This tabulation will be sent to the Company (or INVESCO) in the form of a letter signed by a duly authorized officer of the Insurance Company attesting to the accuracy of the information contained in the letter. If requested by the Insurance Company, the Company shall provide such documentation (including a final copy of the Company's prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for the Insurance Company to print together in one document the current prospectus for the Company, the current prospectus for the Contracts issued by the Insurance Company and/or the prospectuses of other investment companies available for purchase by the Accounts. In the event that such prospectuses are printed together in one document, the costs of printing and mailing copies of the document shall be allocated based on the Company's share of the total costs determined according to the number of pages of the parties' and other investment companies' respective portions of the document. 3.3. The Company will provide, at its expense, the Insurance Company with the following Company (or individual Fund) documents, and any supplements thereto, with respect to prospective Contract owners of the Insurance Company, and Insurance Company shall bear the expense of printing and mailing such documents: (i) camera ready copy of the current prospectus for printing by the Insurance Company; (ii) a copy of the statement of additional information suitable for duplication; and (iii) camera ready copy of the annual and semi-annual reports for printing by the Insurance Company. 3.4. If and to the extent required by law, the Insurance Company shall: (i) solicit voting instructions from Contract owners; (ii) vote the Company shares in accordance with instructions received from Contract owners; and (iii) vote Company shares for which no instructions have been received in the same proportion as Company shares of such Fund for which instructions have been received: 7 so long as and to the extent that the Commission continues to interpret the 1940 Act to require pass-through voting privileges for variable contract owners. The Insurance Company reserves the right to vote Company shares held in any segregated asset account in its own right, to the extent permitted by law. Participating Insurance Companies shall be responsible for assuring that each of their separate accounts participating in the Company calculates voting privileges in a manner consistent with the standards set forth on Schedule C attached hereto and incorporated herein by this reference, which standards will also be provided to the other Participating Insurance Companies. The Insurance Company shall fulfill its obligations under, and abide by the terms and conditions of, the Mixed and Shared Funding Exemptive Order. 3.5. The Company will comply with all provisions of the 1940 Act requiring voting by shareholders, and in particular the Company will either provide for annual meetings (except insofar as the Commission may interpret Section 16 of the 1940 Act not to require such meetings) or, as the Company currently intends, comply with Section 16(c) of the 1940 Act (although the Company is not one of the trusts described in Section 16(c) of that Act) as well as with Sections 16(a) and, if and when applicable, 16(b). Further, the Company will act in accordance with the Commission's interpretation of the requirements of Section 16(a) with respect to periodic elections of directors and with whatever rules the Commission may promulgate with respect thereto. ARTICLE IV. Sales Material and Information 4.1. The Insurance Company shall furnish, or shall cause to be furnished, to the Company or its designee, each piece of sales literature or other promotional material in which the Company, a sub-adviser of one of the Funds, or INVESCO is named, at least fifteen calendar days prior to its use. No such material shall be used if the Company or its designee objects to such use within ten calendar days after receipt of such material. 4.2. The Insurance Company shall not give any information or make any representations or statements on behalf of the Company or concerning the Company in connection with the sale of the Contracts other than the information or representations contained in the registration statement, prospectus or statement of additional information for the Company's shares, as such registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in reports or proxy statements for the Company, or in sales literature or other promotional material approved by the Company or its designee or by INVESCO, except with the permission of the Company or INVESCO. 4.3. The Company, INVESCO, or its designee shall furnish, or shall cause to be furnished, to the Insurance Company or its designee, each piece of sales literature or other promotional material in which the Insurance Company and/or its separate account(s), is named at least fifteen calendar days prior to its use. No such material shall be used if the Insurance Company or its designee objects to such use within ten calendar days after receipt of that material. 8 4.4. The Company and INVESCO shall not give any information or make any representations on behalf of the Insurance Company or concerning the Insurance Company, the Account, or the Contracts other than the information or representations contained in a registration statement, prospectus or statement of additional information for the Contracts, as that registration statement, prospectus and statement of additional information may be amended or supplemented from time to time, or in published reports for the Account which are in the public domain or approved by the Insurance Company for distribution to Contract owners, or in sales literature or other promotional material approved by the Insurance Company or its designee, except with the permission of the Insurance Company. 4.5. The Company will provide to the Insurance Company at least one complete copy of each registration statement, prospectus, statement of additional information, report, proxy statement, piece of sales literature or other promotional material, application for exemption, request for no-action letter, and any amendment to any of the above, that relate to the Company or its shares, contemporaneously with the filing of the document with the Commission, the NASD, or other regulatory authorities. 4.6. The Insurance Company will provide to the Company at least one complete copy of each registration statement, prospectus, statement of additional information, report, solicitation for voting instructions, piece of sales literature and other promotional material, application for exemption, request for no action letter, and any amendment to any of the above, that relates to the Contracts or the Account, contemporaneously with the filing of the document with the Commission, the NASD, or other regulatory authorities. 4.7. For purposes of this Agreement, the phrase "sales literature or other promotional material" includes, but is not limited to, advertisements, newspaper, magazine, or other periodical, radio, television, telephone or tape recording, videotape display, signs or billboards, motion pictures, or other public media, sales literature (i.e., any written communication distributed or made generally available to customers or the public, including brochures, circulars, research reports, market letters, form letters, seminar texts, reprints or excerpts of any other advertisement, sales literature, or published article), educational or training materials or other communications distributed or made generally available to some or all agents or employees, and registration statements, prospectuses, statements of additional information, shareholder reports, and proxy materials. 4.8. At the request of any party to this Agreement, each other party will: make available to the other party's independent auditors and/or representative of the appropriate regulatory agencies, all records, data and access to operating procedures that may be reasonably requested. Company agrees that Insurance Company shall have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement pursuant to the requirements of the California Insurance Department. However, Company and INVESCO shall own and control all of their respective records pertaining to their performance of the services under this Agreement. 9 ARTICLE V. Fees and Expenses 5.1. The Company and INVESCO shall pay no fee or other compensation to the Insurance Company under this agreement, except that if the Company or any Fund adopts and implements a plan pursuant to Rule 12b-1 to finance distribution expenses, then INVESCO may make payments to the Insurance Company if and in amounts agreed to by INVESCO in writing, subject to review by the board of directors of the Company. No such payments shall be made directly by the Company. 5.2. All expenses incident to performance by the Company under this Agreement shall be paid by the Company. The Company shall see to it that all its shares are registered and authorized for issuance in accordance with applicable federal law and, if and to the extent deemed advisable by the Company or INVESCO, in accordance with applicable state laws prior to their sale. The Company shall bear the expenses for the cost of registration and qualification of the Company's shares, preparation and filing of the Company's prospectus and registration statement, proxy materials and reports, setting the prospectus in type, setting in type and printing the proxy materials and reports to shareholders (including the costs of printing a prospectus that constitutes an annual report), the preparation of all statements and notices required by any federal or state law, and all taxes on the issuance or transfer of the Company's shares. 5.3. The Insurance Company shall bear the expenses of printing and distributing to Contract owners the Contract prospectuses and, except as provided in Section 3.1, of distributing to Contract owners the Company's prospectus, proxy materials and reports. ARTICLE VI. Diversification 6.1. The Company will, at the end of each calendar quarter, comply with Section 817(h) of the Code and Treasury Regulation 1.817-5 relating to the diversification requirements for variable annuity, endowment, modified endowment or life insurance contracts and any amendments or other modifications to that Section or Regulation. ARTICLE VII. Potential Conflicts 7.1. The Board will monitor the Company for the existence of any material irreconcilable conflict between the interests of the variable contract owners of all separate accounts investing in the Company. An irreconcilable material conflict may arise for a variety of reasons, including: (a) an action by any state insurance regulatory authority; (b) a change in applicable federal or state insurance, tax, or securities laws or regulations, or a public ruling, private letter ruling, no-action or interpretive letter, or any similar action by insurance, tax, or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Fund are being managed; (e) a difference in voting instructions given by variable annuity contract and variable life insurance contract owners; or (f) a decision by a Participating Insurance Company to disregard the voting 10 instructions of variable contract owners. The Board shall promptly inform the Insurance Company if it determines that an irreconcilable material conflict exists and the implications thereof. The Board shall have sole authority to determine whether an irreconcilable material conflict exists, and such determination shall be binding upon the Insurance Company. 7.2. The Insurance Company will report promptly any potential or existing conflicts of which it is aware to the Board. The Insurance Company will assist the Board in carrying out its responsibilities under the Mixed and Shared Funding Exemptive Order, by providing the Board with all information reasonably necessary for the Board to consider any issues raised. This includes, but is not limited to, an obligation by the Insurance Company to inform the Board whenever Contract owner voting instructions are to be disregarded. Such responsibilities shall be carried out by Insurance Company with a view only to the interests of the Contract owners. 7.3. If it is determined by a majority of the Board, or a majority of its directors who are not interested persons of the Company, INVESCO, or any subadviser to any of the Funds (the "Independent Directors"), that a material irreconcilable conflict exists, the Insurance Company and/or other Participating Insurance Companies shall, at their expense and to the extent reasonably practicable (as determined by a majority of the Independent Directors), take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, up to and including: (1), withdrawing the assets allocable to some or all of the separate accounts from the Company or any Fund and reinvesting those assets in a different investment medium, including (but not limited to) another Fund of the Company, or submitting the question whether such segregation should be implemented to a vote of all affected variable contract owners and, as appropriate, segregating the assets of any appropriate group (e.g., annuity contract owners, life insurance contract owners, or variable contract owners of one or more Participating Insurance Companies) that votes in favor of such segregation, or offering to the affected variable contract owners the option of making such a change; and (2), establishing a new registered management investment company or managed separate account. 7.4. If a material irreconcilable conflict arises because of a decision by the Insurance Company to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, the Insurance Company may be required, at the Company's election, to withdraw the affected Account's investment in the Company and terminate this Agreement with respect to that Account; provided, however that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Independent Directors. Any such withdrawal and termination must take place within six (6) months after the Company gives written notice that this provision is being implemented, and until the end of that six month period INVESCO and the Company shall continue to accept and implement orders by the Insurance Company for the purchase (and redemption) of shares of the Company. 7.5. If a material irreconcilable conflict arises because a particular state insurance regulator's decision applicable to the Insurance Company conflicts with the majority of other state 11 regulators, then the Insurance Company will withdraw the affected Account's investment in the Company and terminate this Agreement with respect to that Account within six months after the Board informs the Insurance Company in writing that it has determined that the state insurance regulator's decision has created an irreconcilable material conflict; provided, however, that such withdrawal and termination shall be limited to the extent required by the foregoing material irreconcilable conflict as determined by a majority of the Independent Directors. Until the end of the foregoing six month period, INVESCO and the Company shall continue to accept and implement orders by the Insurance Company for the purchase (and redemption) of shares of the Company. 7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a majority of the Independent Directors shall determine whether any proposed action adequately remedies any irreconcilable material conflict, but in no event will the Company be required to establish a new funding medium for the Contracts. The Insurance Company shall not be required by Section 7.3 to establish a new funding medium for the Contracts if an offer to do so has been declined by vote of a majority of Contract owners materially adversely affected by the irreconcilable material conflict. In the event that the Board determines that any proposed action does not adequately remedy any irreconcilable material conflict, then the Insurance Company will withdraw the Account's investment in the Company and terminate this Agreement within six (6) months after the Board informs the Insurance Company in writing of the foregoing determination, provided, however, that the withdrawal and termination shall be limited to the extent required by the material irreconcilable conflict, as determined by a majority of the Independent Directors. 7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision of the Act or the rules promulgated thereunder with respect to mixed or shared funding (as defined in the Mixed and Shared Funding Exemptive Order) on terms and conditions materially different from those contained in the Mixed and Shared Funding Exemptive Order, then (a) the Company and/or the Participating Insurance Companies, as appropriate, shall take such steps as may be necessary to comply with Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent those rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of this Agreement shall continue in effect only to the extent that terms and conditions substantially identical to those Sections are contained in the Rule(s) as so-amended or adopted. ARTICLE VIII. Indemnification 8.1. Indemnification By The Insurance Company 8.1(a). The Insurance Company agrees to indemnify and hold harmless the Company and each director of the Board and officers and each person, if any, who controls the Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.1) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Insurance Company) or litigation (including legal and 12 other expenses), to which the Indemnified Parties may become subject under any statute, regulation, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Company's shares or the Contracts and: (i) arise out of or are based upon any untrue statements or alleged untrue statements of any material fact contained in the registration statement or prospectus for the Contracts or contained in the Contracts or sales literature for the Contracts (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if such statement or omission or such alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to the Insurance Company by or on behalf of the Company for use in the registration statement or prospectus for the Contracts or in the Contracts or sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or shares of the Company; (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature of the Company not supplied by the Insurance Company, or persons under its control) or wrongful conduct of the Insurance Company or persons under its control, with respect to the sale or distribution of the Contracts or Company Shares; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature of the Company or any amendment thereof or supplement thereto or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading if such a statement or omission was made in reliance upon information furnished in writing to the Company by or on behalf of the Insurance Company: or (iv) arise as a result of any failure by the Insurance Company to provide the services and furnish the materials under the terms of this Agreement; or (v) arise out of or result from any material breach of any representation and/or warranty made by the Insurance Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Insurance Company, 13 as limited by and in accordance with the provisions of Sections 8.1(b) and 8.l(c) hereof. 8.1(b). The Insurance Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party that may arise from that Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of that Indemnified Party's duties or by reason of that Indemnified Party's reckless disregard of obligations or duties under this Agreement or to the Company, whichever is applicable. 