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LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
Group Variable Annuity Contracts Lincoln Life & Annuity
Variable Annuity
Account L
120 Madison Street, 17th Floor
Syracuse, New York 13202
(800) 893-7168
VARIABLE ANNUITY III
[LOGO OF LINCOLN LIFE(R) APPEARS HERE]
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PROSPECTUS
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MAY 1, 1997
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFERING IN ANY JURISDICTION IN WHICH
SUCH OFFERING MAY NOT LAWFULLY BE MADE. NO PERSON IS AUTHORIZED TO MAKE ANY
REPRESENTATION IN CONNECTION WITH THIS OFFERING OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUS OF
THE APPLICABLE UNDERLYING FUNDS WHICH SHOULD BE RETAINED FOR FUTURE REFERENCE.
INVESTMENT IN THE CONTRACTS INVOLVES INVESTMENT RISK, INCLUDING MARKET FLUC-
TUATION AND POSSIBLE LOSS OF PRINCIPAL AMOUNT INVESTED.
NY90003
This prospectus describes group annuity contracts ("Contracts") offered by Lin-
coln Life & Annuity Company of New York ("Lincoln Life"), a subsidiary of The
Lincoln National Life Insurance Company. The Contracts are designed to enable
Participants and Employers to accumulate funds for retirement programs meeting
the requirements of the following Sections of the Internal Revenue Code of
1986, as amended (the "Code"): 401(a), 403(b), 408 and 457 and other related
Sections as well as for programs offering non-qualified annuities. A Partici-
pant is an employee or other person affiliated with the Contractholder on whose
behalf a Participant Account is maintained under the terms of the Contract.
The Contracts permit Contributions to be deposited in the Guaranteed Interest
Division, which is part of Lincoln Life's General Account, and in certain Sub-
Accounts in Lincoln Life's Lincoln Life & Annuity Variable Annuity Account L
("Variable Investment Division"). Contributions to the Guaranteed Interest Di-
vision earn interest at a guaranteed rate declared by Lincoln Life. Contribu-
tions to the Variable Investment Division will increase or decrease in dollar
value depending on the investment performance of the underlying funds in which
the Sub-Accounts invest.
Currently, the Variable Investment Division consists of the nine Sub-Accounts
listed below: Next to each listed Sub-Account is the name of the fund (the
"Fund") in which the Sub-Account invests. For more information about the in-
vestment objectives, policies and risks of the Funds please refer to the pro-
spectus for each of the Funds.
<TABLE>
<S> <C>
Index Account.......................................... Dreyfus Stock Index Fund
Growth I Account....................................... Fidelity's Variable
Insurance Products Fund:
Growth Portfolio
Asset Manager Account.................................. Fidelity's Variable
Insurance Products Fund
II: Asset Manager
Portfolio
Growth II Account...................................... American Century
Variable Portfolios,
Inc.: VP Capital
Appreciation
Balanced Account....................................... American Century
Variable Portfolios,
Inc.: VP Balanced
International Stock Account............................ T. Rowe Price
International Series,
Inc.
Socially Responsible Account........................... Calvert Responsibly
Invested Balanced
Portfolio
Equity-Income Account.................................. Fidelity's Variable
Insurance Products Fund:
Equity-Income Portfolio
Small Cap Account...................................... Dreyfus Variable
Investment Fund: Small
Cap Portfolio
</TABLE>
This prospectus is intended to provide information regarding the Contracts of-
fered by Lincoln Life that you should know before investing. Please read and
retain this prospectus for future reference. A Statement of Additional Informa-
tion ("SAI"), dated May 1, 1997 has been filed with the Securities and Exchange
Commission and is incorporated by this reference into this Prospectus. If you
would like a free copy write to: Lincoln Life & Annuity Company of New York,
P.O. Box 9737, Portland, ME 04104 or call 1-800-893-7168. A table of contents
for the SAI appears on the last page of this Prospectus.
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TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
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<S> <C>
DEFINITIONS................................................................ 3
SUMMARY (Including Fee Table and Performance Information).................. 5
CONDENSED FINANCIAL INFORMATION............................................ 9
FINANCIAL STATEMENTS....................................................... 9
LINCOLN LIFE, THE VARIABLE INVESTMENT DIVISION AND THE FUNDS............... 10
CONTRACT PROVISIONS........................................................ 13
DEDUCTIONS AND CHARGES..................................................... 19
ANNUITY PERIOD............................................................. 21
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 23
VOTING RIGHTS.............................................................. 29
OTHER CONTRACT PROVISIONS.................................................. 29
GUARANTEED INTEREST DIVISION............................................... 30
TABLE OF CONTENTS FOR STATEMENT OF ADDITIONAL INFORMATION.................. 33
</TABLE>
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DEFINITIONS
ACCUMULATION UNIT: An accounting unit of measure used to record amounts of
increases to, decreases from and accumulations in each Sub-Account during the
Accumulation Period.
ACCUMULATION UNIT VALUE: The dollar value of an Accumulation Unit in each Sub-
Account on any Valuation Date.
ACCUMULATION PERIOD: The period commencing on a Participant's Participation
Date and terminating when the Participant's Account balance is reduced to zero,
either through withdrawal(s), annuitization, imposition of charges, payment of
a Death Benefit or a combination thereof.
ANNUITANT: The person receiving annuity payments under the terms of the
Contract.
ANNUITY COMMENCEMENT DATE: The date on which Lincoln Life makes the first
annuity payment to the Annuitant as required by the Retired Life Certificate.
ANNUITY CONVERSION AMOUNT: The amount applied toward the purchase of an
annuity.
ANNUITY PERIOD: The period concurrent with or following the Accumulation
Period, during which an Annuitant's annuity payments are made.
BENEFICIARY: The person(s) designated to receive a Participant's Account
balance in the event of the Participant's death during the Accumulation Period
or the person(s) designated to receive any applicable remainder of an annuity
in the event of the Annuitant's death during the Annuity Period.
BUSINESS DAY: A day on which Lincoln Life's service office in Portland, Maine,
and the New York Stock Exchange are customarily open for business.
CONTRIBUTIONS: All amounts deposited under a Contract, including any amount
transferred from another contract or Trustee.
CONTRACT: A Group Variable Annuity contract issued by Lincoln Life to the
Contractholder.
CONTRACTHOLDER: The party named as the Contractholder on the group annuity
contract issued by Lincoln Life. The Contractholder may be an Employer, a
retirement plan trust, an association or any other entity allowed under the
law.
DIVISION(S): The Guaranteed Interest Division and/or the Variable Investment
Division.
EMPLOYER: The organization specified in the Contract which offers the Plan to
its employees.
FUNDS: The underlying funds in which the Sub-Accounts invest. Funds are
investment vehicles which offer their shares only to insurance companies'
separate accounts and other qualifying investors.
GENERAL ACCOUNT: All assets of Lincoln Life other than those in the Variable
Investment Division or any other separate account.
GROSS WITHDRAWAL AMOUNT: The amount by which a Participant's Account is reduced
when a withdrawal occurs, including any applicable Annual Administration
Charge.
GUARANTEED ANNUITY: An annuity for which Lincoln Life guarantees the amount of
each payment for as long as the annuity is payable.
GUARANTEED INTEREST DIVISION: The Division maintained by Lincoln Life for the
Contracts and other contracts for which Lincoln Life guarantees the principal
amount and interest credited thereto subject to any fees and charges as set
forth in the Contract. Amounts allocated to the Guaranteed Interest Division
are part of Lincoln Life's General Account.
LINCOLN LIFE: Lincoln Life & Annuity Company of New York.
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NET CONTRIBUTIONS: The sum of all Contributions credited to a Participant
Account less any Net Withdrawal Amounts, outstanding loan (including principal
and due and accrued interest) and amounts converted to a Payout Annuity.
NET WITHDRAWAL AMOUNT: The amount paid when a withdrawal occurs.
PARTICIPANT: An employee or other person affiliated with the Contractholder on
whose behalf an Account is maintained under the terms of the Contract.
PARTICIPANT ACCOUNT: An account maintained for a Participant during the
Accumulation Period the total balance of which equals the Participant's Account
balance in the Variable Investment Division plus the Participant's Account
balance in the Guaranteed Interest Division.
PARTICIPATION ANNIVERSARY: For each Participant, a date at one year intervals
from the Participant's Participation Date. If an anniversary occurs on a non-
Business Day, it is treated as occurring on the next Business Day.
PARTICIPATION DATE: A date assigned to each Participant corresponding to the
date on which the first Contribution on behalf of that Participant is received
by Lincoln Life. A Participant will receive a new Participation Date if such
Participant makes a Total Withdrawal, as defined in this prospectus, and
Contributions on behalf of the Participant are resumed under any Contract.
PARTICIPATION YEAR: A period beginning with one Participation Anniversary and
ending the day before the next Participation Anniversary, except for the first
Participation Year which begins with the Participation Date.
PAYOUT ANNUITY: A series of payments paid under the terms of a Contract to a
person. A Payout Annuity may be either a Guaranteed Annuity or a Variable
Annuity or a combination Guaranteed and Variable Annuity.
PLAN: The retirement program offered by an Employer to its employees for which
a Contract is used to accumulate funds.
RECEIPT: Receipt by Lincoln Life at its service office in Portland, Maine.
SUB-ACCOUNT: An account established in the Variable Investment Division which
invests in shares of a corresponding Fund.
VALUATION DATE: A Business Day. Accumulation Units and Annuity Units are
computed as of the close of trading on the New York Stock Exchange.
VALUATION PERIOD: A period used in measuring the investment experience of each
Sub-Account. The Valuation Period begins at the close of trading on the New
York Stock Exchange on one Valuation Date and ends at the corresponding time on
the next Valuation Date.
VARIABLE ANNUITY: An annuity with payments that increase or decrease in
accordance with the investment results of the selected Sub-Accounts.
VARIABLE INVESTMENT DIVISION: The Division which is maintained by Lincoln Life
for these Contracts and certain other Lincoln Life contracts for which Lincoln
Life does not guarantee the principal amount or investment results. The
Variable Investment Division is the Lincoln Life & Annuity Variable Annuity
Account L which is a group of assets segregated from the General Account whose
income, gains and losses, realized or unrealized, are credited to or charged
against the Variable Investment Division without regard to other income, gains
or losses of Lincoln Life. The Variable Investment Division currently consists
of nine Sub-Accounts. Additional Sub-Accounts may be added in the future.
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SUMMARY
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
Lincoln Life is a life insurance company chartered under New York law on June
6, 1996. Lincoln Life is a subsidiary of The Lincoln National Life Insurance
Company.
CONTRACTS OFFERED
The Group Variable Annuity Contracts offered by this prospectus are available
to Employers and other entities to provide a way to accumulate funds for
retirement and to provide Payout Annuities. Lincoln Life offers Contracts
designed to enable Participants and Employers to accumulate funds for
retirement programs meeting the requirements of the following Sections of the
Internal Revenue Code of 1986, as amended (the "Code"): 401(a), 403(b), 408,
457 and other related Sections as well as for programs offering non-qualified
annuities.
HOW CONTRIBUTIONS ARE MADE
Contributions under the Contract are deposited by the Contractholder.