8.1(c). The Insurance Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless that Indemnified Party shall have notified the Insurance Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon that Indemnified Party (or after the Indemnified Party shall have received notice of such service on any designated agent). Notwithstanding the foregoing, the failure of any Indemnified Party to give notice as provided herein shall not relieve the Insurance Company of its obligations hereunder except to the extent that the Insurance Company has been prejudiced by such failure to give notice. In addition, any failure by the Indemnified Party to notify the Insurance Company of any such claim shall not relieve the Insurance Company from any liability which it may have to the Indemnified Party against whom the action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Insurance Company shall be entitled to participate, at its own expense, in the defense of the action. The Insurance Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action; provided, however, that if the Indemnified Party shall have reasonably concluded that there may be defenses available to it which are different from or additional to those available to the Insurance Company, the Insurance Company shall not have the right to assume said defense, but shall pay the costs and expenses thereof (except that in no event shall the Insurance Company be liable for the fees and expenses of more than one counsel for Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances). After notice from the Insurance Company to the Indemnified Party of the Insurance Company's election to assume the defense thereof, and in the absence of such a reasonable conclusion that there may be different or additional defenses available to the Indemnified Party, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Insurance Company will not be liable to that party under this Agreement for any legal or other expenses subsequently incurred by the party independently in connection with the defense thereof other than reasonable costs of investigation. 8.1(d). The Indemnified Parties will promptly notify the Insurance Company of the commencement of any litigation or proceedings against them in connection with the issuance or sale of the Company's shares or the Contracts or the operation of the Company. 14 8.2. Indemnification by INVESCO 8.2(a). INVESCO agrees to indemnify and hold harmless the Insurance Company and each of its directors and officers and each person, if any, who controls the Insurance Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.2) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of INVESCO) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as such losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements are related to the sale or acquisition of the Company's shares or the Contracts and: (i) arise out of or are based upon any untrue statement or alleged untrue statement of any material. fact contained in the registration statement or prospectus or sales literature of the Company (or any amendment or supplement to any of the foregoing), or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, provided that this agreement to indemnify shall not apply as to any Indemnified Party if the statement or omission or alleged statement or omission was made in reliance upon and in conformity with information furnished in writing to INVESCO or the Company by or on behalf of the Insurance Company for use in the registration statement or prospectus for the Company or in sales literature (or any amendment or supplement) or otherwise for use in connection with the sale of the Contracts or Company shares: or (ii) arise out of or as a result of statements or representations (other than statements or representations contained in the registration statement, prospectus or sales literature for the Contracts not supplied by INVESCO or persons under its control) or wrongful conduct of the Company, INVESCO or persons under their control , with respect to the sale or distribution of the Contracts or shares of the Company; or (iii) arise out of any untrue statement or alleged untrue statement of a material fact contained in a registration statement, prospectus, or sales literature covering the Contracts, or any amendment thereof or supplement thereto, or the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statement or statements therein not misleading, if such statement or omission was made in reliance upon information furnished in writing to the Insurance Company by or on behalf of the Company; or 15 (iv) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement (including a failure, whether unintentional or in good faith or otherwise, to comply with the diversification requirements specified in Article VI of this Agreement); or (v) arise out of or result from any material breach of any representation and/or warranty made by INVESCO in this Agreement or arise out of or result from any other material breach of this Agreement by INVESCO; as limited by and in accordance with the provisions of Sections 8.2(b) and 8.2(c) hereof. 8.2(b). INVESCO shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party that may arise from the Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of the Indemnified Party's duties or by reason of the Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Insurance Company or the Account, whichever is applicable. 8.2(c). INVESCO shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless the Indemnified Party shall have notified INVESCO in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Indemnified Party (or after the Indemnified Party shall have received notice of such service on any designated agent). Notwithstanding the foregoing, the failure of any Indemnified Party to give notice as provided herein shall not relieve INVESCO of its obligations hereunder except to the extent that INVESCO has been prejudiced by such failure to give notice. In addition, any failure by the Indemnified Party to notify INVESCO of any such claim shall not relieve INVESCO from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, INVESCO will be entitled to participate, at its own expense, in the defense thereof. INVESCO also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action; provided, however, that if the Indemnified Party shall have reasonably concluded that there may be defenses available to it which are different from or additional to those available to INVESCO, INVESCO shall not have the right to assume said defense, but shall pay the costs and expenses thereof (except that in no event shall INVESCO be liable for the fees and expenses of more than one counsel for Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances). After notice from INVESCO to the Indemnified Party of INVESCO's election to assume the defense thereof, and in the absence of such a reasonable conclusion that there may be different or additional defenses available to the Indemnified Party, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and INVESCO will not be liable to that party under this Agreement for any legal or other expenses subsequently incurred by that party independently in connection with the defense thereof other than reasonable costs of investigation. 16 8.2(d). The Insurance Company agrees to notify INVESCO promptly of the commencement of any litigation or proceedings against it or any of its officers or directors in connection with the issuance or sale of the Contracts or the operation of the Account. 8.3. Indemnification By the Company 8.3(a). The Company agrees to indemnify and hold harmless the Insurance Company, and each of its directors and officers and each person, if any, who controls the Insurance Company within the meaning of Section 15 of the 1933 Act (collectively, the "Indemnified Parties" for purposes of this Section 8.3) against any and all losses, claims, damages, liabilities (including amounts paid in settlement with the written consent of the Company) or litigation (including legal and other expenses) to which the Indemnified Parties may become subject under any statute, at common law or otherwise, insofar as those losses, claims, damages, liabilities or expenses (or actions in respect thereof) or settlements result from the gross negligence, bad faith or willful misconduct of the Board or any member thereof, are related to the operations of the Company and: (i) arise as a result of any failure by the Company to provide the services and furnish the materials under the terms of this Agreement (including a failure to comply with the diversification requirements specified in Article VI of this Agreement); or (ii) arise out of or result from any material breach of any representation and/or warranty made by the Company in this Agreement or arise out of or result from any other material breach of this Agreement by the Company; as limited by, and in accordance with the provisions of, Sections 8.3(b) and 8.3(c) hereof. 8.3(b). The Company shall not be liable under this indemnification provision with respect to any losses, claims, damages, liabilities or litigation incurred or assessed against an Indemnified Party that may arise from the Indemnified Party's willful misfeasance, bad faith, or gross negligence in the performance of the Indemnified Party's duties or by reason of the Indemnified Party's reckless disregard of obligations and duties under this Agreement or to the Insurance Company, the Company, INVESCO or the Account, whichever is applicable. 8.3(c). The Company shall not be liable under this indemnification provision with respect to any claim made against an Indemnified Party unless the Indemnified Party shall have notified the Company in writing within a reasonable time after the summons or other first legal process giving information of the nature of the claim shall have been served upon the Indemnified Party (or after the Indemnified Party shall have received notice of such service on any designated agent). Notwithstanding the foregoing, the failure of any Indemnified Party to give notice as provided herein shall not relieve the Company of its obligations hereunder except to the extent that the Company has been prejudiced by such failure to give notice. In addition, any failure by 17 the Indemnified Party to notify the Company of any such claim shall not relieve the Company from any liability which it may have to the Indemnified Party against whom such action is brought otherwise than on account of this indemnification provision. In case any such action is brought against the Indemnified Parties, the Company will be entitled to participate, at its own expense, in the defense thereof. The Company also shall be entitled to assume the defense thereof, with counsel satisfactory to the party named in the action; provided, however, that if the Indemnified Party shall have reasonably concluded that there may be defenses available to it which are different from or additional to those available to the Company, the Company shall not have the right to assume said defense, but shall pay the costs and expenses thereof (except that in no event shall the Company be liable for the fees and expenses of more than one counsel for Indemnified Parties in connection with any one action or separate but similar or related actions in the same jurisdiction arising out of the same general allegations or circumstances). After notice from the Company to the Indemnified Party of the Company's election to assume the defense thereof, and in the absence of such a reasonable conclusion that there may be different or additional defenses available to the Indemnified Party, the Indemnified Party shall bear the fees and expenses of any additional counsel retained by it, and the Company will not be liable to that party under this Agreement for any legal or other expenses subsequently incurred by that party independently in connection with the defense thereof other than reasonable costs of investigation. 8.3(d). The Insurance Company and INVESCO agree promptly to notify the Company of the commencement of any litigation or proceedings against it or any of its respective officers or directors in connection with this Agreement, the issuance or sale of the Contracts, the operation of the Account, or the sale or acquisition of shares of the Company. ARTICLE IX. Applicable Law 9.1. This Agreement shall be construed and provisions hereof interpreted under and in accordance with the laws of the State of Colorado. 9.2. This Agreement shall be subject to the provisions of the 1933, 1934, and 1940 acts, and the rules and regulations and rulings thereunder, including any exemptions from those statutes, rules and regulations the Commission may grant (including, but not limited to, the Mixed and Shared Funding Exemptive Order) and the terms hereof shall be interpreted and construed in accordance therewith. ARTICLE X. Termination 10.1. This Agreement shall terminate: (a) at the option of any party upon one year advance written notice to the other parties; provided, however such notice shall not be given earlier than one year following the date of this Agreement; or 18 (b) at the option of the Insurance Company to the extent that shares of Funds are not reasonably available to meet the requirements of the Contracts as determined by the Insurance Company, provided however, that such a termination shall apply only to the Fund(s) not reasonably available. Prompt written notice of the election to terminate for such cause shall be furnished by the Insurance Company; or (c) at the option of the Company in the event that formal administrative proceedings are instituted against the Insurance Company by the NASD, the Commission, an insurance commissioner or any other regulatory body regarding the Insurance Company's duties under this Agreement or related to the sale of the Contracts, the operation of any Account, or the purchase of the Company's shares, provided, however, that the Company determines in its sole judgment exercised in good faith, that any such administrative proceedings will have a material adverse effect upon the ability of the Insurance Company to perform its obligations under this Agreement; or (d) at the option of the Insurance Company in the event that formal administrative proceedings are instituted against the Company or INVESCO by the NASD, the Commission, or any state securities or insurance department or any other regulatory body, provided, however, that the Insurance Company determines in its sole judgement exercised in good faith, that any such administrative proceedings will have a material adverse effect upon the ability of the Company or INVESCO to perform its obligations under this Agreement; or (e) with respect to any Account, upon requisite vote of the Contract owners having an interest in that Account (or any subaccount) to substitute the shares of another investment company for the corresponding Fund shares in accordance with the terms of the Contracts for which those Fund shares had been selected to serve as the underlying investment media. The Insurance Company will give at least 30 days' prior written notice to the Company of the date of any proposed vote to replace the Company's shares; or (f) at the option of the Insurance Company, in the event any of the Company's shares are not registered, issued or sold in accordance with applicable state and/or federal law or exemptions therefrom, or such law precludes the use of those shares as the underlying investment media of the Contracts issued or to be issued by the Insurance Company; or (g) at the option of the Insurance Company, if the Company ceases to qualify as a regulated investment company under Subchapter M of the Code or 19 under any successor or similar provision, or if the Insurance Company reasonably believes that the Company may fail to so qualify; or (h) at the option of the Insurance Company, if the Company fails to meet the diversification requirements specified in Article VI hereof; or (i) at the option of either the Company or INVESCO, if (1) the Company or INVESCO, respectively, shall determine, in their sole judgment reasonably exercised in good faith, that the Insurance Company has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and that material adverse change or material adverse publicity will have a material adverse impact upon the business and operations of either the Company or INVESCO, (2) the Company or INVESCO shall notify the Insurance Company in writing of that determination and its intent to terminate this Agreement, and (3) after considering the actions taken by the Insurance Company and any other changes in circumstances since the giving of such a notice, the determination of the Company or INVESCO shall continue to apply on the sixtieth (60th) day following the giving of that notice, which sixtieth day shall be the effective date of termination; or (i) at the option of the Insurance Company, if (1) the Insurance Company shall determine, in its sole judgment reasonably exercised in good faith, that either the Company or INVESCO has suffered a material adverse change in its business or financial condition or is the subject of material adverse publicity and that material adverse change or material adverse publicity will have a material adverse impact upon the business and operations of the Insurance Company, (2) the Insurance Company shall notify the Company and INVESCO in writing of the determination and its intent to terminate the Agreement, and (3) after considering the actions taken by the Company and/or INVESCO and any other changes in circumstances since the giving of such a notice, the determination shall continue to apply on the sixtieth (60th) day following the giving of the notice, which sixtieth day shall be the effective date of termination; or (k) at the option of either the Company or INVESCO, if the Insurance Company gives the Company and INVESCO the written notice specified in Section 1.6(b) hereof and at the time that notice was given there was no notice of termination outstanding under any other provision of this Agreement; provided, however any termination under this Section 10.1(k) shall be effective forty five (45) days after the notice specified in Section 1.6(b) was given. 20 10.2. It is understood and agreed that the right of any party hereto to terminate this Agreement pursuant to Section 10.1(a) may be exercised for any reason or for no reason. 10.3. Notice Requirement. No termination of this Agreement shall be effective unless and until the party terminating this Agreement gives prior written notice to all other parties to this Agreement of its intent to terminate, which notice shall set forth the basis for the termination. Furthermore, (a) in the event that any termination is based upon the provisions of Article VII, or the provisions of Section 10.1(a), 10.1,(i), 10.1(j), or 10.1(k) of this Agreement, the prior written notice shall be given in advance of the effective date of termination as required by those provisions; and (b) in the event that any termination is based upon the provisions of Section 10.1(c) or 10.1(d) of this Agreement, the prior written notice shall be given at least ninety (90) days before the effective date of termination. 10.4. Effect of Termination. Notwithstanding any termination of this Agreement, the Company and INVESCO shall at the option of the Insurance Company, continue to make available additional shares of the Company pursuant to the terms and conditions of this Agreement, for all Contracts in effect on the effective date of termination of this Agreement ("Existing Contracts"). Specifically without limitation, the owners of the Existing Contracts shall be permitted to reallocate investments in the Company, redeem investments in the Company and/or invest in the Company upon the making of additional purchase payments under the Existing Contracts. The parties agree that this Section 10.4 shall not apply to any terminations under Article VII and the effect of Article VII terminations shall be governed by Article VII of this Agreement. 10.5. The Insurance Company shall not redeem Company shares attributable to the Contracts (as opposed to Company shares attributable to the Insurance Company's assets held in the Account) except (i) as necessary to implement Contract-owner-initiated transactions, or (ii) as required by state and/or federal laws or regulations or judicial or other legal precedent of general application (a "Legally Required Redemption"). Upon request, the Insurance Company will promptly furnish to the Company and INVESCO the opinion of counsel for the Insurance Company (which counsel shall be reasonably satisfactory to the Company and INVESCO) to the effect that any redemption pursuant to clause (ii) above is a Legally Required Redemption. ARTICLE XI. Notices. Any notice shall be sufficiently given when sent by registered or certified mail to the other party at the address of that other party set forth below or at such other address as the other party may from time to time specify in writing. 