Depending upon the type of Plan offered, Contributions may consist of salary
reduction Contributions, Employer Contributions or Participant post-tax
Contributions. Contributions are forwarded by the Contractholder to Lincoln
Life and allocated among the two Divisions in accordance with information
provided by the Contractholder. See "Contract Provisions, Contributions under
the Contract."
Special limits apply to transfers and withdrawals from the Guaranteed
Interest Division. See "Guaranteed Interest Division."
DIVISIONS OFFERED
Contributions may be allocated to the Guaranteed Interest Division or to the
Variable Investment Division or to both Divisions. The Variable Investment
Division currently consists of nine Sub-Accounts. A Contractholder may choose
to offer between zero and nine of the Sub-Accounts to its Participants under a
Contract. The Sub-Accounts invest their assets in shares of a corresponding
Fund. For a full description of the Funds, see the prospectuses for the Funds.
TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period, a Participant or a Contractholder under
certain Plans may make transfers between and among Divisions and Sub-Accounts.
Certain Plans may limit the transfers in dollar amount, type of Contribution,
or frequency. Certain Plans may require Contractholder approval for a transfer.
See "Transfers between Divisions and Sub-Accounts."
WITHDRAWALS
Subject to the restrictions imposed by the Code and regulations thereof and
by the applicable Plan, each year Participants may withdraw up to 20% of the
Guaranteed Interest Division account balance, or, if liquidating or
transferring the entire Guaranteed Interest Division account value, specified
amounts according to a pre-determined five year schedule. With respect to
Section 401(a) Plans and Plans subject to Title I of the Employee Retirement
Income Security Act of 1974 (ERISA), the Contractholder must authorize Lincoln
Life to process a withdrawal request by a Participant. Withdrawal requests
under Section 457 Plans must also be authorized by the Contractholder. With
respect to withdrawal requests by Participants under Plans not subject to Title
I of ERISA, certain Contracts may require that the Participants must certify to
Lincoln Life that an eligible event under the Code has occurred. Withdrawal
requests must be in writing and in a form acceptable to Lincoln Life.
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Certain Plans are also subject to distribution requirements under Section
401(a)(9) of the Code including the incidental death benefit requirements of
Section 401(a)(9)(G). Certain transfers from one Qualified Plan contract to
another Qualified Plan contract are not subject to withdrawal restrictions
under the Code. Withdrawals and distributions may have tax consequences,
including possibly a 10% Federal Excise Tax for premature distributions.
See "Federal Income Tax Considerations."
DEATH BENEFITS
The Contracts provide for a Death Benefit for a Participant who dies during
the Accumulation Period. See "Contract Provisions, Death Benefits."
PAYOUT ANNUITIES
As permitted by the applicable Plan, a Participant or a Beneficiary of a
deceased Participant may elect to convert all or part of the Participant's
Account balance or the Death Benefit, as appropriate, to a Payout Annuity.
Lincoln Life offers both Guaranteed and Variable Annuities or a combination
Guaranteed and Variable Annuity. The range of annuity options available
includes life annuities and annuities for a specific time period as well as
others described more fully in this prospectus. See "Annuity Period."
FREE-LOOK PROVISION
A Participant under a Section 403(b) or 408 Plan and certain Non-Qualified
Plans has ten days, in most cases, from the date the Participant receives an
Active Life Certificate to notify Lincoln Life in writing that the Participant
does not choose to participate under the Contract and to receive a return of
funds. See "Free-Look Period."
FEE TABLE
The following table and examples, prescribed by the Securities and Exchange
Commission (the "SEC"), are included to assist Contractholders and Participants
in understanding the transaction and operating expenses imposed directly or
indirectly under the Contracts. The standardized tables and examples assume the
highest deductions possible under the Contracts, whether or not such deductions
actually would be made from a Participant's Account.
<TABLE>
<S> <C>
Contract Related Transaction Expenses/1//
Sales Load Imposed on Purchases: 0%
Annual Administration Charge/2// $25
Separate Account Annual Expenses
(as a percentage of average daily net assets)
Mortality and Expense Risk Charge: 1.20%
Other Charges: 0.00%
Total Separate Account
Annual Expenses: 1.20%
</TABLE>
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Fund Expenses/3//
(as a percentage of average daily net assets)
<TABLE>
<CAPTION>
INDEX G-I/4// AMGR/4// G-II BAL INT'L SOC RES/5// EQI/4// SMCAP
----- ------- -------- ---- ---- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Management Fees: 0.245 0.61 0.64 1.00 1.00 1.05 0.71 0.51 0.75
Other Expenses 0.055 0.08 0.10 0 0 0 0.13 0.07 0.04
(after expense
reimbursements):
Total Fund Expenses: 0.300 0.69 0.74 1.00 1.00 1.05 0.84 0.58 0.79
</TABLE>
Example #1: Assuming total withdrawal of the Participant's Account balance at
the end of the period shown./6//
A $1,000 investment would be subject to the expenses shown, assuming 5% annual
return on assets.
<TABLE>
<CAPTION>
G-
INDEX I/4// AMGR/4// G-II BAL INT'L SOC RES/5// EQI/4// SMCAP
----- ----- -------- ----- ----- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 21.88 25.78 26.28 28.87 28.87 29.37 27.28 24.68 26.78
3 Years 67.50 79.24 80.73 88.47 88.47 89.95 83.71 75.94 82.22
Example #2: Assuming annuitization of the Participant's Account at the end of
the period shown.
A $1,000 investment would be subject to the expenses shown, assuming 5% annual
return on assets.
<CAPTION>
G-
INDEX I/4// AMGR/4// G-II BAL INT'L SOC RES/5// EQI/4// SMCAP
----- ----- -------- ----- ----- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 21.88 25.78 26.28 28.87 28.87 29.37 27.28 24.68 26.78
3 Years 67.50 79.24 80.73 88.47 88.47 89.95 83.71 75.94 82.22
Example #3: Assuming persistency of the Participant's Account through the
periods shown.
A $1,000 investment would be subject to the expenses shown, assuming 5% annual
return on assets.
<CAPTION>
G-
INDEX I/4// AMGR/4// G-II BAL INT'L SOC RES/5// EQI/4// SMCAP
----- ----- -------- ----- ----- ----- ----------- ------- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 Year 21.88 25.78 26.28 28.87 28.87 29.37 27.28 24.68 26.78
3 Years 67.50 79.24 80.73 88.47 88.47 89.95 83.71 75.94 82.22
</TABLE>
The effect of the Annual Administration Charge for a period is determined by
dividing the total amount of such charges collected in the previous year by the
total average net assets of the accounts for the previous year, as of the
previous month ended; accounts include accounts available under Variable Annuity
III of Lincoln Life and under corresponding accounts of First UNUM Life
Insurance Company, pending assumption reinsurance by Lincoln Life of Variable
Annuity III contracts issued through such corresponding accounts.
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/1// The examples do not take into account any deduction for premium taxes
which may be applicable.
/2// The Employer has the option of paying the Annual Administration Charge on
behalf of the Participants under a Contract. In such a situation, the pro-
jected expenses would be lower than those indicated in the examples. This
charge is not imposed during the Annuity Period. In certain situations the
Annual Administration Charge may be reduced or eliminated. See "Deductions
& Charges--Annual Administration Charge."
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/3// Until complete order instructions are received, initial Contributions may
be allocated temporarily to Fidelity's Variable Insurance Products Fund:
Money Market Portfolio ("VIPF Money Market Portfolio"). Management fees
for this fund are 0.21%. Other expenses are 0.09%. Total Fund Expenses
are 0.30%. The Mortality and Expense Risk Charge is not assessed. For a
discussion of the Money Market Portfolio, please see "Initial
Contributions."
/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 and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, the total operating
expenses presented in the table would have been 0.56% for Equity Income
Portfolio, 0.67% for Growth Portfolio, and 0.73% for Asset Manager
Portfolio.
/5// The figures above are based on expenses for fiscal year 1996, and have
been restated to reflect an increase in transfer agency expenses of 0.03%
expected to be incurred in 1997. "Management Fees" includes a performance
adjustment, which could cause the fee to be as high as 0.85% or as low as
0.55%, depending on performance. "Other Expenses" reflects an indirect
fee of 0.03%. Net fund operating expenses after reductions for fees paid
indirectly (again, restated) would be 0.81%.
/6// The Contracts are designed for retirement planning. Withdrawals prior to
retirement or the Annuity Commencement Date are not consistent with the
long-term purposes of the Contracts and the applicable tax laws.
Withdrawals may also be subject to federal income tax and a 10% Federal
tax penalty.
The fee table and examples reflect expenses and charges of the Sub-
Accounts and the expenses of the applicable Fund for the year ended December 31,
1996. HOWEVER, THE EXAMPLES SHOULD NOT BE CONSIDERED A REPRESENTATION OF PAST OR
FUTURE EXPENSES AND CHARGES OF THE SUB-ACCOUNTS OR THE FUNDS. SIMILARLY, THE
ASSUMED 5% ANNUAL RATE OF RETURN IS NOT AN ESTIMATE OR A GUARANTEE OF FUTURE
INVESTMENT PERFORMANCE. See "Deductions and Charges" in this prospectus and the
discussion of Fund Management in the prospectus for each of the Funds for
further information.
PERFORMANCE INFORMATION
The Variable Investment Division may advertise or use in sales literature
information concerning the investment performance of the various Sub-Accounts.
No performance presentation should be considered as representative of future
investment results. Actual performance is a function not only of the investment
management of the underlying Funds and market forces, but of the time and
frequency of Contributions, the charges and fees imposed under the Contract,
the fees and expenses of the Funds, and transfers made by a Participant, among
other factors.
The investment performance of the Sub-Accounts may be advertised in
comparison with the performances of other variable annuities, other investment
companies (such as mutual funds), and recognized indices (such as the Dow Jones
Industrial Average, Standard & Poor's 500 Composite Stock Price Index, NASDAQ
Index, Consumer Price Index), and data published by Lipper Analytical Services,
Inc., Morningstar, and Variable Annuity Research and Data Service or comparable
services. Performance of the Sub-Accounts may also be compared with performance
of other types of investments. Some advertisements may also include published
editorial comments and performance rankings by independent organizations and
publications that monitor the performance of separate accounts and mutual
funds.
The Sub-Accounts may advertise average annual total return performance
information according to the SEC standardized formula. Average annual total
return shows the average annual percentage increase, or decrease, in the value
of a hypothetical $1,000 contribution allocated to a Sub-Account from the
beginning to the end of each specified period of time. The SEC standardized
formula gives effect to all applicable charges under the Contracts. This method
of calculating performance further assumes that (i) a $1,000 contribution was
allocated to a Sub-Account, (ii) no transfers or additional
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payments were made and (iii) the withdrawal of the investment occurs at the end
of the period. Premium taxes are not included in this calculation. The Sub-
Accounts may also advertise this total return performance as described above on
a cumulative basis.
The Sub-Accounts may present total return information computed on a calendar
year basis. The Sub-Accounts may also present total return information over
specified periods of time (computed on an average annual or cumulative basis)
assuming that no administrative charge will be deducted. The Sub-Accounts may
present hypothetical examples that apply the total return to a hypothetical
initial investment. The Sub-Accounts may also present total return information
based on different amounts of periodic investments. For additional performance
information, please refer to the Statement of Additional Information.
PUBLISHED RATINGS
From time to time, in advertisements or in reports to Contractholders,
Lincoln Life may reflect endorsements. Endorsements are often in the form of a
list of organizations, individuals or other parties which recommend Lincoln
Life or the Contracts. The endorser's name will be used only with the
endorser's consent. It should be noted that the list of endorsements may change
from time to time.
Also, from time to time, the rating of Lincoln Life as an insurance company
by A.M. Best may be referred to in advertisements or in reports to
Contractholders. Each year the A.M. Best Company reviews the financial status
of thousands of insurers, culminating in the assignment of Best's Ratings.
These ratings reflect Best's opinion of the relative financial strength and
operating performance of an insurance company in comparison to the norms of the
life/health insurance Industry. Best's ratings range from A++ to F.
In addition, the claims-paying ability of Lincoln Life as measured by the
Standard and Poor's Rating Group may be referred to in advertisements or in
reports to Contractholders. A Standard and Poor's insurance claims-paying
ability rating is an assessment of an operating insurance company's financial
capacity to meet the obligations of its insurance policies in accordance with
their terms. Standard and Poor's ratings range from AAA to CCC.
From time to time Lincoln Life may refer to Moody's Investors Service rating
of Lincoln Life. Moody's Investors Service financial strength ratings indicate
an insurance company's ability to discharge policyholder obligations and claims
and are based on an analysis of the insurance company and its relationship to
its parent, subsidiaries, and affiliates. Moody's Investors Service ratings
range from Aaa to C.
These ratings are opinions of an operating insurance company's financial
capacity to meet the obligations of its insurance contracts in accordance with
their terms. Claims-paying ability ratings do not refer to an insurer's ability
to meet non-contract obligations (i.e., debt/commercial paper). Lincoln Life's
ratings should not be considered as bearing on the investment performance of
assets held in the Variable Investment Division or the safety (or lack thereof)
for an investment in the Variable Investment Division.
CONDENSED FINANCIAL INFORMATION
No condensed financial information for the Variable Investment Division is
presented because, as of December 31, 1996, the Variable Investment Division
had not yet commenced operations.
FINANCIAL STATEMENTS
The audited statutory-basis financial statements of Lincoln Life may be found
in the Statement of Additional Information. No financial statements are
included for the Variable Investment Division because, as of December 31, 1996,
the Variable Investment Division had not yet commenced operations.
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LINCOLN LIFE, THE VARIABLE INVESTMENT
DIVISION AND THE FUNDS
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
Lincoln Life is a life insurance company chartered under New York law on June
6, 1996. Lincoln Life's principal executive offices are located at 120 Madison
Street, 17th Floor, Syracuse, New York 13202. Lincoln Life is licensed to sell
variable contracts in New York.
Lincoln Life is a subsidiary of The Lincoln National Life Insurance Company.
The Lincoln National Life Insurance Company was incorporated under the laws of
Indiana on June 12, 1905. The Lincoln National Life Insurance Company is
principally engaged in offering life insurance policies and annuity policies,
and ranks among the largest United States stock life insurance companies in
terms of assets and life insurance in force.
The Lincoln National Life Insurance Company is wholly owned by Lincoln
National Corporation ("LNC"), a publicly held insurance holding company
incorporated under Indiana law on January 5, 1968. The principal offices of
both The Lincoln National Life Insurance Company and LNC are located at 1300
South Clinton Street, Fort Wayne, Indiana 46801. Through subsidiaries, LNC
engages primarily in the issuance of life insurance and annuities, property
casualty insurance, and other financial services. Administrative services
necessary for the operation of the Variable Investment Division and the
Contracts are currently provided by The Lincoln National Life Insurance
Company. See "Deductions and Charges--Annual Administration Charge."
LNC EQUITY SALES CORPORATION
LNC Equity Sales Corporation ("LNC Equity"), a registered broker-dealer, is
the principal underwriter of the Contracts. As such, LNC Equity will be
offering the Contracts and performing all duties and functions that are
necessary and proper for distribution of the Contracts. LNC Equity has also
entered into sales agreements with independent broker-dealers for the sale of
the Contracts. Lincoln Life may pay sales commissions to broker-dealers up to
an amount equivalent to 3.5% of Contributions under a Contract. LNC Equity's
principal business address is 3811 Illinois Road, Suite 205, Fort Wayne,
Indiana 46804.
THE VARIABLE INVESTMENT DIVISION
On July 24, 1996, the Board of Directors of Lincoln Life authorized the
establishment of the Variable Investment Division in accordance with New York
Insurance Laws. Under New York law, funds in the Variable Investment Division
are owned by Lincoln Life and Lincoln Life is not, nor can Lincoln Life be, a
trustee with respect to those funds. The Variable Investment Division is
registered with the Securities and Exchange Commission ("SEC") as a unit
investment trust under the Investment Company Act of 1940 ("1940 Act").
Registration with the SEC does not involve supervision of the management or
investment practices or policies of either the Variable Investment Division or
Lincoln Life by the SEC.
The Variable Investment Division currently consists of nine Sub-Accounts. The
Sub-Accounts invest in shares of the Funds. Therefore, the investment
experience of the Sub-Accounts depends on the performance of the Funds.
The Variable Investment Division is a segregated investment account, meaning
that its assets may not be charged with liabilities resulting from any other
business Lincoln Life may conduct. The income, gains and losses, realized or
unrealized, from assets allocated to each Sub-Account of the Variable
Investment Division are credited to or charged against that Sub-Account,
without regard to other income, gains or losses in Lincoln Life's general
account or any other separate account or Sub-Account. The Contract provides
that the assets of the Variable Investment Division may not be
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charged with liabilities arising out of any other business of Lincoln Life.
Lincoln Life may accumulate in the Variable Investment Division proceeds from
charges under the Contract and other amounts in excess of the Variable
Investment Division assets representing Contract reserves and liabilities.
Lincoln Life is the issuer of the Contracts and the obligations set forth
therein, other than those of the Contractholder or the Participant, are
obligations of Lincoln Life.
THE FUNDS
The nine Sub-Accounts invest directly in nine corresponding Funds. Each of
these Funds was formed as an investment vehicle for insurance company separate
accounts.
Information about each of the Funds, including their investment objectives
and investment management, is contained below. Additional information about the
Funds, their investment policies, risks, fees and expenses and all other
aspects of their operations, can be found in the prospectuses for the Funds,
which should be read carefully before investing. THERE IS NO ASSURANCE THAT ANY
FUND WILL ACHIEVE ITS STATED OBJECTIVES. Additional copies of the Funds'
prospectuses, as well as their Statements of Additional Information, can be
obtained directly from each of the Funds without charge by writing to the
particular Funds at the addresses noted on the front of the Fund prospectus.
Shares of the Funds are sold not only to the Sub-Accounts but also to variable
annuity and variable life separate accounts of other insurance companies and
qualified retirement plans. For a disclosure of possible conflicts involved in
the Sub-Accounts investing in Funds that are so offered, see the applicable
Fund prospectus.
DREYFUS STOCK INDEX FUND
Dreyfus Stock Index Fund is an open-end, non-diversified management
investment company known as an index fund. Its goal is to provide investment
results that correspond to the price and yield performance of publicly traded
common stocks in the aggregate, as represented by the Standard & Poor's 500
Composite Stock Price Index. The Fund is neither sponsored by nor affiliated
with Standard & Poor's Corporation.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, acts as the Fund manager and Mellon Equity Associates, an affiliate of
Dreyfus located at 500 Grant Street, Pittsburgh, Pennsylvania 15258, is the
Fund index manager.
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO OF ACACIA CAPITAL CORPORATION
CALVERT RESPONSIBLY INVESTED BALANCED PORTFOLIO: The Calvert Responsibly
Invested Balanced Portfolio seeks total return above the rate of inflation
through an actively managed, non-diversified portfolio of common and preferred
stocks, bonds, and money market instruments which offer income and growth
opportunity and which satisfy the social concern criteria established for the
Portfolio. Shares of the Portfolio are offered only to insurance companies for
allocation to certain of their variable accounts.
The Calvert Asset Management Company, Inc., located at 4550 Montgomery
Avenue, Suite 1000N, Bethesda, Maryland 20814, serves as the Portfolio's
investment adviser.
SMALL CAP PORTFOLIO OF DREYFUS VARIABLE INVESTMENT FUND
Dreyfus Variable Investment Fund is an open-end, diversified management
investment company.
THE SMALL CAP PORTFOLIO: The Portfolio seeks to maximize capital appreciation.
The Small Cap Portfolio seeks out companies that The Dreyfus Corporation
believes have the potential for significant
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growth. Under normal market conditions, the Portfolio will invest at least 65%
of its total assets in companies with market capitalization of less than $1.5
billion, at the time of purchase, both domestic and foreign which the Portfolio
believes to be characterized by new or innovative products or services which
should enhance prospects for growth in future earnings. The Portfolio may also
invest in special situations such as corporate restructurings, mergers or
acquisitions.
The Dreyfus Corporation, located at 200 Park Avenue, New York, New York
10166, serves as the Portfolio's investment adviser.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND: EQUITY-INCOME, GROWTH PORTFOLIO,
AND MONEY MARKET PORTFOLIO
EQUITY-INCOME PORTFOLIO: The Portfolio seeks reasonable income by normally
investing at least 65% of its total assets in income-producing common or
preferred stock and the remainder in debt securities.
GROWTH PORTFOLIO: The Portfolio seeks to achieve capital appreciation. The
Portfolio normally purchases common stocks, although its investments are not
restricted to any one type of security. Capital appreciation may also be found
in other types of securities, including bonds and preferred stocks.
MONEY MARKET PORTFOLIO: The Portfolio seeks to obtain as high a level of
current income as is consistent with preserving capital and providing
liquidity. For more information regarding the Portfolio, into which initial
Contributions are invested pending Lincoln Life's receipt of a complete order,
please see the "Initial Contributions" section.
Fidelity Management & Research Company ("FMR") is the manager of the Equity-
Income Portfolio, the Growth Portfolio and the Money Market Portfolio and is
located at 82 Devonshire Street, Boston, Massachusetts 02109.
FIDELITY'S VARIABLE INSURANCE PRODUCTS FUND II: ASSET MANAGER PORTFOLIO
ASSET MANAGER PORTFOLIO: The Portfolio seeks high total return with reduced
risk over the long term by allocating its assets among domestic and foreign
stocks, bonds and short-term fixed income instruments.
FMR is the manager of the Portfolio and is located at 82 Devonshire Street,
Boston, Massachusetts 02109. FMR or its affiliate may compensate Lincoln Life
or its affiliate for administrative, distribution, or other services. Such
compensation would be based on assets of the Fidelity Funds attributable to the
Contracts and certain other contracts issued by Lincoln Life and its
affiliates.
VP CAPITAL APPRECIATION AND VP BALANCED OF AMERICAN CENTURY VARIABLE
PORTFOLIOS, INC.
VP CAPITAL APPRECIATION: The Portfolio seeks capital growth by investing
primarily in common stocks that are considered by management to have better-
than-average prospects for appreciation.