21 If to the Company: P.O. Box 173706 Denver, Colorado 80217-3706 Attention: General Counsel If to the Insurance Company: 1290 Broadway Denver, Colorado 80203-5699 Attention: Bonnie Dailey If to INVESCO: P.O. Box 173706 Denver, Colorado 80217-3706 Attention: General Counsel ARTICLE XII.Miscellaneous 12.1. Subject to the requirements of legal process and regulatory authority, each party hereto shall treat as confidential the names and addresses of the owners of the Contracts and all information reasonably identified as confidential in writing by any other party hereto and, except as permitted by this Agreement, shall not disclose, disseminate or utilize such names and addresses and other confidential information without the express written consent of the affected party unless and until that information may come into the public domain. 12.2. The captions in this Agreement are included for convenience of reference only and in no way define or delineate any of the provisions hereof or otherwise affect their construction or effect. 12.3. This Agreement may be executed simultaneously in two or more counterparts, each of which taken together shall constitute one and the same instrument. 12.4. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of the Agreement shall not be affected thereby. 12.5. Each party hereto shall cooperate with each other party and all appropriate governmental authorities (including without limitation the Commission, the NASD and state insurance regulators) and shall permit those authorities reasonable access to its books and records in connection with any investigation or inquiry relating to this Agreement or the transactions contemplated hereby. 12.6. The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, which the parties hereto are entitled to under state and federal laws. 12.7. No party may assign this Agreement without the prior written consent of the others. 22 IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to be executed in its name and on its behalf by its duly authorized representative and its seal to be hereunder affixed hereto as of the date specified below. Insurance Company: SECURITY LIFE OF DENVER INSURANCE COMPANY By its authorized officer, By: /s/ Steve Largent Title: Vice President Date: August 26, 1994 Company: INVESCO VARIABLE INVESTMENT FUNDS, INC. By its authorized officer, BY: /s/ Ronald L. Groom Title: Treasurer Date: August 26, 1994 INVESCO: INVESCO FUNDS GROUP, INC. By its authorized officer, By: /s/ Ronald L. Groom Title: Senior Vice President Date: August 26, 1994 23 Schedule A Accounts Date Established Separate Account Al November 3, 1993 Separate Account Ll November 3, 1993 24 Schedule B Contracts 1. The Exchequer Variable Annuity (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) 2. First Line (Flexible Premium Variable Life Insurance Policy) 25 SCHEDULE C PROXY VOTING PROCEDURE The following is a list of procedures and corresponding responsibilities for the handling of proxies relating to the Company by INVESCO, the Company and the Insurance Company. The defined terms herein shall have the meanings assigned in the Participation Agreement except that the term "Insurance Company" shall also include the department or third party assigned by the Insurance Company to perform the steps delineated below. 1. The number of proxy proposals is given to the Insurance Company by INVESCO as early as possible before the date set by the Company for the shareholder meeting to facilitate the establishment of tabulation procedures. At this time INVESCO will inform the Insurance Company of the Record, Mailing and Meeting dates. This will be done verbally approximately two months before meeting. 2. Promptly after the Record Date, the Insurance Company will perform a "tape run", or other activity, which will generate the names, addresses and number of units which are attributed to each contract owner/policyholder (the "Customer") as of the Record Date. Allowance should be made for account adjustments made after this date that could affect the status of the Customers' accounts of the Record Date. Note: The number of proxy statements is determined by the activities described in Step #2. The Insurance company will use its best efforts to call in the number of Customers to INVESCO, as soon as possible, but no later than one week after the Record Date. 3. The Company's Annual Report must be sent to each Customer by the Insurance Company either before or together with the Customers' receipt of a proxy statement. INVESCO will provide at least one copy of the last Annual Report to the Insurance Company. 4. The text and format for the Voting Instruction Cards ("Cards" or "Card") is provided to the Insurance Company by the Company. The Insurance Company, at its expense, shall produce and personalize the Voting Instruction cards. The Legal Department of INVESCO ("INVESCO Legal") must approve the Card before it is printed. Allow approximately 2-4 business days for printing information on the Cards. Information commonly found on the Cards includes: a. name (legal name as found on account registration) b. address c. Fund or account number d. coding to state number of units e. individual Card number for use in tracking and verification of votes (already on Cards as printed by the Company). (This and related steps may occur later in the chronological process due to possible uncertainties relating to the proposals.) 26 5. During this time, INVESCO Legal will develop, produce, and the Company will pay for the Notice of Proxy and the Proxy Statement (one document). Printed and folded notices and statements will be sent to Insurance Company for insertion into envelopes (envelopes and return envelopes are provided and paid for by the Insurance Company). Contents of envelope sent to customers by Insurance Company will include: a. Voting Instruction Card(s) b. One proxy notice and statement (one document) c. Return envelope (postage pre-paid by Insurance Company) addressed to the Insurance Company or its tabulation agent d. "Urge buckslip" - optional, but recommended. (This is a small, single sheet of paper that requests Customers to vote as quickly as possible and that their vote is important. One copy will be supplied by the Company.) e. Cover letter - optional, supplied by Insurance Company and reviewed and approved in advance by INVESCO Legal. 6. The above contents should be received by the Insurance Company approximately 3-5 business days before mail date. Individual in charge at Insurance Company reviews and approves the contents of the mailing package to ensure correctness and completeness. Copy of this approval sent to INVESCO Legal. 7. Package mailed by the Insurance Company. * The Company must allow at least a 15-day solicitation time to the Insurance Company as the shareowner. (A 5-week period is recommended.) Solicitation time is calculated as calendar days from (but not including) the meeting, counting backwards. 8. Collection and tabulation of Cards begins. Tabulation usually takes place in another department or another vendor depending on process used. An often used Procedure is to sort cards on arrival by proposal into vote categories of all yes, no, or mixed replies, and to begin data entry. Note: Postmarks are not generally needed. A need for postmark information would be due to an insurance company's internal procedure. 9. If Cards are mutilated, or for any reason are illegible or are not signed properly, they are sent back to the Customer with an explanatory letter, a new Card and return envelope. The mutilated or illegible Card is disregarded and considered to be not received for purposes of vote tabulation. Such mutilated or illegible Cards are "hand verified," i.e., examined as to why they did not complete the system. Any questions on those Cardsare usually remedied individually. 10. There are various control procedures used to ensure proper tabulation of votes and accuracy of the tabulation. The most prevalent is to sort the Cards as they first arrive into 27 categories depending upon their vote; an estimate of how the vote is progressing may then be calculated. If the initial estimates and the actual vote do not coincide, then an internal audit of that vote should occur. This may entail a recount. 11. The actual tabulation of votes is done in units which are then converted to shares. (It is very important that the Company receives the tabulations stated in terms of a percentage and the number of shares.) INVESCO Legal must review and approve tabulation format. 12. Final tabulation in shares is verbally given by the Insurance Company to INVESCO Legal on the morning of the meeting not later than 10:00 a.m. Denver time. INVESCO Legal may request an earlier deadline if required to calculate the vote in time for the meeting. 13. A Certificate of Mailing and Authorization to Vote Shares will be required from the Insurance Company as well as an original copy of the final vote. INVESCO Legal will provide a standard form for each Certification. 14. The Insurance Company will be required to box and archive the Cards received from the Customers. In the event that any vote is challenged or if otherwise necessary for legal, regulatory, or accounting purposes, INVESCO Legal will be permitted reasonable access to such Cards. 15. All approvals and "signing-off" may be done orally, but must always be followed up in writing. 28 EX-1.A(8)(A)(VII) 13 PARTICIPATION AGMT. - VAN ECK FUND PARTICIPATION AGREEMENT EXHIBIT 1.A(8)(a)(vii) Security Life of Denver ("Insurance Company"), Van Eck Investment Trust ("Trust") and the Trust's investment adviser, Van Eck Associates Corporation ("Advisee") hereby agree that shares of the series of the Trust as listed on Exhibit A, as it may, from time to time, be amended ("Portfolios"), shall be Made available to serve as an underlying investment medium for Individual Deferred Variable Life Contracts and Variable Annuity Contracts ("Contracts") to be offered by Insurance Company subject to the following provisions: 1. Insurance Company represents that it has established separate Accounts Al and LI (each such account hereinafter, a "Variable Account"), a separate account under Colorado law, and has registered it as a unit investment trust under the Investment Company Act of 1940 ("1940 Act") to serve as an investment vehicle for the Contracts. The Contracts provide for the allocation of net amounts received by Insurance Company to separate series of the Variable Account for investment in the shares of specified investment companies selected among those companies available through the Variable Account to act as underlying investment media. Selection of a particular investment company is made by the Contract owner who may change such selection from time to time in accordance with the terms of the applicable Contract. 2. Insurance Company agrees to make every reasonable effort to market its Contracts. It will use its best efforts to give equal emphasis and promotion to shares of the Trust as is given to other underlying investments of the Variable Account. In marketing its Contracts, Insurance Company will comply with all applicable state or Federal laws. 3. The Trust or the Adviser will provide closing net asset value, dividend and capital gain information to Insurance Company each business day by 6:15 p.m. New York time. Insurance Company will use this data to calculate unit values, which will in turn be used to process that same business day's Variable Account unit value. The Variable Account processing will be done the same evening, and orders will be placed by 9:30 a.m. New York time on the morning of the following business day. Orders will be sent by the Insurance Company directly to the Trust or its specified agent, and payment for purchases will be wired to a custodial account designated by the Trust or the Adviser on the same day that the purchase order is executed by the Trust. The Trust will execute the orders at the net asset value as determined as of the close of trading on the prior day. Dividends and capital gains distributions shall be reinvested in additional shares at the ex-date net asset value. 4. If Insurance Company's order requests a net redemption resulting in a payment of redemption proceeds to Insurance Company, Trust shall wire the redemption proceeds to Insurance Company by the next business day, unless doing so would require Trust to dispose of portfolio securities or otherwise incur additional costs, but in such event, proceeds shall be wired to Insurance Company within seven days and Trust shall notify the person designated in writing by Insurance Company as the recipient for such notice of such delay by 3:00 p.m. New York time the same business day that Insurance Company transmits the redemption order to Trust. If Insurance Company's order requests the application of redemption proceeds from the redemption of shares to the purchase of shares of another fund managed or distributed by Adviser, Trust shall so apply such proceeds the following business day that Insurance Company transmits such order to Trust. 5. Trust will bear the printing costs (or duplicating costs with respect to the statement of additional information) and incremental mailing Costs associated with the delivery of the following Trust (or individual portfolio) documents, and any supplements thereto, to existing variable contract owners of Insurance Company. (a) prospectuses and statements of additional information; (b) annual and semi-annual reports; and (c) proxy materials. For purposes of this Section, incremental mailing costs shall mean (1) all costs attributable to any mailing that includes only the document or documents listed in the preceding sentence and (ii) where the document or documents listed in the preceding sentence are mailed with other materials, any cost in excess of what Insurance Company would have otherwise paid to mail periodic confirmation statements or similar documents. Insurance Company will submit any bills for printing, duplicating and/or mailing costs, relating to the Trust documents described above, to Trust for reimbursement by Trust, which reimbursement shall not exceed the Trust's cost of production of such materials. Insurance Company shall monitor such costs and shall use its best efforts to control these costs. Insurance Company will provide Trust on a semi-annual basis, or more frequently as reasonably requested by Trust, with a current tabulation of the number of existing variable contract owners of Insurance Company whose variable contract values are invested in Trust. This tabulation will be sent to Trust in the form of a letter signed by a duly authorized officer of Insurance Company attesting to the accuracy of the information contained in the letter. If requested by Insurance Company, the Trust shall provide such documentation (including a final copy of the Trust prospectus as set in type or in camera-ready copy) and other assistance as is reasonably necessary in order for Insurance Company to print together in one document the current prospectus for the variable contracts issued by Insurance Company and the current prospectus for the Trust. Trust will provide, at its expense, Insurance Company with the following Trust (or individual Portfolio) documents, and any supplements thereto, with respect to prospective variable contract owners of Insurance Company. (d) camera ready copy of the current prospectus for printing by the Insurance Company; (e) a copy of the statement of additional information suitable for duplication; 2 (f) camera ready copy of proxy material suitable for printing; and (g) camera ready copy of the annual and semi-annual reports for printing by the Insurance Company. 6. Insurance Company and its agents shall make no representations concerning the Trust or Trust shares except those contained in the then current prospectuses of the Trust and in current printed sales literature of the Trust. 7. Administrative services to Contract owners shall be the responsibility of Insurance Company, and shall not be the responsibility of the Trust or the Adviser. The Trust and Adviser recognize that Insurance Company shall be the sole shareholder of Trust shares issued pursuant to the Contracts. Such arrangement will result in multiple share orders. 8. The Trust shall comply with Sections 817(h) and 851 of the Internal Revenue Code of 1986, if applicable, and the regulations thereunder, and the applicable provisions of the 1940 Act relating to the diversification requirements for variable annuity, endowment, and life insurance contracts. Upon request, the Trust shall provide Insurance Company with a letter from the appropriate Trust officer certifying the Trust's compliance with the diversification requirements and qualification as a regulated investment company. 9. Insurance Company agrees to inform the Board of Trustees of the Trust of the existence of, or any potential for, any material irreconcilable conflict of interest between the interests of the Contract owners of the Variable Account investing in the Trust and/or any other separate account of any other insurance company investing in the Trust. A material irreconcilable conflict may arise for a variety of reasons, including: (a) an action by any state insurance or other regulatory authority; (b) a change in applicable federal or state insurance, tax or securities laws or regulations, or a public ruling, private letter ruling, or any similar action by insurance, tax or securities regulatory authorities; (c) an administrative or judicial decision in any relevant proceeding; (d) the manner in which the investments of any Portfolio are being managed; (e) a difference in voting instructions given by Contract owners and variable annuity insurance contract owners or by variable annuity or life insurance contract owners of different life insurance companies utilizing the Trust; or (f) a decision by Insurance Company to disregard the voting instructions of contract owners. 3 Insurance Company will be responsible for assisting the Board of Trustees of the Trust in carrying out its responsibilities by providing the Board with all information reasonably necessary for the Board to consider any issue raised, including information as to a decision by Insurance Company to disregard voting instructions of Contract owners. It is agreed that if it is determined by a majority of the members of the Board of Trustees of the Trust or a majority of its disinterested Trustees that a material irreconcilable conflict exists affecting Insurance Company, Insurance Company shall, at its own expense, take whatever steps are necessary to remedy or eliminate the irreconcilable material conflict, which steps may include, but are not limited to, (a) withdrawing the assets allocable to some or all of the separate accounts from the Trust or any Portfolio and reinvesting such assets in a different investment medium, including another Portfolio of the Trust or submitting the questions of whether such segregation should be implemented to a vote of all affected Contract owners and, as appropriate, segregating the assets of any particular group (i.e., annuity Contract owners, life insurance Contract owners or qualified Contract owners) that votes in favor of such segregation, or offering to the affected Contract owners the option of making such a change; (b) establishing a new registered management investment company or managed separate account. If a material irreconcilable conflict arises because of Insurance Company's decision to disregard Contract owner voting instructions and that decision represents a minority position or would preclude a majority vote, Insurance Company may be required, at the Trusts election, to withdraw the Variable Account's investment in the Trust. No charge or penalty will be imposed against the Variable Account as a result of such withdrawal. Insurance Company agrees that any remedial action taken by it in resolving any material conflicts of interest will be carried out with a view only to the interests of Contract owners. For purposes hereof, a majority of the disinterested members of the Board of Trustees of the Trust shall determine whether any proposed action adequately remedies any material irreconcilable conflict. In no event will the Trust be required to establish a new funding medium for any Contracts. Insurance Company shall not be required by the terms hereof to establish a new funding medium for any Contracts if an offer to do so has been declined by vote of a majority of affected Contract owners. The Trust will undertake to promptly make known to Insurance Company the Board of Trustees' determination of the existence of a material irreconcilable conflict and its implications. 10. This Agreement shall terminate as to the sale and issuance of new Contracts: 4 (a) at the option of Insurance Company, the Adviser or the Trust upon six months' advance written notice to the other parties; (b) at the option of Insurance Company, if Trust shares are not available for any reason to meet the requirements of Contracts as determined by Insurance Company. Reasonable advance notice of election to terminate shall be furnished by Insurance Company; (c) at the option of Insurance Company, the Adviser or the Trust, upon institution of formal proceedings against the Broker-Dealer or Broker- Dealers marketing the Contracts, the Variable Account, Insurance Company or the Trust by the National Association of Securities Dealers ("NASD"), the SEC or any other regulatory body; (d) upon a decision by Insurance Company, in accordance with regulations of the SEC, to substitute such Trust shares with the shares of another investment company for Contracts for which the Trust shares have been selected to serve as the underlying investment medium. Insurance Company will give 60 days' written notice to the Trust and the Adviser of any proposed vote to replace Trust shares; (e) upon assignment of this Agreement unless made with the written consent of each other party; (f) in the event Trust shares are not registered, issued or sold in conformance with Federal or State law or such law precludes the use of Trust shares as an underlying investment medium of Contracts issued or to be issued by Insurance Company. Prompt notice shall be given by either party to the other in the event the conditions of this provision occur. 11. Notwithstanding any termination of this Agreement pursuant to this Agreement, at the election of Insurance Company, Trust shall continue to make available additional Trust shares, as provided below, pursuant to the terms and conditions of this Agreement, for all Variable contracts in effect on the effective date of termination of this agreement (hereinafter referred to as "Existing Contracts"). Specifically, without limitation, the owners of the Existing Contracts or Insurance Company, whichever shall have legal authority to do so, shall be permitted to reallocate investments in Trust, redeem investments in Trust and/or invest in Trust upon the payment of additional premiums under the Existing Contracts unless proscribed by Federal or State law. 12. Each notice required by this Agreement shall be given by wire and confirmed in writing to: Security Life of Denver 1290 Broadway Denver, Colorado 80203 Attn: Bonnie Dailey, Esq. 5 Van Eck Investment Trust 122 East 42nd Street New York, New York 10168 Attn: President, with a copy to the Secretary Van Eck Associates Corporation 122 East 42nd Street New York, New York 10168 Attn: President, with a copy to the General Counsel 13. Advertising and sales literature with respect to the Trust prepared by Insurance Company or its agents for use in marketing its Contracts will be submitted to the Trust for review before such material is submitted to the SEC or NASD for review. 14. Insurance Company will distribute all proxy material furnished by the Trust and will vote Trust shares in accordance with instructions received from the Contract owners of such Trust shares. Insurance Company shall vote the Trust shares for which no instructions have been received in the same proportion as Trust shares for which said instructions have been received from Contract owners. Insurance Company and its agents will in no way recommend action in connection with or oppose or interfere with the solicitation of proxies for the Trust shares held for such Contract owners. 15. (a) Insurance Company agrees to indemnify and hold harmless the Trust, the Adviser, and each of its trustees, directors, officers, employees, agents and each person, if any, who controls the Trust within the meaning of the Securities Act of 1933 (the "Act") (the Trust and such persons collectively, "Trust Indemnified Person") against any losses, claims, damages or liabilities to which a Trust Indemnified Person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in information furnished by Insurance Company for use in the Registration Statement or prospectus of the Trust or in the Registration Statement or prospectus for the Variable Account, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or as a result of conduct, statements or representations (other than statements or representations contained in the prospectus and Trust prepared sales literature of the Trust) of Insurance Company or its agents with respect to the sale and distribution of contracts for which Trust shares are an underlying investment or arise out of a material breach of this Agreement by insurance Company or its agents; and Insurance Company will reimburse any legal or other expenses reasonably incurred by a Trust Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability or action. This indemnity agreement will be in addition to any liability which Insurance Company may otherwise have. 6 (b) The Trust agrees to indemnify and hold harmless Insurance Company and each of its directors, officers, employees, agents and each person, if any, who controls Insurance Company within the meaning of the Act (insurance Company and such persons collectively, "Insurance Company Indemnified Person") against any losses, claims, damages or liabilities to which an Insurance Company Indemnified Person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or Trust-prepared sales literature of the Trust, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or are based upon the Trust's failure to comply with the diversification requirements of the Investment Company Act of 1940 and of Section 817 (h) of the Internal Revenue Code of 1986, as amended (the "Code"), and to maintain the Fund as a Regulated Investment Company under the Code, or arise out of a material breach of this Agreement by the Trust or its agents and the Trust will reimburse any legal or other expenses reasonably incurred by an Insurance Company Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Trust will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission or alleged omission made in such Registration Statement or prospectus in conformity with written information furnished to the Trust by Insurance Company specifically for use therein or in Insurance Company-prepared sales literature. This indemnity agreement will be in addition to any liability which the Trust may otherwise have. (c) The Adviser agrees to indemnify and hold harmless each Insurance Company Indemnified Person against any losses, claims, damages or liabilities to which an Insurance Company Indemnified Person may become subject, under the Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in the Registration Statement or prospectus or Adviser-prepared sales literature of the Trust, or arise out of or are based upon the omission or the alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or arise out of or are based upon the Adviser's failure to comply with the diversification requirements of the Investment Company Act of 1940 and of Section 817(h) of the Code as amended, and to maintain the Fund as a Regulated Investment Company under the Code, or arise out of a material breach of this Agreement by the Adviser or its agents and the Adviser will reimburse any legal or other expenses reasonably incurred by each Insurance Company Indemnified Person in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the Adviser will not be liable in any such case to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or omission or alleged omission made in such Registration Statement or prospectus in conformity with written information furnished to the Adviser by Insurance Company specifically for use therein or Insurance Company- prepared sales literature. This 7 indemnity agreement will be in addition to any liability which the Adviser may otherwise have. (d) The Trust and the Adviser shall indemnify and hold Insurance Company harmless against any and all liability, loss, damages, costs or expenses which Insurance Company may incur, suffer or be required to pay directly due to the Trust's or Adviser's (or their designated agent's) (1) incorrect calculation of the daily net asset value, dividend rate or capital gain distribution rate; (2) incorrect reporting of the daily net asset value, dividend rate or capital gain distribution rate; or (3) untimely reporting of the net asset value, dividend rate or capital gain distribution rate. Any gain to Insurance Company attributable to the Trust's, or Adviser's (or their designated agent's) incorrect calculation or reporting of the daily net asset value shall be immediately returned to the Trust, to the extent reasonably practicable unless such gain has been paid to the Contract owner and the owner is no longer invested in the Separate Account. (e) Promptly after receipt by an indemnified party under this paragraph of notice of the commencement of action, such indemnified party will, if a claim in respect thereof is to be made against the indemnifying party under this paragraph, notify the indemnifying party of the commencement thereof; but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party otherwise than under this, paragraph. In case any such action is brought against any indemnified party, and it notified the indemnifying party of the commencement thereof, the indemnifying party will be entitled to participate therein and, to the extent that it may wish, assume the defense thereof, with counsel satisfactory to such indemnified party. After notice from the indemnifying party to such indemnified party under this paragraph of indemnified party's election to assume the defense thereof, the indemnified party will bear the fees and expenses of any additional counsel retained by it and the indemnifying party will not be liable to the indemnified party under this paragraph for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation. (f) Nothing herein shall entitle an indemnified party to special, consequential or exemplary damages or damages of like kind or nature and with respect to section 15(d) hereof all liability, loss and damages shall be limited to the amount required to correct the value of the account as if there had been no incorrect calculation or reporting or untimely reporting of net asset value, dividend rate or capital gain distribution rate. (g) No indemnifying party shall be liable under Sections 15(a), (b), or (c) of this Agreement where such liability arises from the willful misfeasance, bad faith, or gross negligence of the indemnified party in the performance of such indemnified party's duties or by reason of such indemnified party's reckless disregard of obligations or duties under this Agreement. 8 16. If, in the course of future marketing of the Contracts, Insurance Company or its agents shall request the continued assistance of the Trust's sales personnel, compensation (which will be negotiated by the Trust and Insurance Company) shall be paid by Insurance Company to the Trust. 17. Each party hereto agrees to furnish the California Insurance Commissioner with any information or reports in connection with services provided under this Agreement which such Commissioner may request in order to ascertain whether the insurance operations Insurance Company are being conducted in a manner consistent with the California Insurance Regulations and any other applicable law or regulations. Insurance Company agrees to inform the Trust and Adviser of any applicable law or regulation of the State of California or any other State. Trust agrees that Insurance Company shall have the right to inspect, audit and copy all records pertaining to the performance of services under this Agreement pursuant to the requirements of the California Insurance Department. However, Trust and Adviser shall own and control all the pertinent records pertaining to their performance of services under this Agreement. 9 SECURITY LIFE OF DENVER August 31, 1994 By /s/ Steve Largent Date VAN ECK INVESTMENT TRUST August 31, 1994 By /s/ Thaddeus Laszczynski Date VAN ECK ASSOCIATES CORPORATION August 31, 1994 By /s/ Thaddeus Laszczynski Date 10 EXHIBIT A FUND Gold and Natural Resources Fund World Wide Balanced Fund EX-1.A(8)(B)(IV) 14 FIRST AMENDMENT SALES AGMT. EXHIBIT 1.A(8)(b)(iv) FIRST AMENDMENT TO SALES AGREEMENT THIS AGREEMENT is made by and between The Alger American Fund ("FUND"), a Massachusetts business trust, FRED ALGER MANAGEMENT, INC., a New York corporation ("ADVISER"), and SECURITY LIFE OF DENVER INSURANCE COMPANY ("LIFE COMPANY"), a life insurance company organized under the laws of the State of Colorado (collectively, the "PARTIES"). WHEREAS, the PARTIES executed a sales agreement dated August 26, 1994 (the "Sales Agreement"), governing how shares of FUND's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts offered by LIFE COMPANY through certain separate accounts (the "Separate Accounts"). WHEREAS, the FUND portfolios available to the Separate Accounts are listed in Appendix A of the Sales Agreement; WHEREAS, the PARTIES have agreed that it is in their interests to make two additional FUND portfolios available to the separate accounts; NOW, THEREFORE, in consideration of their mutual promises, LIFE COMPANY, FUND and ADVISER agree as follows: 1. The Sales Agreement is hereby amended by substituting for the original Appendix A an amended Appendix A in the form attached hereto which adds the Alger American Growth Portfolio and Alger American Leveraged Allcap Portfolio to the list of portfolios made available to the Separate Accounts. Executed this 28th day of February, 1995. The Alger American Fund ATTEST: /s/ Nanci Staple BY: /s/ Gregory Duch Security Life of Denver Insurance Company ATTEST: /s/Bonnie C. Dailey BY: /s/ Steve Largent Fred Alger Management, Inc. ATTEST: /s/ Nanci Staple BY: /s/ Gregory Duch APPENDIX A Alger American Small Capitalization Portfolio Alger American MidCap Growth Portfolio Alger American Growth Portfolio Alger American Leveraged Allcap Portfolio EX-1.A(8)(B)(V) 15 FIRST AMENDMENT PARTICIPATION AGMT. EXHIBIT 1.A(8)(b)(v) FIRST AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado ("Insurance Company"), Variable Insurance Products Fund, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation (the "Underwriter") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 10, 1994 (the "Participation Agreement"), governing how shares of Fund's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by Insurance Company through certain separate accounts (the "Separate Accounts"). WHEREAS, the various Contracts for which shares are purchased are listed in Schedule A of the Participation Agreement and the various portfolios made available to the Separate Accounts are listed in Schedule C; WHEREAS, the Parties have agreed that it is in their interests to add two additional Contracts funded by the Separate Accounts and two additional portfolios made available to the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, Insurance Company, Fund, and Underwriter agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule A an amended Schedule A in the form attached hereto which adds the Strategic Advantage Variable Universal Life policy and the Fulcrum Fund Variable Account to the list of Contracts funded by the Separate Accounts. 2. The Participation Agreement is hereby amended by substituting for the original Schedule C an amended Schedule C in the form attached hereto which adds the Alger American Growth Portfolio and Alger American Leveraged AllCap Portfolio to the list of portfolios made available to the Separate Accounts. Executed this day of February, 1995. Variable Insurance Products Fund ATTEST: BY: /s/ J. Gary Burkhead Security Life of Denver Insurance Company ATTEST: /s/ Bonnie C. Dailey BY: /s/ Steve Largent Fidelity Distributors Corporation ATTEST: BY: /s/ Kurt A. Lange -2- Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account Security Life Separate Account Al The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) The Fulcrum Fund Variable Account Security Life Separate Account LI First Line (Flexible Premium Variable (November 3, 1993) Life Insurance Policy) Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) -3- Schedule C Other investment companies currently available under variable annuities or variable life insurance issued by the Company: Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF Total Return Portfolio INVESCO VIF Utilities Portfolio Neuberger and Berman Government Income Portfolio Neuberger and Berman Growth Portfolio Neuberger and Berman Limited Maturity Bond Portfolio Neuberger and Berman Partners Portfolio Van Eck Gold and Natural Resources Portfolio Van Eck Worldwide Balanced Portfolio Fidelity Investments Variable Insurance Products Fund II Asset Manager Portfolio Index 500 Portfolio -4- EX-1.A(8)(B)(VI) 16 SECOND AMENDMENT PARTICIPATION AGMT. EXHIBIT 1.A(8)(b)(vi) AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT AMONG VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS CORPORATION and SECURITY LIFE OF DENVER INSURANCE COMPANY WHEREAS, SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Company"), VARIABLE INSURANCE PRODUCTS FUND (the "Fund") and FIDELITY DISTRIBUTORS CORPORATION have previously entered into a Participation Agreement (the "Agreement") containing certain arrangements concerning prospectus costs; and WHEREAS, the Trustees of the Fund have approved certain changes to the expense structure of the Fund; and NOW, THEREFORE, the parties do hereby agree to amend the Agreement by substituting the following arrangement in place of any inconsistent language in the Participation Agreement, wherever found: 1. The Fund will provide to the Company each year, at the Fund's cost, such number of prospectuses and Statements of Additional Information as are actually distributed to the Company's then-existing variable life and/or variable annuity contract owners. 2. If the Company takes camera-ready film or computer diskettes containing the Fund's prospectus and/or Statement of Additional Information in lieu of receiving hard copies of these documents, the Fund will reimburse the Company in an amount computed as follows. The number of prospectuses and Statements of Additional Information actually distributed to existing contract owners by the Company will be multiplied by the Fund's actual per-unit cost of printing the documents. 3. The Company agrees to provide the Fund or its designee with such information as may be reasonably requested by the Fund in order to verify that the prospectuses and Statements of Additional Information provided to the Company, or the reimbursement made to the Company, are or have been used only for the purposes set forth hereinabove. IN WITNESS WHEREOF we have set our hand as of the 15th day of December, 1994. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Steve Largent Name: Steve Largent Title: Vice President VARIABLE INSURANCE PRODUCTS FUND FIDELITY DISTRIBUTORS CORPORATION By: /s/ J. Gary Burkhead By: /s/ Kurt A. Lange Name: J. Gary Burkhead Name: Kurt A. Lange Title: Senior Vice President Title: President EX-1.A(8)(B)(VII) 17 FIRST AMENDMENT PARTICIPATION AGMT. EXHIBIT 1.A(8)(b)(vii) FIRST AMENDMENT TO PARTICIPATION AGREEMENT THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado ("Insurance Company"), Variable Insurance Products Fund II, an unincorporated business trust organized under the laws of the Commonwealth of Massachusetts (the "Fund"), and Fidelity Distributors Corporation, a Massachusetts corporation (the "Underwriter") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 10, 1994 (the "Participation Agreement"), governing how shares of Fund's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by Insurance Company through certain separate accounts (the "Separate Accounts"). WHEREAS, the various Contracts for which shares are purchased are listed in Schedule A of the Participation Agreement and the various portfolios made available to the Separate Accounts are listed in Schedule C; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract funded by the Separate Accounts and two additional portfolios made available to the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, Insurance Company, Fund, and Underwriter agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule A an amended Schedule A in the form attached hereto which adds the Strategic Advantage Variable Universal Life policy to the list of Contracts funded by the Separate Accounts. 