VP BALANCED: The Portfolio seeks capital growth and current income. Its
investment team intends to maintain approximately 60% of the portfolio's assets
in common stocks that are considered by its manager to have better than average
prospects for appreciation and the balance in bonds and other fixed income
securities.
American Century Variable Portfolios, Inc. is managed by American Century
Investment Management, Inc. (formerly Investors Research Corporation), which
also manages the American
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Century family of mutual funds. American Century Investment Management, Inc.
has its principal place of business at 4500 Main Street, Kansas City, Missouri
64111.
Lincoln Life or its affiliate may perform certain administrative or other
services that would otherwise be performed by American Century Services
Corporation, and American Century Investment Management, Inc. may pay Lincoln
Life or its affiliate for such services. Such compensation would be based on
assets of the American Century Funds attributable to the Contracts and certain
other contracts issued by Lincoln Life and its affiliates.
INTERNATIONAL STOCK PORTFOLIO OF T. ROWE PRICE INTERNATIONAL SERIES, INC.
INTERNATIONAL STOCK PORTFOLIO: The International Stock Portfolio seeks long-
term growth of capital through investments primarily in common stocks of
established, non-U.S. companies.
The Series is managed by Rowe Price-Fleming International, Inc., one of
America's largest international no load mutual fund managers with approximately
$25 billion under management as of December 31, 1996 from its offices in
Baltimore, London, Tokyo, Hong Kong and Singapore.
CONTRACT PROVISIONS
GENERAL
These Contracts were designed for Employers and other entities to enable
Participants and Employers to accumulate funds for retirement programs meeting
the requirements of the following Sections of the Internal Revenue Code of
1986, as amended (the "Code"): 401(a), 403(b), 408, 457 and other related
Sections as well as for programs offering non-qualified annuities. An Employer,
Association or trustee in some circumstances, may enter into a Contract with
Lincoln Life by filling out an application and returning it to Lincoln Life.
Upon Lincoln Life's acceptance of the application, Contractholders or an
affiliated Employer can forward Contributions on behalf of employees who then
become Participants under the Contracts. For Plans that have allocated rights
to the Participant, Lincoln Life will issue to each Participant a separate
Active Life Certificate that describes the basic provisions of the Contract to
each Participant.
CONTRIBUTIONS UNDER THE CONTRACT
Generally, under the Contracts, Contributions are forwarded by the
Contractholders to Lincoln Life for investment. Depending on the Plan, the
Contributions may consist of salary reduction Contributions, Employer
Contributions or post-tax Contributions.
Contributions may accumulate on either a guaranteed or variable basis
depending upon the Divisions available under the Contract and/or the Division
in which the Contributions are deposited. Contributions to the Guaranteed
Interest Division become part of Lincoln Life's General Account and are
guaranteed a minimum rate of interest. See "Guaranteed Interest Division."
Contributions to the Variable Investment Division increase or decrease in value
daily to reflect the investment experience of the Sub-Accounts in which the
Contributions are invested.
Contributions by Participants may be in any amount unless there is a minimum
amount set by the Contractholder or Plan. A Contract may require the
Contractholder to contribute a minimum annual amount on behalf of all
Participants. Annual Contributions under Qualified Plans may be subject to
maximum limits imposed by the Code. Annual Contributions under non-qualified
plans may be limited by the terms of the Contract. In the Statement of
Additional Information see "Tax Law Considerations" for a discussion of these
limits. Subject to any restrictions imposed by the Plan or the Code, transfers
from other contracts and qualified rollover Contributions will be accepted.
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Contributions must be in United States funds. All withdrawals and
distributions under this Contract will be in U.S. funds. If a bank or other
financial institution does not honor the check or other payment method
constituting a Contribution, Lincoln Life will treat the Contribution as
invalid. All allocation and subsequent transfers resulting from the invalid
Contributions shall be reversed and the party responsible for the invalid
Contribution shall reimburse Lincoln Life for any losses or expenses resulting
from the invalid Contribution.
INITIAL CONTRIBUTIONS
The initial Contribution for a Participant will be credited to the
Participant's Account no later than two (2) Business Days after it is received
by Lincoln Life at its service office if it is preceded or accompanied by a
completed enrollment form containing all the information necessary for
processing the Participant's Contribution. If Lincoln Life does not receive a
complete enrollment form, Lincoln Life will notify the Contractholder or the
Participant that Lincoln Life does not have the necessary information to
process the Contribution. If the necessary information is not provided to
Lincoln Life within five (5) Business Days after Lincoln Life first receives
the initial Contribution, Lincoln Life will return the initial Contribution
less any withdrawal(s) by the Participant or by the Contractholder, unless the
Participant or the Contractholder specifically consents to Lincoln Life
retaining the Contribution until the enrollment form is made complete.
Notwithstanding the above, when the Contract includes language regarding the
"Pending Allocation Account", the following shall apply: Where state approval
has been obtained, if Lincoln Life receives Contributions which are not
accompanied by a properly completed Enrollment Form, Lincoln Life will notify
the Contractholder of that fact and deposit the Contributions to the Pending
Allocation Account, unless such Contributions are designated to another Account
in accordance with the Plan. Within two (2) Business Days of receipt of a
properly completed Enrollment Form, the Participant's Account balance in the
Pending Allocation Account will be transferred in accordance with the
allocation percentages elected on the Enrollment Form. All future Contributions
will also be allocated in accordance with these percentages until such time as
the Participant may notify Lincoln Life of a change. If a properly completed
Enrollment Form is not received after three monthly notices have been sent, the
Participant's Account balance in the Pending Allocation Account will be
refunded to the Contractholder within 105 days of the date of the initial
Contribution. The Pending Allocation Account invests in Fidelity's Variable
Insurance Products Fund Money Market Portfolio and is not available as an
investment option under the group annuity contract. Mortality & Expense Risk
Charges and the Annual Administration Charge do not apply to this Account.
These charges will be applicable upon receipt of a properly completed
Enrollment Form and the Participant's contract Participation Date will be the
date money was deposited in the Pending Allocation Account.
ALLOCATION OF CONTRIBUTIONS
A Participant must designate in writing, subject to the Plan, the percent of
their Contribution which will be allocated to each Division and to each Sub-
Account available under their Contract. The Contributions allocation percentage
to the Guaranteed Investment Division or any Sub-Account can be in any whole
percent. A Participant whose Employer offers two or more Lincoln Life contracts
for the same type of Qualified or Non-Qualified Plan may allocate Contributions
to a maximum of ten Sub-Accounts and the Guaranteed Interest Division.
Participants, subject to the terms of the Plan, may change the allocation of
Contributions by notifying Lincoln Life in writing or by telephone in
accordance with procedures published by Lincoln Life. Telephone requests for
allocation changes follow the same verification of identity rules as for
Transfers. (See "Telephone Transfers.") When Lincoln Life receives a notice in
writing, the form must be acceptable to Lincoln Life. Upon receipt by Lincoln
Life, the change will be effective for all Contributions received concurrently
with the allocation change form and for all future Contributions, unless a
later date is requested. Changes in the allocation of future Contributions have
no effect on amounts a Participant may have already
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contributed. Such amounts, however, may be transferred between Divisions and
Sub-Accounts pursuant to the requirements described in "Transfers between
Divisions and Sub-Accounts." Allocations of Employer Contributions may be
restricted by the applicable plan.
SUBSEQUENT CONTRIBUTIONS
The Contractholder will forward Contributions to Lincoln Life specifying the
amount being contributed on behalf of each Participant. The Contractholder must
send Contributions and provide such allocation information in accordance with
procedures established by Lincoln Life. The Contributions shall be allocated
among the Guaranteed Interest Division and the Variable Investment Division in
accordance with the Contractholder's or the Participant's written instructions
as described above in "Allocation of Contributions."
INVESTMENT OF CONTRIBUTIONS
Contributions are invested as of the date of receipt at Lincoln Life's
service office, provided that they are received prior to 4:00 p.m. (Eastern
Time) on a Business Day and allocation information is provided in a form
acceptable to Lincoln Life in accordance with procedures established by Lincoln
Life. If the Contribution is not received prior to 4:00 p.m. (Eastern Time),
Lincoln Life will invest the Contribution on the next Business Day.
Contributions on behalf of a Participant which are allocated to the Variable
Investment Division will be credited with Accumulation Units as of that date. A
Participant's interest in the Variable Investment Division during the
Accumulation Period is the value of the Participant's Accumulation Units in the
Variable Investment Division. The number of Accumulation Units credited to a
Participant's Account in a Sub-Account is calculated by dividing the
Contribution allocated to the Sub-Account by the dollar value of an
Accumulation Unit next determined after receipt of the Contribution. The number
of Accumulation Units purchased will not vary as a result of any subsequent
fluctuations in the Accumulation Unit Value. The Accumulation Unit Value, of
course, fluctuates with the investment performance of the underlying Fund and
also reflects deductions and charges made against the Variable Investment
Division.
DETERMINATION OF ACCUMULATION UNIT VALUE
Lincoln Life determines the Accumulation Unit Value of each Sub-Account on
each Valuation Date. Accumulation Unit Values are determined by multiplying the
Net Investment Factor for the current Valuation Period by the Accumulation Unit
Value as of the end of the immediately preceding Valuation Period.
Lincoln Life uses a Net Investment Factor to measure the daily fluctuations
in value of a Sub-Account. The Net Investment Factor for any Valuation Period
is determined as follows:
(a) The net asset value per share of the underlying Fund as of the end of
a Valuation Period is added to the amount per share of any dividends or
capital gain distributions paid by the Fund during that Valuation Period;
(b) The amount in (a) above is then divided by the net asset value per
share of the underlying Fund as of the end of the immediately preceding
Valuation Period;
(c) The result of (a) divided by (b) is then multiplied by one minus the
annual mortality and expense risk charge to the n/365th power where n
equals the number of calendar days since the immediately preceding Valua-
tion Date.
The above calculation will be adjusted by the amount per share of any taxes
which are incurred by Lincoln Life because of the existence of the Variable
Investment Division.
The Participant's Account balance is equal to the sum of the Participant's
Account balances in both the Variable Investment Division and the Guaranteed
Interest Division.
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TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
During the Accumulation Period and subject to the terms of the Plan,
transfers may be made of all or part of a Participant's Account balance in any
Division or Sub-Account to another Sub-Account or Division. Transfers will not
change the allocation of future Contributions to the Divisions and Sub-
Accounts. Lincoln Life does not require that any minimum amount be transferred.
To effect a transfer, Lincoln Life must receive a written transfer request in a
form acceptable to Lincoln Life. During any one calendar year, a Participant
may make one transfer from the Guaranteed Interest Division to the Variable
Investment Division in an amount not to exceed 20% of the Guaranteed Interest
Division Account balance pursuant to the provisions of the Contract.
Transfers to or from the Variable Investment Division are made using the
Accumulation Unit Value next computed following Lincoln Life's receipt of the
written transfer request.
TELEPHONE TRANSFERS BETWEEN DIVISIONS AND SUB-ACCOUNTS
Lincoln Life may accept telephone transfers from Participants when this is
allowed by the Contractholder. In order to prevent unauthorized or fraudulent
transfers, Lincoln Life will require a Participant to provide certain
identifying information before Lincoln Life will act upon their instructions.