2. The Participation Agreement is hereby amended by substituting for the original Schedule C an amended Schedule C in the form attached hereto which adds the Alger American Growth Portfolio and Alger American Leveraged AllCap Portfolio to the list of portfolios made available to the Separate Accounts. Executed this day of February, 1995. Variable Insurance Products Fund II ATTEST: BY: /s/ J. Gary Burkhead Security Life of Denver Insurance Company ATTEST: /s/ Bonnie C. Dailey BY: /s/ Steve Largent Fidelity Distributors Corporation ATTEST: BY: /s/ Kurt A. Lange -2- Schedule A Separate Accounts and Associated Contracts Name of Separate Account and Contracts Funded Date Established by Board of Directors By Separate Account Security Life Separate Account Al The Exchequer Variable Annuity (November 3, 1993) (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) Security Life Separate Account LI First Line (Flexible Premium Variable (November 3, 1993) Life Insurance Policy) Strategic Advantage Variable Universal Life (Flexible Premium Variable Universal Life Insurance Policy) -3- Schedule C Other investment companies currently available under variable annuities or variable life insurance issued by the Company: Alger American MidCap Growth Portfolio Alger American Small Capitalization Portfolio Alger American Growth Portfolio Alger American Leveraged AllCap Portfolio INVESCO VIF High Yield Portfolio INVESCO VIF Industrial Income Portfolio INVESCO VIF Total Return Portfolio INVESCO VIF Utilities Portfolio Neuberger and Berman Government Income Portfolio Neuberger and Berman Growth Portfolio Neuberger and Berman Limited Maturity Bond Portfolio Neuberger and Berman Partners Portfolio Van Eck Gold and Natural Resources Portfolio Van Eck Worldwide Balanced Portfolio Fidelity Investments Variable Insurance Products Fund Growth Portfolio Money Market Portfolio Overseas Portfolio -4- EX-1.A(8)(B)(VIII) 18 SECOND AMENDMENT PARTICIPATION AGMT. EXHIBIT 1.A(8)(b)(viii) AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT AMONG VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION and SECURITY LIFE OF DENVER INSURANCE COMPANY WHEREAS, SECURITY LIFE OF DENVER INSURANCE COMPANY (the "Company"), VARIABLE INSURANCE PRODUCTS FUND II (the "Fund") and FIDELITY DISTRIBUTORS CORPORATION have previously entered into a Participation Agreement (the "Agreement") containing certain arrangements concerning prospectus costs; and WHEREAS, the Trustees of the Fund have approved certain changes to the expense structure of the Fund; and NOW, THEREFORE, the parties do hereby agree to amend the Agreement by substituting the following arrangement in place of any inconsistent language in the Participation Agreement, wherever found: 1. The Fund will provide to the Company each year, at the Fund's cost, such number of prospectuses and Statements of Additional Information as are actually distributed to the Company's then-existing variable life and/or variable annuity contract owners. 2. If the Company takes camera-ready film or computer diskettes containing the Fund's prospectus and/or Statement of Additional Information in lieu of receiving hard copies of these documents, the Fund will reimburse the Company in an amount computed as follows. The number of prospectuses and Statements of Additional Information actually distributed to existing contract owners by the Company will be multiplied by the Fund's actual per-unit cost of printing the documents. 3. The Company agrees to provide the Fund or its designee with such information as may be reasonably requested by the Fund in order to verify that the prospectuses and Statements of Additional Information provided to the Company, or the reimbursement made to the Company, are or have been used only for the purposes set forth hereinabove. IN WITNESS WHEREOF we have set our hand as of the 15th day of December, 1994. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Steve Largent Name: Steve Largent Title: Vice President VARIABLE INSURANCE PRODUCTS FUND II FIDELITY DISTRIBUTORS CORPORATION By: /s/ J. Gary Burkhead By: /s/ Kurt A. Lange Name: J. Gary Burkhead Name: Kurt A. Lange Title: Senior Vice President Title: President EX-1.A(8)(B)(IX) 19 FIRST AMENDMENT PARTICIPATION AGMT. FIRST AMENDMENT TO PARTICIPATION AGREEMENT EXHIBIT 1.A (8) (b) (ix) THIS AGREEMENT is made by and among Security Life of Denver Insurance Company, a life insurance company organized under the laws of the State of Colorado ("Insurance Company"), Invesco Variable Investment Funds, Inc., a Maryland corporation (the "Company"), and Invesco Funds Group, Inc., a Delaware corporation ("Invesco") (collectively, the "Parties"). WHEREAS, the Parties executed a participation agreement dated August 26 1994 (the "Participation Agreement"), governing how shares of Company's portfolios are to be made available to certain variable life insurance and/or variable annuity contracts (the "Contracts") offered by Insurance Company through certain separate accounts (the "Separate Accounts"). WHEREAS, the various Contracts for which shares are purchased are listed in Schedule B of the Participation Agreement; WHEREAS, the Parties have agreed that it is in their interests to add an additional Contract funded by the Separate Accounts; NOW, THEREFORE, in consideration of their mutual promises, Insurance Company, Company, and Invesco agree as follows: 1. The Participation Agreement is hereby amended by substituting for the original Schedule B an amended Schedule B in the form attached hereto which adds the Strategic Advantage Variable Universal Life policy to the list of Contracts funded by the Separate Accounts. Executed this 22nd day of February, 1995. Invesco Variable Investment Funds, Inc. ATTEST: /s/ Glen A. Payne BY: /s/ J. Hansen Security Life of Denver Insurance Company ATTEST: /s/ Bonnie C. Dailey BY: /s/ Steve Largent Invesco Funds Group, Inc. ATTEST: /s/ Glen A. Payne BY: /s/ J. Hansen Schedule B Contracts 1. The Exchequer Variable Annuity (Flexible Premium Deferred Combination Fixed and Variable Annuity Contract) 2. First Line (Flexible Premium Variable Life Insurance Policy) 3. Strategic Advantage Variable (Flexible Premium Variable Universal Life Universal Life Insurance Policy) 2 EX-1.A(8)(C) 20 SERVICE AGMT. EXHIBIT 1.A(8)(c) SERVICE AGREEMENT This Agreement is made as of the 28th day of February, 1995 by and between Security Life of Denver Insurance Company ("Security Life") and Fred Alger Management, Inc., a New York corporation ("Adviser") (collectively, the "Parties"). W I T N E S S E T H: WHEREAS, the Adviser serves as the investment adviser of The Alger American Fund, a Massachusetts business trust (the "Fund"), which currently consists of six separate series (each, a "Portfolio"); and WHEREAS, Security Life has entered into an agreement, dated August 26, 1994, and amended February 28, 1995, with the Fund and Adviser (the "Sales Agreement") pursuant to which the Fund will make shares of each Portfolio listed from time to time on Schedule A thereto available to certain variable life insurance and/or variable annuity contracts offered by Security Life through certain separate accounts (the "Separate Accounts") at net asset value and with no sales charges, subject to the terms of the Sales Agreement; and WHEREAS, the Sales Agreement provides that the Fund will bear the costs of preparing, filing with the Securities and Exchange Commission, printing or duplicating and mailing the Fund's prospectus, statement of additional information and any amendments or supplements thereto, periodic reports to shareholders, Fund proxy material and other shareholder communications (collectively, the "Fund Materials") required by law to be sent to owners of Contracts ("Contract owners") who have allocated any Contract value to a Portfolio; and WHEREAS, the Sales Agreement provides that the Adviser, at its expense, will provide Security Life with camera ready copies or copies suitable for duplication of all Fund Materials with respect to prospective Variable Contract owners of Security Life; and WHEREAS, the Sales Agreement makes no provision for which party shall incur various administrative expenses in connection with the servicing of Contract owners who have allocated Contract value to a portfolio, including, but not limited to, responding to various Contract owner inquiries regarding a Portfolio; and WHEREAS, the Parties hereto wish to allocate the expenses in a manner that is fair and equitable, and consistent with the best interests of Contract owners; and WHEREAS, the Parties hereto wish to establish a means for allocating the expenses that does not entail the expense and inconvenience of separately identifying and accounting for each item of Fund expense; 1 NOW THEREFORE, in consideration of the mutual benefits and promises contained herein, the Parties hereto agree as follows: I. Services Provided: Security life agrees to provide services to the Adviser including the following: a) responding to inquiries from Security Life Contract owners using one or more of the Portfolios as an investment vehicle regarding the services performed by Security life as they relate to the Fund or its Portfolios; b) providing information to the Adviser and to Contract owners with respect to shares attributable to Contract owner accounts; c) printing and mailing of shareholder communications from the Fund as may be required pursuant to Paragraph 4 of the Sales Agreement; d) communication directly with Contract owners concerning the Fund's operations; e) providing such similar services as Adviser may reasonably request to the extent permitted or required under applicable statutes, rules and regulations. II. Expense Allocations: Subject to Section III hereof, Security Life or its affiliates shall initially bear the costs of the following: a) printing and distributing all Fund Materials to be distributed to prospective Contract owners; b) printing and distributing all sales literature or promotional material developed by Security Life or its affiliates and relating to the Contracts; c) servicing Contract owners who have allocated Contract value to a Portfolio, which servicing shall include, but is not limited to, the items listed in Paragraph I of this Agreement. 2 III. Payment of Expenses: a) The Adviser shall pay to Security Life a quarterly fee equal to a percentage of the average daily net assets of the Portfolio attributable to Contracts, at the annual rate of .10% (hereinafter, the "Quarterly Fee"), in connection with the expenses incurred by Security Life under Section 11 hereof. The payment of the Quarterly Fee shall commence at the end of the first calendar quarter in which Contract value has been allocated to a Portfolio. b) From time to time, the Parties hereto shall review the Quarterly Fee to determine whether it reasonably approximates the incurred and anticipated costs, over time, of Security Life in connection with its duties hereunder. The Parties agree to negotiate in good faith any change to the Quarterly Fee proposed by a Party in good faith. c) This Agreement shall not modify any of the provisions of Paragraph 4 of the Sales Agreement, but shall supplement those provisions. IV. Term of Agreement: Any Party may terminate this Agreement, without penalty, on 60 days' written notice to the other Parties. Unless so terminated, this Agreement shall continue in effect for so long as the Adviser or its successor(s) in interest, or any affiliate thereof, continues to perform in a similar capacity for the Fund, and for so long as any Contract value or any monies attributable to Security life is allocated to a Portfolio. V. Indemnification: a) Security Life agrees to indemnify and hold harmless the Adviser and its officers and directors, from any and all loss, liability and expense resulting from the gross negligence or willful wrongful act of Security Life under this Agreement, except to the extent such loss, liability or expense is the result of the willful misfeasance, bad faith or gross negligence of the Adviser in the performance of its duties, or by reason of the reckless disregard of its obligations and duties under this Agreement. b) Adviser agrees to indemnify and hold harmless Security Life and its officers and directors from any and all loss, liability and expense resulting from the gross negligence or willful wrongful act of Adviser under this Agreement, except to the extent such loss, liability or expense is the result of the willful misfeasance, bad faith or gross negligence of Security Life in the performance of its duties, or by reason of the reckless disregard of its obligations and duties under this Agreement. 3 VI. Notices: Notices and communications required or permitted hereby will be given to the following persons at the following addresses and facsimile numbers, or such other persons, addresses or facsimile numbers as the Party receiving such notices or communications may subsequently direct in writing: Fred Alger Management, Inc. 75 Maiden Lane New York, N.Y. 10038 Attn: Gregory S. Duch FAX: (201) 434-1459 Security Life of Denver Insurance Company 1290 Broadway Denver, Colorado 80203-5699 Attn: Stephan M. Largent FAX: (303) 860-2134 VII. Applicable Law: Except insofar as the Investment Company Act of 1940 or other federal laws and regulations may be controlling, this Agreement will be construed and the provisions hereof interpreted under and in accordance with New York law, without regard for that state's principles of conflict of laws. VIII. Execution in Counterparts: This Agreement may be executed simultaneously in two or more counterparts, each of which taken together will constitute one and the same instrument. IX. Severability: If any provision of this Agreement is held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement will not be affected thereby. X. Rights Cumulative: The rights, remedies and obligations contained in this Agreement are cumulative and are in addition to any and all rights, remedies and obligations, at law or in equity, that the Parties are entitled to under federal and state laws. 4 XI. Headings: The headings used in this Agreement are for purposes of reference only and shall not limit or define the meaning of the provisions of this Agreement. IN WITNESS WHEREOF, the Parties have caused this Agreement to be executed in their names and on their behalf by and through their duly authorized officers signing below. FRED ALGER MANAGEMENT, INC. SECURITY LIFE OF DENVER INSURANCE COMPANY By: /s/ Gregory Duch By: /s/ Steve Largent Name: Gregory Duch Name: Stephan M. Largent Title: Executive Vice President Title: Vice President 5 EX-1.A(8)(D) 21 ADMIN. SVC. AGMT. - FASCORP EXHIBIT 1.A (8) (d) ADMINISTRATION SERVICES AGREEMENT between Security Life of Denver Insurance Company and Financial Administrative Services Corporation AGREEMENT made as of the 21st day of November, 1994 by and between Financial Administrative Services Corporation ("FASCorp"), of 8515 East Orchard Road, Englewood, Colorado, 80111, and Security Life of Denver Insurance Company ("SLD"), of 1290 Broadway, Denver, Colorado, 80203-5699. WHEREAS, FASCorp shall provide data processing and other services to SLD pursuant to the terms and conditions of this Agreement and such other terms and conditions as SLD and FASCorp may agree in written amendments to this Agreement, NOW, THEREFORE, in consideration of the mutual covenants herein contained, the parties hereto agree as follows: SECTION 1 Terms of Appointment 1.01 Subject to the conditions set forth in this Agreement, SLD hereby appoints FASCorp as Administrative Services Agent. 1.02 FASCorp agrees to provide at its expense the necessary facilities, equipment, and personnel to perform its duties and obligations hereunder in accordance with accepted industry practice, and in full compliance with the rules and regulations of state insurance departments, and other regulatory bodies with jurisdiction over SLD, SLD Equities, Inc. and FASCorp. 1.03 Beacon Software Development Company ("Beacon") will provide the LifeCAD software package ('LifeCAD') to SLD to support the Contracts for which recordkeeping services will be provided by FASCorp hereunder. 1.04 SLD will facilitate the delivery by Beacon to FASCorp of LifeCAD and arrange for training by Beacon of FASCorp on LifeCAD. 1.05 FASCorp will provide the Unit Value Calculator software package (the "Unit Value Calculator") and build a connection between LifeCAD and the Unit Value Calculator to generate all the unit values as well as the accounting in support of the Contracts for which administrative and recordkeeping services will be provided by FASCorp hereunder. 1.06 SLD will provide necessary training of FASCorp on SLD's Contracts. 1.07 FASCorp agrees that it will perform, at the direction of SLD, those Administrative Services as set forth in Exhibit B attached, which may be amended by mutual agreement from time to time, and which is incorporated into this Agreement by this reference. FASCorp shall have only the authority necessary or incident to the performance of those services expressly set forth in this Agreement or in Exhibit B and shall have no other express or implied authority or right to act on behalf of SLD or to bind SLD with regard to any statement, representation or undertaking. FASCorp shall have no authority to alter, amend or waive any contractual provision on behalf of SLD without SLD's express written authorization. FASCorp shall be limited to act only in the capacity in which it is licensed. SECTION 2 Term 2.01 Subject to termination as hereinafter provided, this Agreement shall remain in full force and effect for a period of five (5) years, the initial term of the Agreement. This Agreement shall be renewed automatically for additional successive terms of eighteen (18) months at the end of the initial term and the end of each renewal term, subject to the provisions of Section 9.02, unless terminated as herein provided. SECTION 3 Fees and Expenses 3.01 SLD shall pay to FASCorp such fees and charges as are set forth in Exhibit A attached hereto and incorporated herein by reference. 3.02 SLD shall also reimburse FASCorp for all reasonable out-of-pocket expenses listed in the attached Exhibit A, as may be incurred by FASCorp in the performance of this Agreement. 3.03 FASCorp may impose a 1.5% per month late payment charge on balances of fees, charges or expenses outstanding for over 45 days. SECTION 4 Representations and Warranties of FASCorp FASCorp represents and warrants to SLD as follows: 4.01 It is a corporation duly organized and in good standing under the laws of the State of Colorado. 2 4.02 It is empowered under applicable laws to enter into and perform the services contemplated in this Agreement. 4.03 All requisite corporate proceedings have been taken to authorize it to enter into and perform the services contemplated in the Agreement. 4.04 It has and will continue to have and maintain the necessary facilities, equipment and personnel to perform its duties and obligations under this Agreement. 4.05 It has and will maintain a minimum capital and surplus of at least $50,000 during the term of this Agreement. FASCorp will provide to SLD within 30 days after execution of this Agreement, and thereafter at SLD's request, a copy of its most recent audited financial statement. SECTION 5 Representations and Warranties of SLD SLD represents and warrants to FASCorp as follows: 5.01 It is a corporation duly organized and in good standing under the laws of the State of Colorado. 5.01 It is empowered under the applicable laws to enter into and perform this Agreement. 5.03 All requisite corporate proceedings have been taken to authorize it to enter into and perform this Agreement. 