Lincoln Life may also assign the Participant a Personal Identification Number
(PIN) to serve as identification. Lincoln Life will not be liable for following
telephone instructions it reasonably believes are genuine. Telephone transfer
requests may be recorded and written confirmation of all transfer requests will
be mailed to the Participant or Contractholder on the next Business Day.
Telephone transfers will be processed on the Business Day that they are
received when they are received at the Lincoln Life service office before 4:00
p.m. Eastern Time. If the Participant or Contractholder determines that a
transfer has been made in error, the Participant or Contractholder must notify
Lincoln Life within 30 days of the confirmation notice date. See "Contract
Provisions, Transfers between Divisions and Sub- Accounts."
WITHDRAWALS
During the Accumulation Period and subject to the terms of the Plan,
withdrawals may be made from either or both Divisions of all or part of the
Participant's Account balance in a Division or Sub-Account remaining after
deductions for any applicable (1) Annual Administration Charge (imposed on
Total Withdrawals), (2) premium taxes, and (3) outstanding loan including loan
security. Annuity Conversion Amounts are not considered withdrawals. See
"Annuity Period, Annuities: General."
Special limits apply to withdrawals (and transfers to the Variable Investment
Division) from the Guaranteed Interest Division. See "Guaranteed Interest
Division."
Notwithstanding such limits, a Participant may withdraw 100% of their
Guaranteed Interest Division Account balance at any time provided that Lincoln
Life receives satisfactory proof of the following events: (a) the Participant
has attained age 59 1/2; (b) the Participant has died; (c) the Participant has
incurred a disability as defined under the Contract; (d) the Participant has
separated from service from their Employer, or (e) the Participant has incurred
a financial hardship. A Contractholder may choose to add the requirement that
the Participant be age 55 or older and separated from service in order to
receive a 100% withdrawal from the Contract; or to eliminate "financial
hardship" as an event entitling the Participant to a 100% withdrawal. Under
401(a) Contracts, the Contractholder may also choose to require participation
under the Contract for a specified number of years in conjunction with the
standard 100% withdrawal conditions (disability, age 59 1/2, separation from
service and financial hardship) and the above features, if added, in order to
be entitled to a 100% withdrawal. A Contractholder choosing one of these
features may receive a different declared interest rate under the Guaranteed
Interest Division of their Contract than under Contracts not offering these
features.
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All withdrawal requests must indicate the amount to be withdrawn and be
submitted in a form acceptable to Lincoln Life. If the request does not specify
the Sub-Accounts and/or the Divisions from which the withdrawal is to be made,
the withdrawal will be made pro rata based on balances in the Sub-Accounts and
the Guaranteed Investment Division. Lincoln Life does not require that any
minimum amount be withdrawn. Telephone withdrawal requests are not permitted.
Withdrawals from the Variable Investment Division are made by reducing the
Participant's number of Accumulation Units in the applicable Sub-Account. In
determining the number of Accumulation Units to be reduced, Lincoln Life uses
the Accumulation Unit Value next computed after Lincoln Life's receipt of the
written withdrawal request.
Payment of all Variable Investment Division withdrawal amounts generally will
be made within seven days after receipt by Lincoln Life of the withdrawal
request in a form acceptable to Lincoln Life. See "Market Emergencies."
TOTAL WITHDRAWALS
A Total Withdrawal can only be made by a Participant who has no outstanding
loans under the Contract. A Total Withdrawal of a Participant's Account will
occur when (a) the Participant or Contractholder requests the liquidation of
the Participant's entire Account balance, or (b) the amount requested results
in a remaining Participant's Account balance of less than or equal to the
Annual Administration Charge, in which case the request is treated as if it
were a request for liquidation of the Participant's entire Account balance.
Any Active Life Certificate must be surrendered to Lincoln Life when a Total
Withdrawal occurs. If a Contractholder resumes Contributions on behalf of a
Participant after a Total Withdrawal, the Participant will receive a new
Participation Date and Active Life Certificate.
A Participant refund under the free-look provisions is not considered a Total
Withdrawal.
PARTIAL WITHDRAWALS
A Partial Withdrawal of a Participant's Account will occur when less than a
Total Withdrawal is made from a Participant's Account.
SYSTEMATIC WITHDRAWAL OPTION
Under certain Contracts Participants who are at least age 59 1/2, are
separated from service from their employer or are disabled and certain spousal
beneficiaries and alternate payees who are former spouses may be eligible for a
Systematic Withdrawal Option ("SWO") under the Contract. Payments are made only
from the Guaranteed Interest Division. Under the SWO a Participant may elect to
withdraw either a monthly amount which is an approximation of the interest
earned between each payment period based upon the interest rate in effect at
the beginning of each respective payment period or a flat dollar amount
withdrawn on a periodic basis. A Participant must have a vested pre-tax account
balance of at least $10,000 in the Guaranteed Interest Division in order to
select the SWO. A Participant may transfer amounts from the Variable Investment
Division to the Guaranteed Interest Division in order to support SWO payments.
These transfers, however, are subject to the transfer restrictions described in
this Prospectus and/or imposed by any applicable Plan. A one-time fee of up to
$30 may be charged to set up the SWO. This charge is waived for total vested
pre-tax account balances of $25,000 or more. Additional restrictions applicable
to withdrawals under a Contract generally may also apply to exercise of the
SWO. More information about SWO, including applicable fees and charges, is
available in the Contracts and Active Life Certificates as well as from Lincoln
Life.
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MAXIMUM CONSERVATION OPTION
Under certain Contracts Participants who are at least age 70 1/2 may request
that Lincoln Life calculate and pay to them the minimum annual distribution
required by Sections 401(a)(9), 403(b)(10), 408 or 457(d) of the Code. The
Participant must complete forms as required by Lincoln Life in order to elect
this option. Lincoln Life will base its calculation solely on the Participant's
Account Value with Lincoln Life. Participants who select this option are
responsible for determining the minimum distributions amount applicable to
their non-Lincoln Life contracts.
WITHDRAWAL RESTRICTIONS
Withdrawals under Section 403(b) Contracts are subject to the limitations
under Section 403(b)(11) of the Code and regulations thereof and in any
applicable Plan document. That section provides that salary reduction
Contributions deposited and earnings credited on any salary reduction
Contributions after December 31, 1988 may only be withdrawn if the Participant
has (1) died, (2) become disabled, (3) attained age 59 1/2, (4) separated from
service or (5) incurred a hardship. If amounts accumulated in a Section
403(b)(7) custodial account are deposited in a Contract, such amounts will be
subject to the same withdrawal restrictions as are applicable to post-1988
salary reduction Contributions under the Contracts. For more information on
these provisions see "Federal Income Tax Considerations."
Withdrawal requests for a Participant under Section 401(a) Plans, Section
457(b) Plans and Plans subject to Title I of ERISA must be authorized by the
Contractholder on behalf of a Participant. All withdrawal requests will require
the Contractholder's written authorization and written documentation specifying
the portion of the Participant's Account balance which is available for
distribution to the Participant. Withdrawal requests for Section 457(f) Plans
must be requested by the Contractholder.
For withdrawal requests (other than transfers to other investment vehicles),
by Participants under Plans not subject to Title I of ERISA and non-401(a)
Plans and non-457 Plans, the Participant must certify to Lincoln Life that one
of the permitted distribution events listed in the Code has occurred (and
provide supporting information, if requested) and that Lincoln Life may rely on
such representation in granting such withdrawal request. See "Federal Income
Tax Considerations." A Participant should consult their tax adviser as well as
review the provisions of their Plan before requesting a withdrawal.
In addition to the restrictions noted above, a Plan and applicable law may
contain additional withdrawal or transfer restrictions.
Withdrawals may have Federal tax consequences. In addition, early
withdrawals, as defined under Section 72(q) and 72(t) of the Code, may be
subject to a ten percent excise tax.
DEATH BENEFITS
The payment of death benefits will be governed by the provisions of the
applicable Plan and the Code. In the event of the death of a Participant during
the Accumulation Period, Lincoln Life will pay the Beneficiary, if one is
living, or the Plan the greater of the following amounts:
(1) The Net Contributions, or
(2) The Participant's Account balance less any outstanding loan (includ-
ing principal and due and accrued interest), provided that, if Lincoln Life
is not notified of the Participant's death within six months of such death,
the Beneficiary will receive the Death Benefit amount described in para-
graph (2).
A Beneficiary may elect to have the Death Benefit (1) paid as a lump sum, (2)
converted to a Payout Annuity or (3) as a combination of a lump sum payment and
a Payout Annuity.
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Lincoln Life will calculate the Death Benefit as of the end of the Valuation
Period during which it receives both satisfactory notification of the
Participant's death and an election of a form of Death Benefit (as described
below). Payment of a lump sum election generally will be made within seven days
following such calculation. Payment of an annuity option will be paid in
accordance with the provisions regarding annuities. See "Annuity Period." If no
election is made within sixty days following Lincoln Life's receipt of
satisfactory notice of the Participant's death, the Death Benefit will be paid
in the form of a lump sum payment and will be calculated as of the end of the
Valuation Period during which that sixtieth day occurs (and payment generally
will be made within seven days after such calculation date). See "Market
Emergencies."
Satisfactory proof of death may consist of: a copy of a certified death
certificate; a copy of a certified decree of a court of competent jurisdiction
as to the finding of death; a written statement by a medical doctor who
attended the deceased at the time of death; or any other proof satisfactory to
Lincoln Life.
Notwithstanding the above, under qualified annuities, if the Beneficiary is
someone other than the spouse of the deceased Participant, the Code provides
that the Beneficiary may not elect an annuity which would commence later than
December 31st of the calendar year following the calendar year of the
Participant's death. If a non-spousal Beneficiary elects to receive payment in
a single lump sum, the Code provides that such payment must be received no
later than December 31st of the fourth calendar year following the calendar
year of the Participant's death.
If the Beneficiary is the surviving spouse of the deceased Participant,
distributions generally are not required under the Code to begin earlier than
December 31st of the calendar year in which the Participant would have attained
age 70 1/2. If the surviving spouse dies before the date distributions
commence, then, for purposes of determining the date distributions to the
Beneficiary must commence, the date of death of the surviving spouse is
substituted for the date of death of the Participant.
Other rules apply to non-qualified annuities. See "Federal Income Tax
Considerations."
If there is no living named Beneficiary on file with Lincoln Life at the time
of a Participant's death and unless the Plan directs otherwise, Lincoln Life
will pay the Death Benefit to the Participant's estate in the form of a lump
sum payment, upon receipt of satisfactory proof of the Participant's death, but
only if such proof of death is received by Lincoln Life no later than the end
of the fourth calendar year following the year of the Participant's death. In
such case, valuation of the Death Benefit will occur as of the end of the
Valuation Period during which due proof of death is received by Lincoln Life,
and the lump sum Death Benefit generally will be paid within seven days of that
date. See "Market Emergencies."