5.04 No policy or other form will be provided by SLD to be administered by FASCorp unless it has been duly filed as necessary and approved by all applicable state insurance departments and other regulatory bodies with jurisdiction over SLD, and is in compliance with all federal and state laws and regulations. SECTION 6 Indemnification 6.01 FASCorp shall not be responsible for and SLD shall indemnify and hold FASCorp harmless from and against, any and all costs, expenses, losses, damages, charges, reasonable attorney's fees, payments and liability, which may be asserted against FASCorp or for which it may be held to be liable, arising out of or attributable to: a. SLD's refusal or failure to comply with the terms of this Agreement, or SLD's failure to act in a reasonable or customary manner in connection 3 with this Agreement, or which arise out of SLD's negligence or misconduct or which arise out of the breach of any representation or warranty of SLD hereunder; b. Reliance on or use by FASCorp in accordance with the terms of this Agreement such information and materials provided by or at the direction of SLD and instructions or directions given by the authorized individuals described in Exhibit C; or c. Reliance by FASCorp on LifeCAD to function properly and to accurately support SLD's Contracts. d. Any failure by SLD to comply with Federal, state or local laws or regulations with respect to the offering and/or sale of any insurance products or securities. e. Any matters associated with SLD or its Contracts or the sale of such Contracts subject to this Agreement which are unrelated to the services provided by FASCorp hereunder. 6.02 FASCorp shall be responsible for and shall indemnify and hold SLD harmless from and against any and all losses, damages, costs, charges, reasonable attorney's fees, payments, expenses and liability arising, out of or attributable to FASCorp's refusal or failure to comply with the terms of this Agreement, FASCorp's failure to act in a reasonable manner in connection with this Agreement, any failure by FASCorp to comply with federal, state or local regulations with respect to the books and records maintained by FASCorp, or which arise out of FASCorp's negligence or misconduct or which arise out of the breach of any representation or warranty of FASCorp hereunder. 6.03 At any time FASCorp may apply to a person indicated on SLD's "Schedule of Authorized Personnel" set forth in Exhibit C attached hereto and incorporated herein by reference as a person authorized to give instructions under this section with respect to any matter arising in connection with this Agreement. FASCorp shall not be liable for, and shall be indemnified by SLD, against any action taken or omitted by FASCorp in good faith and in the exercise of due care and diligence in reliance upon such instructions. 6.04 In the event malfunction of any FASCorp system causes an error or mistake in any record, report, data, information or output under the terms of this Agreement FASCorp shall at its expense correct and reprocess such records, provided that SLD shall promptly notify FASCorp in writing of such error or mistake in any 4 record, report, data, information, or output received by SLD. Such writing may be hand-delivered, sent by mail or courier or transmitted by telefax. 6.05 If either party believes it is entitled to indemnification hereunder, it shall, within five business (5) days of the commencement of any action or threat of any action, give written notice to the other party of any claim for which it believes it is entitled to indemnification; provided, however, that the failure to provide timely notice shall not relieve the indemnifying party of any liability which it may have to the other party as long as such notice is not unreasonably withheld or delayed. The parties shall cooperate with each other concerning any defense and give each other all information and assistance which either may reasonably request in defending any matter hereunder. 6.06 The provisions of this Section shall survive termination of this Agreement. 6.07 The provisions of this Section shall not be deemed to be a limitation upon a party's right to injunction, specific performance or any other legal or equitable remedy to which either party may be entitled by virtue of this Agreement or to prevent any breach or threatened breach of this Agreement. 6.08 IN NO EVENT AND UNDER NO CIRCUMSTANCES, HOWEVER, SHALL ANY PARTY UNDER THIS AGREEMENT BE LIABLE TO THE OTHER PARTIES UNDER ANY PROVISION OF THIS AGREEMENT FOR LOST PROFITS OR FOR EXEMPLARY, SPECIAL, PUNITIVE OR CONSEQUENTIAL DAMAGES. SECTION 7 Covenants of FASCorp 7.01 FASCorp shall establish and maintain facilities and procedures for the safekeeping of check forms and facsimile signature imprinting devices, if any, and all other documents, reports, records, books, files and other materials relative to this Agreement. 7.02 It is expressly understood and agreed that all documents, reports, records, books, files and other materials relative to this Agreement shall be the sole property of SLD and SLD Equities and that such as agent, during the effective terms property shall be held by FASCorp, of this Agreement. 7.03 FASCorp shall maintain back-up computer files, as necessary, so long as LifeCAD currently and continually allows FASCorp to maintain such records. The purpose of back-up and recovery is to permit file recovery in the event of destruction of 5 normal processing files. SLD may review the procedures in effect and inspect the storage facility upon demand. A copy of FASCorp's current procedures is attached hereto as Exhibit F. 7.04 All charges or premiums received by FASCorp on behalf of SLD from SLD's Lockbox Account shall be promptly remitted by FASCorp to the person entitled to it or deposited in a fiduciary account. Any payments received by FASCorp for insurance on behalf of SLD shall be deemed received by SLD, shall be held in a separate SLD trust account and shall be administered as set out in Exhibit B. Premium bills shall direct premium payors to send premiums to a lock box as set forth in Exhibit B. 7.05 No advertising or sales literature in connection with the Contracts shall be utilized by FASCorp unless it has been approved in writing by SLD prior to such use. 7.06 Except as specifically provided to the contrary in this Agreement, FASCorp shall be responsible for providing all technical and operational support, obtaining office space, purchasing all equipment and paying all costs and expenses associated with its provision of administration services to SLD hereunder, including, but not limited to, all rents, salaries and other overhead expenditures. 7.07 If FASCorp receives any notice from any source (including, but not limited to, the policy Owner or regulatory agency) of a lawsuit or other legal or administrative hearing, or proceeding being brought against SLD and involving the business administered for SLD by FASCorp, or the threat of any such lawsuit, hearing or proceeding, FASCorp shall immediately notify SLD and send a copy of all legal documents, correspondence and other material relevant thereto which FASCorp reasonably has access to: FASCorp agrees to cooperate fully with SLD in connection with any suit, hearing or proceeding and shall provide SLD with all books, records, documents and data requested by SLD in connection therewith; provided, however, FASCorp shall be entitled to review such requests with its counsel prior to furnishing SLD with such materials so long as such review is done in a timely manner. 7.08 FASCorp will conduct its business and performance obligations in accordance with all applicable federal and state laws, rules and regulations and in a manner which will not put SLD's or its affiliates' registrations and licenses in any jeopardy of revocation or suspension or cause SLD or any of its affiliates to sustain any disciplinary action of any nature, subject only to any limitations to which FASCorp may be subject due to the use of the LifeCAD system. 7.09 FASCorp acknowledges and agrees that all books and records maintained by FASCorp in connection with the Contracts shall be maintained and preserved in 6 conformity with the requirements of Rules 17a-3 and 17a-4 of the Securities Exchange Act of 1934 (the "1934 Act"), to the extent that such requirements are applicable to the Contracts; that all such books and records are maintained and held by FASCorp on behalf of SLD and SLD Equities, whose property they are and shall remain. FASCorp further acknowledges and agrees that all such books and records are at all times subject to inspection by the Securities and Exchange Commission ("SEC") in accordance with Section 17(a) of the 1934 Act, and undertakes to permit examination of such books and records at any time and from time to time during business hours by representatives or designees of the SEC or National Association of Securities Dealers, Inc., true, correct, complete and current hard copies of any or all or any part of such books and records. 7.10 FASCorp acknowledges, covenants and agrees that it shall issue payments, including commission payments to retail broker-dealers, on behalf of and on the account(s) of SLD, as a purely ministerial services for and on behalf of SLD Equities, and that the records in respect of such payments shall be properly reflected by FASCorp on the books and records maintained by it for SLD and SLD Equities. 7.11 FASCorp acknowledges, covenants and agrees that it will send a confirmation for each transaction which constitutes the sale of a security to the contract owner as required by applicable law, regulation or rule in such form as required by applicable law, regulation or rule. 7.12 FASCorp shall provide SLD with full and free access as reasonably requested, during ordinary business hours, to all documents, records, reports, books, files and other materials relative to this Agreement and maintained by FASCorp. 7.13 FASCorp shall furnish to SLD any information or reports in connection with its services to SLD, which the California Commissioner of Insurance may request in order to ascertain whether the variable life insurance operations of SLD are being conducted in a manner consistent with applicable California law, regulations and rules. SECTION 8 Covenants of SLD. 8.01 SLD shall, on a prompt basis, provide FASCorp with current forms of policies, prospectuses and applications, names and states of license of all insurance and/or broker-dealer agents and representatives authorized to sell the Contracts. 8.02 All policies subject to the services performed under this Agreement are underwritten by SLD. 7 8.03 SLD shall immediately provide FASCorp with written notice of any change of authority of persons authorized and enumerated in Exhibit C to provide FASCorp with instructions or directions relating to services to be performed by FASCorp under this Agreement. SECTION 9 Termination of Agreement 9.01 a) Either party may terminate this Agreement at the end of the initial term or any renewal term by providing at least 180 days prior written notice to the other. b) This Agreement may be terminated at any time upon the mutual written consent of the parties hereto. c) This Agreement may be terminated upon written notice of one party to the other hereto in the event of bankruptcy or insolvency of such party to which notice is given. d) This Agreement shall automatically be terminated in the event of its assignment, subject to the provisions of Section 10.01. 9.02 At least 180 days prior to the end of the initial or any renewal term hereof, FASCorp shall give SLD written notice if FASCorp desires to increase its fees or charges to SLD or to change the manner of payment. If FASCorp and SLD do not agree to fees and charges before the end of the term during which such notice is given by FASCorp, this Agreement shall terminate at the end of such term. 9.03 Additionally, this Agreement shall terminate at SLD's option because of: a) fraud, misrepresentation, conversion or unlawful withholding of funds by FASCorp; or b) the dissolution or disqualification of FASCorp to do business under any applicable state or federal law; or c) the suspension or revocation of any material license or permit held by FASCorp by the appropriate governmental agency or authority; or d) the sale (without the prior written consent of SLD, which consent shall not be unreasonably withheld) of FASCorp's business to an unaffiliated person 8 or entity, whether by merger, consolidation, or sale of substantially all of FASCorp's assets or stock or otherwise, during the term of, and any extension to, this Agreement. 9.04 At FASCorp's option because of fraud, misrepresentation, conversion, or withholding of funds belonging to FASCorp by SLD. 9.05 In order to act as administrative agent for the Contracts, FASCorp will depend on the correct operation and adequate functionality of LifeCAD provided by Beacon. The parties therefore agree that if during testing prior to initial "production" implementation, LifeCAD does not meet the requirements of FASCorp for Contract administration and if Beacon is unable to provide the necessary software modifications by the date actual production must commence, the Agreement will terminate automatically. Once production has commenced, if LifeCAD is not capable of supporting the Contract administration and if Beacon is unable to make reasonable corrections in a timely manner, the Agreement will terminate automatically. 9.06 The parties acknowledge that regulatory approval will be required for the policies and contracts to be administered under this Agreement and for their distribution by SLD 's broker-dealer. The parties agree that if regulatory approval for SLD 's broker-dealer distribution procedure is not received the Agreement will automatically terminate so long as no Contracts are in force. If there are in force Contracts, the termination procedures set forth in Section 9.01 will apply. Additionally, the parties agree that if all regulatory approval necessary for SLD to sell any one or more of the contracts to be administered hereunder is not received, the Agreement will automatically terminate, but only as to that contract or contracts. 9.07 If either of the parties hereto shall breach this Agreement or be in default in the performance of any of its duties and obligations hereunder ("the defaulting party"), the other party hereto may give written notice thereof to the defaulting party and if such default or breach shall not have been remedied within ninety (90) days after such written notice is given, then the party giving such written notice may terminate this Agreement by giving ninety (90) days written notice of such termination to the defaulting party, provided, however, that FASCorp will not be deemed to be in default if its failure to perform any of its duties and obligations hereunder is due to a defect or flaw in LifeCAD. 9.08 Termination of this Agreement by default or breach by SLD shall not constitute a waiver of any rights of FASCorp in reference to services performed prior to such termination of rights of FASCorp to be reimbursed for out-of-pocket expenditures and to collect fees; termination of this Agreement by default or breach by 9 FASCorp shall not constitute a waiver by SLD of any other rights it might have under this Agreement. 9.09 In the event of a termination, FASCorp will return LifeCAD to SLD and will make its computer record formats and other relevant systems information available to SLD for a machine conversion, subject to reimbursement to FASCorp for such assistance at its standard rates and fees in effect at that time. Additionally, the Unit Value Calculator may be purchased at FASCorp's standard rate and applicable fees for the transition thereof shall be assessed by FASCorp. FASCorp will provide any required training in any such conversion or transition at FASCorp's standard rate and applicable fees. As described in Sections 7.02 and 7.09, all data contained in the computer flies is the exclusive property of SLD. 9.10 During the period between the date of any notice of intention to terminate given pursuant to this Section 9 and the date of actual termination of the Agreement, each party shall continue to perform its obligations under this Agreement. 9.11 During any transition period FASCorp agrees to cooperate with SLD to effectuate an orderly transfer of all policy records and materials to SLD or its designee. For services performed during the transition period, FASCorp shall be compensated for its services pursuant to Exhibit A of this Agreement. 9.12 The parties agree that following a termination of this Agreement, for a period reasonable to effect an orderly transition, they will continue to perform each and every obligation hereunder. SECTION 10 Assignment 10.01 Neither this Agreement nor any rights or obligations hereunder may be assigned by either party without the prior written consent of the other. 10.01 This Agreement shall inure to the benefit of and be binding upon the parties hereto, SLD Equities and their respective successors and assigns, provided that any assignment is performed in accordance with Section 10.01 above. SECTION 11 Confidentiality 11.01 The parties hereto agree that all tapes, books, reference manuals, instructions, records, information and data pertaining to the business of the other party, FASCorp's systems, and the policyowners serviced by FASCorp hereunder, which 10 are exchanged or received pursuant to the negotiation of and/or the carrying out of this Agreement, shall remain confidential and shall not be voluntarily disclosed to any other person, except to the extent disclosure thereof may be required by law All such tapes, books, reference manuals, instructions, records, information and data in the possession of each of the parties hereto shall be returned to the party from whom it was obtained upon the termination or expiration of this Agreement. 11.02 FASCorp shall maintain the confidentiality of all trade secrets and other confidential information obtained from SLD or its affiliates, SLD Equities, First ING and Southland (collectively "SLD" for purposes of this Section 11). FASCorp will use all reasonable precautions and take all necessary steps to prevent any information obtained by FASCorp provided to it hereunder from being acquired by any unauthorized persons, including its parent company or any of its affiliates. FASCorp acknowledges that such information has been disclosed by SLD only to enable FASCorp to provide the services hereunder and that disclosure thereof would be damaging to SLD if such information were obtained by any competitor of SLD. 11.03 SLD shall maintain the confidentiality of all trade secrets and other confidential information obtained from FASCorp. SLD will use all reasonable precautions and take all necessary steps to prevent any information obtained by SLD provided to it hereunder from being acquired by any unauthorized persons, including its parent company or any of its affiliates other than First ING or Southland. SLD acknowledges that such information has been disclosed by FASCorp only to enable FASCorp to provide the services hereunder and that disclosure thereof would be damaging to FASCorp if such information were obtained by any competitor of FASCorp. 11.04 SLD shall use its best efforts to facilitate a confidentiality agreement between FASCorp and Beacon. SECTION 12 Insurance 12.01 Errors and Omissions Insurance. FASCorp, as a member of the Great- West Life family of companies, is currently self insured for errors and omissions coverage. Such coverage is for amounts up to and in excess of one million dollars per claim. 12.02 Fidelity and Theft Insurance. For the duration of this Agreement, FASCorp shall carry fidelity and theft insurance from any insurer rated "A" or better by A.M. Best Company. Such insurance shall cover the theft, loss or disappearance of any monies collected by FASCorp on SLD's behalf and shall 11 provide at least $1,000,000 coverage per occurrence. The policy shall not exclude any employee or principal of FASCorp. 12.03 Approval and Evidence of Insurance. FASCorp shall provide SLD with a copy of the fidelity and theft insurance prior to the effective date of this Service Agreement, with evidence that policy is full force. Additionally, FASCorp shall, on an annual basis, provide SLD with written certification from the insurers that the required insurance coverage has been renewed. 12.04 Notice of Cancellation. All required insurance contracts shall contain a clause which requires the insurers issuing the fidelity and theft insurance to provide SLD with thirty (30) days prior written notice in the event any required insurance coverage is canceled or the tenons of the insurance are materially altered. FASCorp shall give SLD written notice of any change or cancellation of such insurance. 