DEDUCTIONS AND CHARGES
CHARGES AGAINST THE VARIABLE INVESTMENT DIVISION
MORTALITY AND EXPENSE RISK CHARGES
Certain charges will be assessed as a percentage of the value of the net
assets of the Variable Investment Division to compensate Lincoln Life for risks
assumed in connection with the Contracts.
Lincoln Life deducts from the net assets of the Variable Investment Division
a daily charge of 1.20% on an annual basis.
This charge is assessed both during the Accumulation Period and the Annuity
Period although, during the Annuity Period, Lincoln Life will bear no mortality
risk with respect to the Annuity Options that do not involve life
contingencies. This amount is intended to compensate Lincoln Life for certain
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Mortality and Expense Risks Lincoln Life assumes in operating the Variable
Investment Division and for providing services to the Participant. The total
charge may not be altered.
The Expense Risk is the risk that Lincoln Life's actual expenses in issuing
and administering the Contract will be more than Lincoln Life estimated. The
Mortality Risk borne by Lincoln Life arises from the chance that Lincoln Life's
actuarial estimate of mortality rates during the Annuity Period, as guaranteed
in the Contract, may prove erroneous and that an Annuitant may live longer than
expected. This contractual guarantee assures that neither an Annuitant's own
longevity nor an improvement in life expectancy generally will have any adverse
effect under the Contracts. In addition, Lincoln Life bears the Mortality Risk
because it guarantees to pay a Death Benefit that may be higher than the
Participant's Account balance upon the death of the Participant prior to the
Annuity Period.
CHARGES AGAINST THE CONTRACTS
The charges that Lincoln Life assesses in connection with the Contracts are
described below.
ANNUAL ADMINISTRATION CHARGE
Lincoln Life provides many administrative functions in connection with the
Contracts, including receiving and allocating Contributions in accordance with
the Contracts, making annuity payments when they become due, and preparing and
filing all reports required to be filed by the Variable Investment Division. In
addition, Lincoln Life provides Participants with Account statements and
accounting services that keep track of pre-tax monies, employee and Employer
monies, vested Account balances and rollover or transferred monies.
In consideration for these administrative services, Lincoln Life currently
deducts $25 (or the balance of the Participant's Account if less) per year from
each Participant's Account balance on the last Business Day of the month in
which a Participation Anniversary occurs. This charge is deducted only during
the Accumulation Period. This Annual Administration Charge is also withdrawn
from a Participant's Account balance if and when a Participant's Account is
totally withdrawn on any date other than the last Business Day of the month in
which the Participation Anniversary occurs.
The Annual Administration Charge may be reduced or waived for those
Participants who are participating under another Lincoln Life contract which
imposes an Annual Administration Charge or where Lincoln Life's interest costs
or expenses are reduced due to the terms of the Contract, economies of scale or
administrative assistance provided by the Contractholder. In addition, the
Employer has the option of paying the Annual Administration charge on behalf of
the Participants under a Contract.
Under certain Contracts, the Contractholder may also choose to have the
Annual Administration Charge paid only by those Participants in the Variable
Investment Division. Contracts offering this provision will typically have a
declared interest rate in the Guaranteed Interest Division which is lower than
under contracts not offering this provision. For contracts offering this
provision, the Annual Administration Charge will be deducted as described in
this section.
PREMIUM TAXES
Certain states require that a premium tax be paid on contributions to a
variable annuity contract. Others assess a premium tax at the time of
annuitization. Lincoln Life will deduct a charge for any applicable premium tax
from the Participant's Account balance either (1) at the time of a Total
Withdrawal of a Participant's Account balance; (2) on the Annuity Commencement
Date; (3) at such other date as the taxes are assessed. Various states levy a
premium tax, currently ranging from 0.5% to 4.0%, on variable annuity
contracts.
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MISCELLANEOUS
The Variable Investment Division purchases shares from the Funds at net asset
value. The net asset value reflects investment management fees and other
expenses that have already been deducted from the assets of the Funds. The
Funds' investment management fees, expenses and expense limitations, if
applicable, are more fully described in each prospectus for the Funds.
ANNUITY PERIOD
GENERAL
To the extent permitted by the Plan, the Participant, or the Beneficiary of a
deceased Participant, may elect to convert all or part of the Participant's
Account balance or the Death Benefit to a Payout Annuity. Payout Annuities are
available as either a Guaranteed or Variable Annuity or a combination of both.
Annuity payments from the Guaranteed Interest Division remain constant
throughout the annuity period. Annuity payments from the Variable Investment
Division fluctuate depending upon the investment experience of the applicable
Sub-Accounts. Variable Annuity payments are based upon Annuity Unit Values. See
"Annuity Payments" below and "Determination of Variable Annuity Payments" in
the Statement of Additional Information for further information.
The Annuity Commencement Date marks the date on which Lincoln Life makes the
first annuity payment to an Annuitant. For Plans subject to Section
401(a)(9)(B) of the Code, a Beneficiary must select an Annuity Commencement
Date that is not later than one year after the date of the Participant's death.
A Participant or Contractholder may select any Annuity Commencement Date for
the Annuitant which is then reflected in the Retired Life Certificate. However,
since an annuity payment is considered a distribution under the Code, selection
of an Annuity Commencement Date may be affected by the distribution
restrictions under the Code and the minimum distribution requirements under
Section 401(a)(9) of the Code. See "Federal Income Tax Considerations." The
selection of an Annuity Commencement Date, the annuity option, the amount of
the Payout Annuity and whether the amount is to be paid as a Guaranteed or a
Variable Annuity must be made by the Participant in writing, in a form
satisfactory to Lincoln Life, and received by Lincoln Life at least 30 days in
advance of the Annuity Commencement Date. After the Annuity Commencement Date
an Annuitant may not change either their annuity option or the type (i.e.,
variable or guaranteed) of Payout Annuity for any amount applied toward the
purchase of an annuity.
The Annuity Conversion Amount is either the Participant's Account balance, or
a portion thereof, or the Death Benefit plus interest, as of the Annuity
Payment Calculation Date. For a Guaranteed Annuity, the Annuity Commencement
Date is typically one month after the Annuity Payment Calculation Date;
subsequent payments are at one month intervals from the Annuity Commencement
Date. For a Variable Annuity, the Annuity Commencement Date is ten (10)
Business Days after the initial Annuity Payment Calculation Date; subsequent
monthly payments have Annuity Payment Calculation Dates which are ten (10)
Business Days prior. The ten (10) Business Days are necessary to calculate the
amount of the Payout Annuity payments and to mail the checks in advance of
their monthly due dates.
If the Participant's Account balance or the Beneficiary's Death Benefit is
less than $2,000 or if the amount of the first scheduled payment is less than
$20, Lincoln Life may, at its option, cancel the annuity and pay the
Participant or Beneficiary the entire amount in a lump sum.
PAYOUT ANNUITY PAYMENTS
The amount of each annuity payment will depend upon the Annuity Conversion
Amount applied to an annuity option, the form of the annuity option selected
and the age of the Participant at the
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Annuity Commencement Date. Unless otherwise notified, Lincoln Life will apply
the Participant's Account balance in the Guaranteed Interest Division toward a
Guaranteed Annuity and the Participant's Account balance in the Variable
Investment Division toward a Variable Annuity.
The payment amount for a Guaranteed Annuity is determined by dividing the
Participant's Annuity Conversion Amount in the Guaranteed Interest Division as
of the initial Annuity Payment Calculation Date by the applicable Annuity
Conversion Factor as defined in the Contract.
The initial payment amount for a Variable Annuity is determined by dividing
the Participant's Annuity Conversion Amount(s) in the applicable Sub-Account(s)
as of the initial Annuity Payment Calculation Date by the applicable Annuity
Conversion Factor as defined in the Contract. The amounts of subsequent
payments vary depending on the investment experience of the Sub-Account(s) and
the interest rate option selected by the Contractholder or Annuitant. The
payment amounts will not be affected by Lincoln Life's mortality or expense
experience and will not be reduced by an Annual Administration Charge. For
additional information on the determination of subsequent payment amounts,
refer to the Statement of Additional Information, "Determination of Variable
Annuity Payments."
PAYOUT ANNUITY OPTIONS
Lincoln Life offers a range of annuity options including, but not limited to,
the following:
SINGLE LIFE ANNUITY
Payments are made monthly during the lifetime of the Annuitant, and the
annuity terminates with the last payment preceding death.
LIFE ANNUITY WITH PAYMENTS GUARANTEED FOR 10, 15 OR 20 YEARS
Payments are made monthly during the lifetime of the Annuitant with a monthly
payment guaranteed to the Beneficiary for the remainder of the selected number
of years, if the Annuitant dies before the end of the period selected. Payments
under this annuity option are smaller than a Single Life Annuity without a
guaranteed payment period.
JOINT LIFE ANNUITIES
Payments are made monthly during the joint lifetime of the Annuitant and a
designated second person.
NON-LIFE ANNUITIES
Annuity payments are guaranteed monthly for the selected number of years.
While there is no right to make any total or partial withdrawals during the
Annuity Period, an Annuitant who has selected this annuity option as a Variable
Annuity or a surviving Beneficiary may request at any time during the payment
period that the present value of any remaining installments be paid in one lump
sum.
Under Qualified Plans, any annuity selected must be payable over a period
that does not extend beyond the life expectancy of the Participant and the
Participant's designated Beneficiary. If the Beneficiary is someone other than
the Participant's spouse, the present value of payments to be made to the
Participant must be more than 50% of the present value of the total payments to
be made to the Participant and the Beneficiary.
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In the event that an Annuitant dies before the end of a designated Annuity
period, the Beneficiary, if any, or the Annuitant's estate will receive any
remaining payments due under the annuity option in effect.
Note Carefully: Under the Single Life Annuity and Joint Life Annuities
options it would be possible for only one annuity payment to be made if the
Annuitant(s) were to die before the due date of the second annuity payment;
only two annuity payments if the Annuitant(s) were to die before the due date
of the third annuity payment; and so forth.
FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a general discussion of federal income tax
considerations relating to the Contract and is not intended as tax advice. This
discussion is not intended to address the tax consequences resulting from all
of the situations in which a person may be entitled to or may receive a
distribution under the Contract. Any person concerned about these tax
implications should consult a competent tax adviser before initiating any
transaction. This discussion is based upon Lincoln Life's 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 the continuation of the present federal income tax laws or of the
current interpretation by the IRS. Moreover, no attempt has been made to
consider any applicable state or other tax laws.
The Contract may be purchased on a non-tax qualified basis ("Non-Qualified
Contract") or purchased and used in connection with certain retirement
arrangements entitled to special income tax treatment under section 401(a),
403(b), 408(b) or 457 of the Code ("Qualified Contracts"). The ultimate effect
of federal income taxes on the amounts held under a Contract, on Annuity
Payments, and on the economic benefit to the Contract Owner, the Annuitant, or
the Beneficiary may depend on the tax status of the individual concerned.
In addition, certain requirements must be satisfied in purchasing a Qualified
Contract with proceeds from a tax qualified retirement plan in order to
continue receiving favorable tax treatment. Therefore, you should consult your
legal counsel and tax adviser regarding the suitability of the Contract for
your situation, the applicable requirements and the tax treatment of the rights
and benefits of the Contract. This summary assumes that Qualified Contracts are
purchased with proceeds from retirement plans that qualify for the intended
special Federal income tax treatment.
All dollar amounts and percentages stated below are subject to change
according to Federal law. For additional Federal Income Tax Consideration,
please refer to the Statement of Additional Information.
NON-QUALIFIED CONTRACTS
In general, under non-qualified annuity contracts, an individual may make
Contributions to the Contracts which are not tax-deductible. A participant is
generally not taxed on increases in the value of a contract until a
distribution occurs. This can be in the form of a lump sum payment received by
requesting all or part of the cash value (i.e., withdrawals) or as Annuity
Payouts. For this purpose, the assignment or pledge of, or the agreement to
assign or pledge, any portion of the value of a contract will be treated as a
distribution. A transfer of ownership of a contract, or designation of an
annuitant (or other beneficiary) who is not also the participant, may also
result in tax consequences. The taxed portion of a distribution (in the form of
a lump sum payment or an annuity) is taxed as ordinary income. For
Contributions made after February 28, 1986, a participant who is not a natural
person (for example, a corporation) will, subject to limited exceptions, be
taxed on any increase in the contract's cash value over the investment in the
contract during the taxable year, even if no distribution occurs. The following
discussion applies to contracts owned by or on behalf of participants who are
natural persons.
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In General. Section 72 of the Code governs taxation of annuities in general.
Lincoln Life believes that an Owner who is a natural person generally is not
taxed on increases in the Owner's Account Value until distribution occurs by
withdrawing all or part of such Account Value (e.g., withdrawals or Annuity
payments under the Annuity Option elected). For this purpose, the assignment,
pledge, or agreement to assign or pledge any portion of the Account Value (and
in the case of a Qualified Contract, any portion of an interest in the
qualified plan) generally will be treated as a distribution. (The Contracts are
not assignable without Lincoln Life's prior written consent. See
"Assignability.") The taxable portion of a distribution (in the form of a
single sum payment or an annuity) is taxable as ordinary income.
The owner of any Contract who is not a natural person generally must include
in income any increase in the excess of the Account Value over the "investment
in the contract" (discussed below) during the taxable year. There are some
exceptions to this rule and prospective Owners that are not natural persons may
wish to discuss these with a competent tax adviser.
Withdrawals. In the case of a withdrawal, generally amounts received are
first treated as taxable income to the extent that the cash value of the
contract immediately before the withdrawal exceeds the investment in the
contract at that time. Any additional amount withdrawn is not taxable. The
investment in the contract generally equals the portion, if any, of any
contributions paid by or on behalf of a participant under a contract which is
not excluded from the participant's gross income.
Annuity Payouts. Even though the tax consequences may vary depending on the
form of Annuity Payout selected under the contract, the recipient of an Annuity
Payout generally is taxed on the portion of such payout that exceeds the
investment in the contract. For variable Annuity Payouts the taxable portion is
determined by a formula that establishes a specific dollar amount of each
payout that is not taxed. The dollar amount is determined by dividing the
investment in the contract by the total number of expected periodic payouts.
For fixed Annuity Payouts, there generally is no tax on the portion of each
payout that represents the same ratio that the investment in the contract bears
to the total expected value of payouts for the term of the annuity; the
remainder of each payout is taxable. For individuals whose annuity starting
date is after December 31, 1986, the entire distribution will be fully taxable
once the recipient is deemed to have recovered the dollar amount of the
investment in the contract.
Excise tax. There may be imposed an excise tax on distributions equal to 10%
of the amount treated as taxable income. The excise tax is not imposed in
certain circumstances, which generally are distributions:
1. Received on or after the participant attains age 59 1/2;
2. Made as a result of the participant's death or disability;
3. Received in substantially equal installments as a life annuity (sub-
ject to special recapture rules if the series of payouts is subsequently
modified);
4. Allocable to the investment in the contract before August 14, 1982;
5. Under a qualified funding asset in a structured settlement;
6. Under an Immediate Annuity contract as defined in the Code; and/or
7. Under a contract purchased in connection with the termination of cer-
tain retirement plans.
Multiple contracts. All non-qualified annuity contracts entered into after
October 21, 1988, and issued by the same insurance company (or its affiliates)
to the same participant during any calendar year will be treated as a single
contract for tax purposes.
Diversification. Section 817(h) of the Code provides that separate account
investments (or the investments of a mutual fund the shares of which are owned
by separate accounts of insurance companies) underlying a non-qualified annuity
contract must be "adequately diversified" in
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accordance with treasury regulations in order for the contract to qualify as an
annuity contract under section 72 of the Code. The Variable Investment
Division, through the Fund, intends to comply with the diversification
requirements prescribed in the regulations.
Required Distributions. In addition to the requirements of section 817(h),
the Code (section 72(s)) provides that non-qualified annuity contracts issued
after January 18, 1985, will not be treated as annuity contracts for purposes
of section 72 unless the contract provides that (a) if any Participant dies on
or after the annuity starting date but prior to the time the entire interest in
the contract has been distributed, the remaining portion of such interest must
be distributed at least as rapidly as under the method of distribution in
effect at the time of the Participant's death; and (b) if any Participant dies
prior to the annuity starting date, the entire interest must be distributed
within five years after the death of the Participant. These requirements are
considered satisfied if any portion of the Participant's interest that is
payable to or for the benefit of a "designated beneficiary" is distributed over
that designated beneficiary's life, or a period not extending beyond the
designated beneficiary's life expectancy, and if that distribution begins
within one year of the Participant's death. The "designated beneficiary" must
be a natural person. Contracts issued after January 18, 1985 contain provisions
intended to comply with these Code requirements, although regulations
interpreting these requirements have yet to be issued. Lincoln Life intends to
review such provisions and modify them, if necessary, to assure that they
comply with the requirements of section 72(s) when clarified by regulation or
otherwise.
QUALIFIED CONTRACTS
In General. The Qualified Contract is designed for use with several types of
retirement plans. The tax rules applicable to participants and beneficiaries in
retirement plans vary according to the type of plan and the terms and
conditions of the plan. Special favorable tax treatment may be available for
certain types of contributions and distributions. Adverse tax consequences may
result from contributions in excess of specified limits; distributions prior to
age 59 1/2 (subject to certain exceptions); distributions that do not conform
to specified commencement and minimum distribution rules; aggregate
distributions in excess of a specified annual amount; and in other specified
circumstances.
Lincoln Life makes no attempt to provide more than general information about
use of the Contracts with the various types of retirement plans. Owners and
participants under retirement plans as well as annuitants and beneficiaries are
cautioned that the rights of any person to any benefits under Qualified
Contracts may be subject to the terms and conditions of the plans themselves,
regardless of the terms and conditions of the Contract issued in connection
with such a plan. Some retirement plans are subject to distribution and other
requirements that are not incorporated in the administration of the Contracts.
Owners are responsible for determining that contributions, distributions and
other transactions with respect to the Contracts satisfy applicable law.
Purchasers of Contracts for use with any retirement plan should consult their
legal counsel and tax adviser regarding the suitability of the Contract.
Section 401(a) Plans. Section 401(a) of the Code provides special tax
treatment for pension, profit sharing and stock bonus Plans established by
Employers for their employees. Contributions to a Section 401(a) Plan and any
earnings attributable to such Contributions are currently excluded from the
Participant's income. Section 401(a) Plans are subject to, among other things,
limitations on: maximum Contributions, minimum coverage and participation,
minimum funding, minimum vesting requirements and distribution requirements.
The specific limitations are outlined in the plan document adopted by the
Employer.
A Participant who makes a withdrawal from a Section 401(a) program generally
must include that amount in current income. In addition, Section 401(k)(2) of
the Code requires that salary reduction Contributions made and/or earnings
credited on any salary reduction Contributions may not
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be withdrawn from the Participant's Section 401(k) program prior to the
Participant having (1) attained age 59 1/2, (2) separated from service, (3)
become disabled, (4) died or (5) incurred a hardship. Hardship withdrawals may
not include any income credited after December 31, 1988 that is attributable to
any salary reduction Contributions. In addition, Section 402 of the Code
permits tax-free rollovers from Section 401(a) programs to individual
retirement annuities or certain other Section 401(a) programs under certain
circumstances. Qualified distributions eligible for rollover treatment may be
subject to a 20% federal tax withholding depending on whether or not the
distribution is paid directly to an eligible retirement plan.
Section 403(b) Plans. A Participant who is an employee of a hospital or other
tax-exempt organization described in Section 501(c)(3) or 501(e) of the Code
may exclude from current earnings amounts contributed to a Section 403(b)
program. Under the terms of a Section 403(b) program, an Employer may make
Contributions directly to the program on behalf of the Participant, the
Participant may enter into a salary reduction agreement with the Participant's
Employer authorizing the Employer to contribute a percentage of the
Participant's salary to the program and/or the Participant may authorize the
Employer to make after tax Contributions to the program. Currently, the Code
permits employees to defer up to $9,500 of their income through salary
reduction agreements. All Contributions made to the Section 403(b) program are
subject to the limitations described in Code Sections 402(g) regarding elective
deferral amounts, 403(b)(2) regarding the maximum exclusion allowance, and
415(a)(2) and 415(c) regarding the limitations on annual additions.
A Participant who makes a withdrawal from their Section 403(b) program
generally must include that amount in current income. In addition, Section
403(b)(11) of the Code requires that salary reduction Contributions made and/or
earnings credited on any salary reduction Contributions after December 31, 1988
may not be withdrawn from the Participant's Section 403(b) program prior to the
Participant having (1) attained age 59 1/2, (2) separated from service, (3)
become disabled (4) died or (5) incurred a hardship. Hardship withdrawals may
not include any income credited after December 31, 1988 that is attributable to
any salary reduction Contributions. The Internal Revenue Service has ruled
(Revenue Ruling 90-24) that amounts may be transferred between Section 403(b)
investment vehicles as long as the transferred funds retain withdrawal
restrictions at least as restrictive as that of the transferring investment
vehicle. Such transferred amounts are considered withdrawals under the
Contract. In addition, Section 403(b)(8) of the Code permits tax-free rollovers
from Section 403(b) programs to individual retirement annuities or other
Section 403(b) programs under certain circumstances. Qualified distributions
eligible for rollover treatment may be subject to a 20% federal tax withholding
depending on whether or not the distribution is paid directly to an eligible
retirement plan.
Section 408 Plans (IRAs). Under current law, individuals may contribute and
deduct the lesser of $2,000 or 100% of their compensation to an IRA. The $2,000
is increased to $4,000 when the IRA covers the taxpayer and a non-working
spouse. The deduction for Contributions is phased out for individuals who are
considered active participants under qualified Plans and whose Adjusted Gross
Income attains a certain level. For a single person the $2,000 deduction is
available when the taxpayers Adjusted Gross Income is $25,000 or less. For each
$50 that the taxpayer's Adjusted Gross Income rises above $25,000, the
taxpayer's deductible IRA is reduced by $10. When the single taxpayer's
Adjusted Gross Income is $35,000 or greater, a tax deduction for an IRA is no
longer available. For a married couple filing jointly, the threshold level is
$40,000 rather than $25,000. For a married person filing separately, the
threshold is $0.