12.05 Review of Required Insurance. The parties agree to review the amounts and terms of all required insurance from time to time to determine the adequacy of such insurance. 12.06 Survival. If this Service Agreement terminates for any reason, FASCorp shall use its best efforts to keep the insurance called for in this section in force for 3 years following termination. FASCorp shall give SLD at least 30 days prior notice of any change or cancellation of such insurance. SECTION 13 Arbitration 13.01 Any dispute which arises between the parties with respect to any of the terms of this Agreement, whether such dispute arises during the term of the Agreement or after the termination, shall be resolved through binding arbitration. Arbitration shall be conducted in accordance with the commercial rules of the American Arbitration Association ("AAA"). Each party agrees to waive its right, if any, to a jury trial. Each party shall bear its own cost in the arbitration proceedings. The judgment of the AAA may be entered in, and enforced by, any court of competent jurisdiction. SECTION 14 Miscellaneous 14.01 SLD or its duly authorized independent auditors have the right under this Agreement to perform on-site audits of records and accounts directly pertaining to the Contracts serviced by FASCorp at FASCorp's facilities in accordance with reasonable procedures and at mutually agreeable dates and times, but at least once annually. At the request of SLD FASCorp will make available to SLD's auditors 12 and representatives of the appropriate regulatory agencies all reasonably requested records and data. 14.02 This Agreement constitutes the entire agreement between the parties hereto and may not be modified except in written instrument executed by both of the parties hereto and except that if any section herein contained shall be found to be unenforceable as contrary to the current law, that section shall be severed and the remaining sections of this Agreement shall continue to be enforceable. 14.03 Neither party shall be liable for damages due to delay or failure to perform any obligation under this Agreement if such delay or failure results directly or indirectly from circumstances beyond the control and without the fault or negligence of such party. 14.04 It is understood and agreed that all services performed hereunder by FASCorp shall be as an independent contractor and not as an employee of SLD. 14.05 Beacon, through agreement with SLD, will provide FASCorp with LifeCAD at no charge to FASCorp. SLD agrees to execute and keep current a maintenance agreement for LifeCAD with Beacon, also at no charge to FASCorp. 14.06 FASCorp agrees not to use LifeCAD for any other party including FASCorp without entering into a separate agreement with Beacon. 14.07 FASCorp and SLD acknowledge that in using LifeCAD, FASCorp may encounter routine difficulties caused by software failure. FASCorp is authorized, without SLD's prior approval, to contact Beacon and incur, on SLD's behalf and at SLD's expense, any service costs that may be charged by Beacon to correct such failures, up to $1,000 per separate occurrence. Except for the foregoing, FASCorp is not authorized to cause SLD to incur any costs to make any changes or customizations of LifeCAD without SLD's express written consent. 14.08 This Agreement shall be governed by the laws of the State of Colorado. 13 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in duplicate, in their names and on their behalf by and through their duly authorized officers as of the day and year first above written. Security Life of Denver Insurance Company By: /s/ Steve Largent Title: Vice President Variable & Product Financial Administrative Services Corporation By: /s/ Joan W. McCallen Title: Vice President, Operations 14 Exhibit A Fee Schedule CONTRACTS: Individual variable life and variable annuity products of Security Life of Denver ("SLD"). FEES: A. Basic one-time set up charge due upon the signing of this Agreement: $70,000 which consists of two variable annuity products and one variable life product of SLD and one variable annuity product and one variable life product for each of First ING and Southland. If one additional affiliate of SLD contracts with FASCorp for similar services, that affiliate shall pay FASCorp $45,000 as a one-time set up charge, and FASCorp shall pay SLD $25,000 to reimburse SLD for the affiliate's share of the one-time set up charge. If two additional affiliates of SLD contract with FASCorp for similar services, the second affiliate shall pay FASCorp $36,666 as a one-time set up charge, and FASCorp shall pay SLD and the first affiliate each $8,333 to reimburse SLD and the first affiliate for their respective shares of the one-time set up charge. B. Processing Charges: 1. Policy Contract Processing Charges: Variable Monthly Service Fee Contract Volume Per Contract Variable Annuities First 30,000 $2.50 per policy, per month Over 30,000 $2.50 per policy, per month Storage, all contracts .08 per policy, per month Variable Life All $3.00 per policy, per month Storage, all contracts .08 per policy, per month The policy contract processing charges will be based on the aggregate policy count for each company at the end of the month. 2. Investment Option Unit Value Processing Charges: For each daily unit value calculation, the processing charge will be $70 per month. C. Minimum Monthly Contract Service Fee: The minimum monthly contract service fee schedule for SLD and any subsidiary of SLD contracting with FASCorp for similar services is: $70 per month for each daily unit value calculation, PER COMPANY, plus 1. For SLD alone - the greater of $10,000 per month or the actual Policy Contract Processing Charges plus the Unit Value Processing Charges. 2. For SLD and one affiliate - per company, the greater of $6,000 per month or the companies' aggregate of the actual Policy Contract Processing Charges plus the Unit Value Processing Charges, with such Processing Charges prorated between the companies according to Contract Volume. 3. For SLD and two affiliates - per company, the greater of $4,667 per month or the companies' aggregate of the actual Policy Contract Processing Charges plus the Unit Value Processing Charges, with such Processing Charges prorated among the companies according to Contract Volume. Effective the end of the month in which the first application is received, that company will be included in the above calculations for the minimum Monthly Contract Services Fee, and FASCorp will begin billing, the greater of the Minimum Monthly Contract Service Fee or the actual Policy Contract Processing Charges plus the Unit Value Processing Charges. D. Out-Of-Pocket Expenses: In addition to the fees set forth above, FASCorp will bill out-of-pocket expenses as they are incurred. Out-of-pocket expenses are expenditures for the items such as those listed below and any other items agreed to by the parties: 1. The cost of long distance telephone calls including toll-free "800" lines and facsimile (fax) transmissions to or from SLD, and to or from policyowners. Costs of any lines installed for network communications between FASCorp and SLD, 2 including CRT's and related minicomputer equipment. Costs of telecommunication lines and equipment installed to provide primary and backup support for on-line access to the administrative system, including transmission capabilities between FASCorp and SLD. 2. Cost of equipment (including maintenance) which is provided to or obtained by FASCorp for purposes of the Services Agreement. SLD will be responsible for such costs including costs under FASCorp leases and maintenance agreements with third parties for such equipment, including leases and maintenance agreements which may extend beyond the termination or expiration of the Services Agreement. 3. Cost of postage for mailing forms, reports, contracts, bills, statements, prospectuses, and other materials to policyowners or agents, and cost for postage and overnight delivery for any other communication to policyowners or FASCorp or SLD. 4. Cost of printing blank stock and the cost of set-up and printing (including per impression costs) confirmation statements, contract file folders, checks, tax reporting forms, contract pages, specification pages, envelopes, proxy or voting, instructions cards, periodic policyowner statements, separate account statements, individual and list bills, and any other required forms or reports. Cost of labor for folding, inserting and mailing functions 5. Cost of microfilm and microfiche equipment and supplies and the cost of transferring all necessary information to microfilm and/or microfiche. 6. Costs involved with on- or off-site storage for SLD records, documents, correspondence and other items. 7. Custom programming, and new product implementation at $75 per hour. 8. Normal and reasonable travel, meal and lodging expenses incurred during FASCorp's performance of the Services Agreement, if any. 3 Exhibit B Operational Plan Systems A. LifeCAD System will: 1. Produce the contract data page, standard policy pages, state variation pages. 2. Calculate and process periodic charges as specified in product prospectuses. 3. Calculate and process valuations as specified by product prospectus(es). 4. Calculate and process withdrawals (partial, full, periodic) as specified. 5. Calculate and process annuity payout amounts. 6. Calculate and process periodic transactions including free look transfer, dollar cost averaging transfer, automatic rebalance transfer as specified in the prospectus. 7. Produce reporting including confirmations, client statements, daily transactions, notification of upcoming maturities, lapse notification, billing notices, qualified plan reporting, COLI reporting. 8. Produce required extract files including accounting, tax reporting, production, electronic funds transfer, check writing, reinsurance, valuation, inforce illustration, SLD client alpha index, proxy solicitation. 9. Produce reports required to transact daily business with the mutual funds and for periodic reconciliations. 10. Accept import of unit values (accumulation, annuity) from FASCorp system. 11. Calculate and process changes in death benefits. 12. Perform appropriate past due processing on life products. Allow for reinstatements. 13. Accommodate other product features described in prospectus including persistency refunds, guaranteed death benefit provisions and riders. 14. Handle subsidiary/affiliate companies with products substantially similar to those of SLD. 15. Track state approvals by product, by company. As SLD will do the actual product filings information regarding approvals will be provided to FASCorp. 16. Store and provide access to agent licensing information. As SLD will do the actual agent appointments, information will be provided to FASCorp via interface with SLD systems and LifeCAD. 17. Accommodate SLD and regulatory audit requirements. 18. Maintain client account history as required to process transactions and administer contract provisions. 19. Systems will automatically interface with SLD and FASCorp systems. A scheduled time for data transmission will be determined and daily user involvement will not be required. 20. Interface LifeCAD with SLD to automatically feed to SLD systems any necessary updates for other SLD policies. 21. Provide information necessary for proxy preparation and mailings. B. Additional systems support is required to provide the following functions: 1. Automated voice response a. Inquiry for unit values, account values b. Transactions which update the account. 2. Interfaces, reporting requirements and other special requests from outside broker/dealers. 3. Electronic funds transfer capabilities a. Draw from accounts for premium payments b. Deposit disbursements to accounts. The functions described in this section B are considered essential by FASCorp. Development and implementation of these functions will be mutually agreed upon by SLD and FASCorp. Item 1 will be addressed during the first half of 1995. Item 2 will be bid by FASCorp on a per occurrence basis. Item 3(b) will be bid on by FASCorp at a future date. Item 3(a) has been bid by FASCorp and is scheduled for implementation 4th quarter, 1994. 2 ADMINISTRATIVE SERVICES A. Contract Issue - Annuity 1. Reviews application, applies issue criteria developed by SLD to application for annuity contract. Verifies license status of brokers/agents based on information supplied by SLD. SLD to provide a written set of issue criteria to FASCorp 2. Prepares contract data page, issues contract for paid business and mails to contract owners or agents. System will produce contract data pages. Policy page production to be automated as agreed upon by SLD and FASCorp. 3. Establishes and maintains annuitant and contract owner records, as applicable, on computer and manual systems. 4. Notifies dealer/agent of any error or missing data needed to establish annuitant or contract owner records. 5. Produces and mails required confirmation statements. 6. Deposits monies received with application into depository account. 7. Maintains inventory of all issue-related forms, contracts and endorsements based on updates provided by SLD. Printing to be coordinated with SLD. 8. For policies being exchanged from another company or IRA funds being transferred, FASCorp will request the funds from the other insurance company (or IRA custodian) using forms supplied by SLD. SLD will establish signing authority for FASCorp personnel. B. Policy Issue - Life 1. Upon receipt of a life application, FASCorp will check the binding requirements. Return of money, if required, will be coordinated with SLD. 2. Verifies license status of brokers/agents based on information supplied by SLD. 3. Upon completion of the underwriting and approval of the life application by SLD, FASCorp will prepare policy data page and issue policies for SLD approved applications and mail to brokers/agents. Policy data pages to be produced by LifeCAD. Policy page production to be automated as agreed upon by SLD and FASCorp. If any outstanding requirements at issue, SLD will inform FASCorp when to place policy into inforce status. Any required amendments will be prepared by SLD. 3 4. Establishes and maintains all policyowner records, as applicable, on computer and manual systems. SLD will be responsible for establishing and maintaining underwriting records both manual and system. Policy changes requiring underwriting will be coordinated with SLD. 5. Deposits premiums received into depository account. 6. Prepares and mails "Notice of Withdrawal Right" to life policyowners. 7. For policies being exchanged from another company, SLD will request the funds from the other insurance company. 8. Reissue and duplicate policy requests will be coordinated between FASCorp and SLD. 9. Maintains inventory of all issue-related forms, contracts and endorsements based on updates provided by SLD. Printing to be coordinated with SLD. C. Collection procedures (after policy/contract is in force) 1. Receives from lockbox the remittance information in accordance with processing requirements. 2. Processes payments received to customer accounts. 3. Prepares and mails required confirmation of transactions. 4. Deposits cash received directly by FASCorp under the policies into a designated bank account. 5. Transmits daily accounting and bank transfer authorization summaries prepared for each valuation period. 6. Bills for planned premiums at appropriate frequencies for life policies. 7. Notifies policyowner of approaching lapse. Administers grace period provisions. 8. Prepares and mails refunds as appropriate (declines, free look). D. Banking 1. Photocopies checks received directly by FASCorp and assigns them a control number. Balances, edits, endorses and prepares daily deposit. Reconciles bank lockbox deposits to applications received. 4 2. Deposits are placed into a depository account. 3. Transfers funds from the depository account to one of the following, as appropriate: a. General Account of Security Life b. Mutual Fund Custodian Account(s) c. Disbursement Account of Security Life and SLD Equities, Inc. d. Separate Accounts of Security Life Bank accounts and mutual fund accounts to be established by SLD with appropriate signing and trading authorizations established for FASCorp personnel. 4. Generates from the system daily cash journal summary reports and maintains detail of activity. 5. Processes disbursement transactions for policyowner or beneficiary, surrenders, withdrawals, loans, and death claims. Death claims administered by SLD. LifeCAD will produce check production extract file. Check production will be through a FASCorp checkwriting system. 6. LifeCAD will produce check production extract file for annuitants in payout phase whose contracts are administered by LifeCAD. Supplemental contract administered by LifeCAD. Supplemental Contract is the contract issued when an annuity is in the payout phase. The actual form of the contract is to be supplied by Security Life. Check production will be through a FASCorp checkwriting system. 7. SLD will maintain balances in the appropriate SLD bank accounts necessary to meet administrative needs identified in the contract. 8. SLD will obtain the appropriate authorizations to allow FASCorp to transfer funds amongst SLD accounts. 9. Reprocess dishonored items. Reverses associated transactions, prepares reports and communicates with policyowner. LifeCAD will reverse all ledger entries associated with dishonored items. 10. LifeCAD will produce check production extract file for systematic payouts (IRA income, systematic income and others which may be established). Check production will be through a FASCorp checkwriting system. E. Accounting/Auditing 1. Generates from the LifeCAD system daily accounting extracts for policies maintained on the system. 5 2. Generates from the LifeCAD system accounting information necessary to post entries to ledgers. 3. Retains systems generated reports in accordance with a retention schedule [tbd] mutually established and as required by regulatory authorities. Provides access to such reports for internal and external auditing. 4. Determines the "Net Amount Available for Investment" in mutual fund and places fund purchase/redemption orders with the appropriate mutual funds. Receives confirmation of mutual fund investments. 5. Maintains an inventory of all mutual fund shares owned, including the date purchased and sold, cost, book value, gain, loss, and other relevant information. 6. Reconciles inventory of mutual fund shares owned to reports of mutual fund shares owned supplied by mutual funds. 7. Cooperates in annual audit of separate account financials conducted for purposes of financial statement certification and publication and accommodates SLD or regulatory audits, as required. F. Pricing/Valuation 1. Collects information needed in determining variable account unit values from the mutual fund. This information includes the daily net asset value of the underlying mutual funds, any capital gains or dividend distribution made by the mutual funds and the number of mutual fund shares acquired or sold during the immediate preceding valuation date. 2. Enters required information into FASCorp system for unit value calculation to be performed. 3. FASCorp system will generate separate account ledger activity associated with unit valuation. SLD will specify the required accounting entries based on information available from the Unit Value Calculator. LifeCAD will be updated with the calculated unit values. G. Contract Owner Service/Record Maintenance 1. Receives and implements contract owner service requests including information requests, beneficiary changes, transfer of funds between eligible mutual funds, loan request, payout requests, exchange of policies, and changes of any other information maintained on the system. 6 2. Researches contract owner inquiries using both data stored in the system and manual records. Responds directly to any questions or inquires. 3. LifeCAD will generate a set of daily journals confirming financial changes made to annuity or life accounts. 4. Address changes will be coordinated between SLD and FASCorp. An interface to SLD systems to coordinate policy changes (name, address, beneficiary) will be developed. 5. Processes reinstatements when approved by SLD. 6. Produces tax reporting based on extracts from LifeCAD. H. Disbursement (Surrenders, Loans) 1. Receives requests for systematic, partial and full surrenders and loans from contract owners. Retains and accounts for any contract administrative charges. 2. Processes all surrender and loan requests against the policyowner files. Generates related separate account ledger accounting. 3. LifeCAD will produce check production extract file for surrenders and loans and forwards to contract owner in accordance with applicable law. Check production will be through a FASCorp checkwriting system. 4. Prepares and mails confirmation statements of disbursement transactions to contract owners. 5. LifeCAD will generate a report on surrenders and loans. 6. Reviews, causes to have printed, and maintains adequate supply of checks. 7. Contacts policyowner regarding tax withholding procedures, if required. 8. Backup withholding will be coordinated between FASCorp and SLD. I. Claims 1. Receives request for death claim from contract owners and beneficiaries. Immediately notifies SLD. In addition, any notification received by SLD regarding a policy administered by FASCorp will immediately be communicated to FASCorp. This is necessary to freeze the account. 7 2. If multiple policies are involved, SLD and FASCorp will coordinate sending claim forms. 3. Respond to request from SLD for disbursement of proceeds. Generate related separate account ledger accounting. 4. LifeCAD will produce check production extract file for disbursements as directed by SLD. Check production will be through a FASCorp checkwriting system. 5. Make changes to owner and/or annuitant information on LifeCAD as directed by SLD where no payout is required. 6. LifeCAD will generate report on death claims, if required. 7. Claims examination will be done by SLD. J. Commissions 1. Verifies license status of brokers/agents based on information supplied by SLD. 2. LifeCAD will produce detailed commission transactions for each policy financial transaction processed including premium application or reversal, cancellation, etc. for which a commission is required. 3. Prepares commission statements for broker/dealer firms. LifeCAD will produce check production extract file for any required checks. Check production will be through a FASCorp checkwriting system. 4. Creates tax reporting forms, if required, based on extracts from LifeCAD. 4. LifeCAD will generate required production information. K. Annuity Benefit Processing 1. Notifies owner of approaching annuitization approximately 90 days before annuitization date based on information generated by LifeCAD. 2. Receives information regarding annuitants going into the annuity (payout) phase. 3. Calculates the amount of the initial annuity payment for variable payout based on tables supplied by Security Life. Calculation of fixed payout based on information supplied by Security Life. 8 4. Deducts applicable premium taxes. LifeCAD will produce accounting information. Premium tax reporting and payment will be done by Security Life. 5. Establishes and maintains annuitant records. 6. Withholds appropriate federal and state income tax; LifeCAD generates journal entries for Security Life general ledger. 7. Provides information for general account ledger maintenance. 8. Maintains inventory of variable annuity units on annuitant master files using LifeCAD. Inventory of fixed annuity units to be maintained on LifeCAD (subject to system constraints). 9. LifeCAD will produce check production or electronic fund transfer extract file for payment of amount due to annuitant in accordance with applicable law. Check production will be through a FASCorp checkwriting system. 10. issues supplemental contract as defined in the variable annuity contract. Actual form of contract to be supplied by Security Life. Contract filing to be done by Security Life. 11. FASCorp will generate tax reporting based on extracts from LifeCAD. SLD will make all payments to the appropriate regulatory agencies for any taxes withheld and will effect all necessary associated reports. L. Proxy Processing 1. Receives record date information from the underlying mutual funds. Receives proxy solicitation material from underlying mutual funds. 2. Prepares proxy cards, if applicable. 3. Mails solicitation and resolicitations, if necessary. 4. Maintains all proxy registers and other required proxy material. 5. LifeCAD will provide all necessary information for preparation of proxy cards, if applicable. 6. Tabulates returned proxy cards and transmits results to underlying mutual funds. 9 M. Periodic Reports to Policyowners 1. Prepares and mails statement of account to each policyowner. Mails on schedule supplied by SLD. 2. Inserts and mails semi-annual and annual reports to policyowners, as required, both underlying mutual fund and Separate Account reports. Filing of reports with NASD and SEC will be done by Security Life. Printing of reports will be done by Security Life. N. Regulatory/Statement Reports 1. Prepares IRS reports for contract owners who received annuity payments or distributions. Mails to contract owners and transmits to IRS. 2. Prepares other IRS reports as required for IRAs (i.e., 5498s). 3. Responds to requests for calculations applicable to annuity payments as may be necessary to tax calculations. O. Actuarial and Management Reports 1. Provides, on the time schedule [tbd], extracts listed below: a. Reserve Extracts b. Production Extracts c. Premium Tax Extracts d. Loan Extracts e. Surrender Extracts f. Claims Report 10 EXHIBIT C SCHEDULE OF AUTHORIZED PERSONNEL The following individuals are authorized by Security Life of Denver Insurance Company to give instructions or direction to Financial Administrative Services Corporation with respect to matters arising in connection with the servicing to be performed under this Agreement: Steve Largent /s/ Steve Largent Jerrianne Smith /s/ Jerrianne Smith Donna Mosely Jan Gaston Bonnie Dailey Melodie Jones Exhibit D Backup Procedures Current backup practices and procedures are described herein and may be changed upon mutual agreement of Security Life of Denver ("SLD") and Financial Administrative Services Corporation ("FASCorp"). SLD products are administered on the LifeCAD system that resides on a PC network. Every night all LifeCAD data is copied from the PC network to the UNIX system where data is backed up on a corporate basis. PC Network: 1. For daily on line processes, the hardware configuration provides for all activity to be written to twin, redundant hard drives. 2. Before the nightly batch processing takes place, an image copy of the data is taken in case any batch problems require a rerun of the cycle. 3. Every night, after the batch cycle, the LifeCAD data is copied to the UNIX network where corporate backup procedures are followed. UNIX Network: Every night the UNIX network back up process waits for the data to be received from the LifeCAD PC network. At that time, the backup process is done according to the following corporate schedule: Level 0 - Each UNIX machine is totally backed up. This takes place every 3 to 4 months and the backup files are kept for 1 year. Every year end a special Level 0 is done and the backup files are kept for 7 years. Level 1 - Everything that changed since the last Level 0 back up is copied. This takes place every Friday night and the backup files are kept for 120 days. Level 5 - Everything that changed since the last Level 1 back up is copied. This takes place every night and the backup files are kept for 60 days. The back up files are moved to off-site storage daily, on a rotating basis. Hardware Location. The hardware that stores and backs up the SLD data is located in a separate computer operations building which has its own emergency power supply. EXHIBIT E Great-West Life & Annuity Insurance Company Statement of Support (See Attached) Great-West LIFE & ANNUITY INSURANCE COMPANY 8515 Past Orchard Road Englewood, CO 80111 Tel. (303) 689-3000 Address mail to: P.O. Box 1700. Denver, CO 80201 November 21, 1994 Security Life of Denver Insurance Company 1290 Broadway Denver. CO 80203-5699 Re: Financial Administrative Services Corporation ("FASCorp") Dear Madam or Sir: Please be advised that FASCorp is a member of the Great-West Life family of companies. As such, FASCorp is entitled to coverage through the self insurance arrangement for errors and omissions coverage maintained by the Great-West family of companies. Further, FASCorp is a wholly owned subsidiary of Great-West Life & Annuity Insurance Company ("GWL&A") and, as such, has the full financial backing of GWL&A. Sincerely, Dennis Low Executive Vice President Financial Services Great-West Life & Annuity Insurance Company EX-1.A(8)(E) 22 AMENDMENT SVC. AGMT. - FASCORP EXHIBIT 1.A(8)(e) SERVICES AGREEMENT THIS SERVICES AGREEMENT is made this 24th day of April, 1995 among Great West Life & Annuity Insurance Company ("GWL&A"), Financial Administrative Services Corporation ("FASCorp") and Security Life of Denver Insurance Company ("SLD"), collectively (the "Parties"). WHEREAS, SLD and FASCorp entered into an Administrative Services Agreement ("The Agreement") on November 21, 1994; and at this time FASCorp is in the process of becoming licensed in all states, plus the District of Columbia, but is not now licensed in all of these jurisdictions. WHEREAS, as time is of the essence, GWL&A has agreed to deliver the administrative services anticipated by The Agreement with SLD. In those jurisdictions where a Third Party Administrator ("TPA") license may be required, and FASCorp is not licensed; NOW, THEREFORE, the Parties agree to the following: 1. GWL&A agrees to provide the administrative services, as set forth in The Agreement, to SLD in jurisdictions where a TPA license may be required, but FASCorp is not licensed. 2. Attachment A to this Agreement enumerates the states where these services are to be provided by GWL&A. As FASCorp is licensed as a TPA in a jurisdiction, FASCorp will assume the provision of services set forth in The Agreement, and Attachment A will be updated. FASCorp agrees to promptly obtain licenses in all jurisdictions in which FASCorp is required to be licensed, and to timely obtain such license in any state which in the future enacts or promulgates legislation or regulations requiring such license. 3. All of the terms and conditions of The Agreement will apply to the Parties, with GWL&A substituting for FASCorp for the jurisdictions listed in Attachment A, as updated. 4. If disputes arising from this agreement can not be settled through negotiation, the Parties will first make a good faith effort to settle the dispute by mediation under the Commercial Mediation Rules of the American Arbitration Association, if such mediation does not resolve the dispute, Section 13 of The Agreement shall apply. 5. This Agreement will terminate on the earlier of the termination of The Agreement or the date when FASCorp is licensed in the last of the jurisdictions listed on Attachment A. THIS AGREEMENT IS AGREED TO BY: Great West Life & Annuity Insurance Security Life of Denver Insurance Company: Company /s/ Dennis Low /s/ Frank Wright Name: Dennis Low Name: Frank Wright Title: Executive Vice President, Title: Sr. Vice President, Financial Services Variable Sales /s/ Roy Weinstein /s/ Shirley A. Knarr Name: Roy Weinstein Name: Shirley A. Knarr Title: Asst. Vice President, Title: Actuarial Officer Systems Financial Administrative Services Corporation: /s/ Joan W. McCallin Name: Joan W. McCallin Title: President /s/ Beverly A. Byrne Name: Beverly A. Byrne Title: Secretary ATTACHMENT A April 21, 1995 Alaska New Mexico Arizona North Carolina Idaho Oklahoma Indiana Pennsylvania Maine South Carolina Missouri Tennessee Montana Wisconsin Nevada Wyoming New Hampshire EX-3.A 23 OPINION - COPELAND [Logo of Security Life Appears here] December 14, 1993 EXHIBIT 3.A Security Life of Denver Insurance Company Security Life Center 1290 Broadway Denver, Colorado 80203-5699 Dear Sirs: This opinion is furnished in connection with the Form S-6 Registration Statement being filed by Security Life of Denver Insurance Company ("Security Life") under the Securities Act of 1933, as amended (the "Act"), for the offering of interests ("Interests") in Security Life Separate Account L1 ("Separate Account L1") under the Flexible Premium Variable Life Insurance Policies ("Policies") to be issued by Security Life. The securities being registered under the Act are to be offered in the manner described in the Registration Statement. I have examined or supervised the examination of all such corporate records of Security Life and such other documents and such laws as I consider appropriate as a basis for the opinion hereinafter expressed. On the basis of such examination, it is my opinion that: 1. Security Life is a corporation duly organized and validly existing under the laws of the State of Colorado. 2. Separate Account L1 was duly created as a separate investment account of Security Life pursuant to the laws of the State of Colorado. 3. The assets of Separate Account L1 will be owned by Security Life. Under Colorado law and the provisions of the Policies, the income, gains and losses, whether or not realized, from assets allocated to Separate Account L1 must be credited to or charged against such Account, without regard to the other income, gains or losses of Security Life. 4. The Policies provide that the assets of Separate Account L1 may not be charged with liabilities arising out of any other business Security Life may conduct, except to the extent that assets of Separate Account L1 exceed its liabilities arising under the Policies. December 14, 1993 Page 2 5. The Policies and the Interests in Separate Account L1 to be issued under the Policies have been duly authorized by Security Life; and the Policies, including the Interests therein, when issued and delivered, will constitute validly issued and binding obligations of Security Life in accordance with their terms. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of my name under the caption "Legal Matters" in the Prospectus contained in the Registration Statement. Very truly yours, /s/ Eugene L. Copeland Eugene L. Copeland Senior Vice President Secretary and General Counsel EX-3.B 24 OPINION - WAGGONER [Logo of Security Life Appears here] April 27, 1998 EXHIBIT 3.B Security Life of Denver Insurance Company Security Life Center 1290 Broadway Denver, Colorado 80203-5699 Dear Sirs: This opinion is furnished in connection with the Form S-6 Registration Statement being filed by Security Life of Denver Insurance Company ("Security Life") under the Securities Act of 1933, as amended (the "Act"), for the offering of interests ("Interests") in Security Life Separate Account L1 ("Separate Account L1") under the Flexible Premium Variable Life Insurance Policies ("Policies") to be issued by Security Life. The securities being registered under the Act are to be offered in the manner described in the Registration Statement. I have examined or supervised the examination of all such corporate records of Security Life and such other documents and such laws as I consider appropriate as a basis for the opinion hereinafter expressed. On the basis of such examination, it is my opinion that: 1. Security Life is a corporation duly organized and validly existing under the laws of the State of Colorado. 2. Separate Account L1 was duly created as a separate investment account of Security Life pursuant to the laws of the State of Colorado. 3. The assets of Separate Account L1 will be owned by Security Life. Under Colorado law and the provisions of the Policies, the income, gains and losses, whether or not realized, from assets allocated to Separate Account L1 must be credited to or charged against such Account, without regard to the other income, gains or losses of Security Life. 4. The Policies provide that the assets of Separate Account L1 may not be charged with liabilities arising out of any other business Security Life may conduct, except to the extent that assets of Separate Account L1 exceed its liabilities arising under the Policies. April 27, 1998 page 2 5. The Policies and the Interests in Separate Account L1 to be issued under the Policies have been duly authorized by Security Life; and the Policies, including the Interests therein, when issued and delivered, will constitute validly issued and binding obligations of Security Life in accordance with their terms. I hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the use of my name under the caption "Legal Matters" in the Prospectus contained in the Registration Statement. Very truly yours, /s/ Gary W. Waggoner Gary W. Waggoner Vice President, General Counsel and Corporate Secretary EX-6.B 25 OPINION - L.TAYLOR EXHIBIT 6.B [SECURITY LIFE LOGO APPEARS HERE] April 27, 1998 Security Life of Denver Insurance Company 1290 Broadway Denver, CO 80203-5699 Re: Security Life Separate Account L1 Post-Effective Amendment No. 7; SEC File No. 33-74190 Gentlemen: In my capacity as Senior Vice President and Chief Actuary of Security Life of Denver Insurance Company ("Security Life"), I have provided actuarial advice concerning: The preparation of Post-Effective Amendment No. 7 to the Registration Statement on Form S-6 (File No. 33-88148) to be filed by Security Life and its Security Life Separate Account L1 (the "Separate Account") with the Securities and Exchange Commission ("SEC") under the Securities Act of 1933 with respect to the "Strategic Advantage" and "Strategic Advantage II" variable universal life insurance policies; and The preparation of the policy forms for the variable universal life insurance policies described in Post-Effective Amendment No. 7 (the "Policies"). It is my professional opinion that 1. The aggregate fees and charges under the Policies are reasonable in relation to the services rendered the expenses expected to be incurred and the risks assumed by Security Life. 2. The illustrations of death benefits, account value, cash surrender value, and total premiums paid plus interest at 5 percent shown in the Prospectus, based on the assumptions stated in the illustration are consistent with the provisions of the Policies. The rate structures of the Policies have not been designed so as to make the relationship between premiums and benefits, as shown in the illustrations included, appear to be correspondingly more favorable to prospective buyers than other illustrations which could have been provided at other combinations of ages, sex of the insured, death benefit option and amount, definition of life insurance test, premium class, and premium amounts. Insureds of other premium classes may have higher costs of insurance charges. 3. All other numerical examples shown in the Prospectus are consistent with the Policies and our other practices, and have not been designed to appear more favorable to prospective buyers than other examples which could have been provided. I hereby consent to the filing of this opinion as an Exhibit to Post-Effective Amendment No. 7 to the Registration Statement and the use of my name under the heading "Experts" in the Prospectus. Sincerely, /s/ Lawrence D. Taylor Lawrence D. Taylor, F.S.A., M.A.A.A. LDT:tls EX-7.A 26 CONSENT ERNST & YOUNG EXHIBIT 7.A Consent of Independent Auditors We consent to the reference to our firm under the captions "Experts" and "Financial Statements" and to the use of our reports dated April 13, 1998 (with respect to the financial statements of Security Life Separate Account L1) and April 10, 1998 (with respect to the financial statements of Security Life of Denver Insurance Company), in Post-Effective Amendment No. 7 to the Registration Statement (Form S-6 No. 33-74190) and related Prospectus of Security Life of Denver Insurance Company and Security Life Separate Account L1 dated May 1, 1998. /s/ ERNST & YOUNG LLP Denver, Colorado April 24, 1998 EX-7.B 27 CONSENT MAYER BROWN & PLATT EXHIBIT 7.B CONSENT OF MAYER, BROWN & PLATT We hereby consent to the reference to our firm under the caption "Legal Matters" in the Additional Information section comprising a part of Post-Effective Amendment No. 7 to the Form S-6 Registration Statement of Security Life Separate Account L1 with respect to File No. 33-74190. /s/ Mayer, Brown & Platt Mayer, Brown & Platt Washington, D.C. 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