In addition, certain amounts distributed from Section 401(a) and 403(b) Plans
may be rolled over to an IRA on a tax-free basis if done in a timely manner
(within 60 days of the Participant's receipt of the distribution). The
limitations on contributions discussed above do not apply to amounts rolled
over to an IRA.
All Participants in an IRA receive an IRA Disclosure. This document explains
the tax rules that apply to IRAs in greater detail.
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Eligible Section 457 Plans. Eligible Section 457 Plans may be established by
state and local governments as well as private tax-exempt organizations (other
than churches). Participants may contribute on a before tax basis to a deferred
compensation Plan of their employer in accordance with the employer's Plan and
Section 457 of the Code. Section 457 places limitations on the amount of
Contributions to these Plans. Generally, the limitation is one-third of
includable compensation or $7,500 whichever is less. In the Participant's final
three years of employment before normal retirement age, the $7,500 limit is
increased to $15,000.
Participants in an Eligible 457 Plan may not receive a withdrawal or other
distribution from their Plan except in the event of separation of service from
the employer, attainment of age 70 1/2, or when faced with an unforeseen
emergency. The Contractholder's Plan may further restrict the Participant's
rights to a withdrawal. In general, all amounts received under a Section 457
Plan are taxable.
An employee electing to participating in an Eligible Section 457 Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Depending on the terms of the particular Plan,
the Employer may be entitled to draw on deferred amounts for purposes unrelated
to its Section 457 Plan obligations. Participants under Eligible Section 457
Plans should look to the terms of their Plan for any charges in regard to
participation other than those disclosed in this Prospectus.
Section 457(f) Plans. Section 457(f) Plans may be established by state and
local governments as well as private tax-exempt organizations. Employers and
Participants may contribute on a before-tax basis to a deferred compensation
Plan of their Employer in accordance with the Employer's Plan. Section 457(f)
does not place limitations on the amount of Contributions to these Plans;
however, the Internal Revenue Service may review these plans to determine if
the deferral amount is acceptable to the IRS based on the nature of the 457(f)
Plan.
Participants in 457(f) Plans may not receive a withdrawal or other
distribution from their 457(f) Plans until a distributable event occurs. The
Plan will define such events.
An employee electing to participate in a Section 457(f) Plan should
understand that their rights and benefits are governed strictly by the terms of
the Plan, that they are in fact a general creditor of the Employer under the
terms of the Plan, that the Employer is legal owner of any contract issued with
respect to the Plan and that the Employer retains all rights under the contract
issued with respect to the Plan. Participants under Section 457(f) Plans should
look to the terms of their Plan for any charges in regard to participating
other than those disclosed in this Prospectus.
Taxation of Qualified Annuities: General. In Qualified Plans such as 401(a),
403(b) and 408 and Eligible 457 Plans, the Participant is not taxed on the
value in their Accounts until they receive payments from the Account. In some
situations, default or forgiveness of a loan, assignment or other transactions
will result in taxable income. Distributions from all these Plans are taxed
under the rules of Sections 72 and 402 of the Code.
Penalty Tax For Premature Distributions. Section 72(t) imposes a 10% excise
tax on certain premature distributions for non-qualified and Section 401(a),
403(b) and 408 Plans. The penalty tax will not apply to distributions made on
account of the Participant having (i) attained age 59 1/2; (ii) become
disabled; or (iii) died. The penalty tax will also not apply under 401(a) and
403(b) retirement plans where a Participant separates from service after age
55. In addition, the penalty does not apply if the distribution is received as
a series of substantially equal periodic payments made for the life (or life
expectancy) of the Participant or the joint lives (or life expectancies) of the
Participant and a designated Beneficiary. Certain other exceptions may also
apply. The 10% excise tax is an additional tax; it does not apply to any money
that the Participant receives as a return of their cost basis. The 10% excise
tax does not apply to Section 457 Plans.
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Minimum Distributions. Participants in Plans subject to Code Sections 401(a),
403(b), 408 and Eligible 457 Plans are subject to Minimum Distribution Rules.
For a Participant who attains age 70 1/2 after December 31, 1987, distributions
generally must begin by April 1 of the calendar year following the calendar
year in which the Participant attains age 70 1/2. For a Participant who attains
age 70 1/2 before January 1, 1988, distributions must begin on the April 1 of
the calendar year following the later of (1) the calendar year in which the
Participant attains age 70 1/2 or (2) the calendar year in which the
Participant retires. Additional requirements may apply with respect to certain
Plans.
Participants in Eligible 457 Plans are taxed when Plan benefits are
distributed or made available to them. Participants in 457(f) Plans are taxed
when services related to contributions are performed or when distributions are
not subject to a substantial risk of forfeiture. Distributions under Eligible
457 or 457(f) Plans are taxed as ordinary income.
The following discussion generally applies to a Contract owned by a natural
person.
Withdrawals. In the case of a withdrawal under a Qualified Contract,
including withdrawals under the Systematic Withdrawal Option, a ratable portion
of the amount received is taxable, generally based on the ratio of the
"investment in the contract" to the individual's total accrued benefit under
the retirement plan. The "investment in the contract" generally equals the
amount of any non-deductible Contributions paid by or on behalf of any
individual. For a Contract issued in connection with qualified plans, the
"investment in the contract" can be zero. Special tax rules may be available
for certain distributions from a Qualified Contract.
With respect of a Non-Qualified Contract, partial withdrawals are generally
treated as taxable income to the extent that the Account Value immediately
before the withdrawal exceeds the "investment in the contract" at that time.
Full surrenders of a Non-Qualified Contract are treated as taxable income to
the extent that the amount received exceeds the "investment in the contract."
Annuity Payments. Although the tax consequences may vary depending on the
Annuity payment elected under the Contract, in general, only the portion of the
Annuity payment that represents the amount by which the Account Value exceeds
the "investment in the contract" will be taxed; after the "investment in the
contract" is recovered, the full amount of any additional Annuity payments is
taxable. For Variable Annuity payments, the taxable portion is generally
determined by an equation that establishes a specific dollar amount of each
payment that is not taxed. The dollar amount is determined by dividing the
"investment in the contract" by the total number of expected periodic payments.
However, the entire distribution will be taxable once the recipient has
recovered the dollar amount of his or her "investment in the contract". For
Fixed Annuity payments, in general there is no tax on the portion of each
payment which represents the same ratio that the "investment in the contract"
bears to the total expected value of the Annuity payments for the term of the
payments; however, the remainder of each Annuity payment is taxable. Once the
"investment in the contract" has been fully recovered, the full amount of any
additional Annuity payments is taxable. If Annuity payments cease as a result
of an Annuitant's death before full recovery of the "investment in the
contract," consult a competent tax advisor regarding deductibility of the
unrecovered amount.
Restrictions under Qualified Contracts. Other restrictions with respect to
the election, commencement, or distribution of benefits may apply under
Qualified Contracts or under the terms of the plans in respect of which
Qualified Contracts are issued.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under
which a variable annuity contract will not be treated as an annuity contract
for tax purposes if the contract owner has
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excessive control over the investments underlying the contract. The issuance of
those guidelines may require us to impose limitations on your right to control
the investment. We do not know whether any such guidelines would have a
retroactive effect.
VOTING RIGHTS
Lincoln Life is the legal owner of the shares of the Funds held by the
Variable Investment Division. As such, Lincoln Life is entitled to vote those
Fund shares with respect to issues such as the election of a Fund's directors,
ratification of a Fund's choice of independent auditors and other matters
required by the 1940 Act to be voted on by shareholders.
In those years in which the Funds hold a shareholder meeting, Lincoln Life
will solicit from Contractholders voting instructions with respect to Fund
shares held by the Variable Investment Division. Each Contractholder will
receive a number of votes in proportion to the Contractholder's investment in
the corresponding Sub-Account as of the record date established by the Fund.
During the Accumulation Period, a Participant has the right to instruct
Contractholders as to the votes attributable to their Participant Account
balance in the Sub-Accounts. Annuitants have similar rights with respect to the
annuity amount attributable to the Sub-Accounts.
Lincoln Life will furnish Contractholders with sufficient Fund proxy material
and voting instruction forms for all Participants who have voting rights under
the Contract. Lincoln Life will vote those Fund shares attributable to the
Contract for which Lincoln Life receives no voting instructions in the same
proportion as Lincoln Life will vote shares for which Lincoln Life has received
instructions. Lincoln Life will vote shares attributable to amounts Lincoln
Life may have in the Variable Investment Division in the same proportion as
votes that Lincoln Life receives from Contractholders. If the federal
securities laws or regulations or any interpretation of them changes so that
Lincoln Life is permitted to vote shares of the Fund in Lincoln Life's own
right or to restrict Participant voting, Lincoln Life may do so.
Fund shares may be held by separate accounts of insurance companies
unaffiliated with Lincoln Life. Fund shares held by those separate accounts
will be voted, in most cases, according to the instruction of owners of
insurance policies and contracts issued by those other unaffiliated insurance
companies. This will dilute the effect of the voting instructions of the
Contractholders in the Variable Investment Division. Lincoln Life does not
foresee any disadvantage to this. Pursuant to conditions imposed in connection
with regulatory relief, the Fund's Board of Directors has an obligation to
monitor events to identify conflicts that may arise and to determine what
action, if any, should be taken. For further information, see the prospectuses
for the Funds.
OTHER CONTRACT PROVISIONS
RIGHTS RESERVED BY LINCOLN LIFE
Lincoln Life reserves the right, subject to compliance with applicable law,
including approval by the Contractholder or the Participants if required by
law, (1) to create additional Sub-Accounts in the Variable Investment Division,
(2) to combine or eliminate Sub-Accounts in the Variable Investment Division,
(3) to transfer assets from one Sub-Account in the Variable Investment Division
to another, (4) to transfer assets to the General Account and other separate
accounts, (5) to cause the deregistration of the Variable Investment Division
under the Investment Company Act of 1940, (6) to operate the Variable
Investment Division under a committee and to discharge such committee at any
time, and (7) to eliminate any voting rights which the Contractholder or the
Participants may have with respect to the Variable Investment Division, (8) to
amend the Contract to meet state law requirements or to meet the requirements
of the Investment Company Act of 1940 or other federal
29
<PAGE>
securities laws and regulations, (9) to operate the Variable Investment
Division in any form permitted by law, (10) to substitute shares of another
fund for the shares held by a Sub-Account, and (11) to make any change required
by the Internal Revenue Code, ERISA or the Securities Act of 1933. Participants
will be notified if any changes are made that result in a material change in
the underlying investments of the Variable Investment Division.
ASSIGNABILITY
The Contracts are not assignable without Lincoln Life's prior written
consent. In addition, a Participant, a Beneficiary or an Annuitant may not,
unless permitted by law, assign or encumber any payment due under the Contract.
MARKET EMERGENCIES
While Lincoln Life generally may not suspend the right of redemption or delay
payment from the Variable Investment Division for more than seven days, the
following events may delay payment for more than seven days: (1) any period
when the New York Stock Exchange is closed (other than customary weekend and
holiday closings); (2) any period when trading in the markets normally utilized
is restricted, or an emergency exists as determined by the Securities and
Exchange Commission, so that disposal of investments or determination of the
Accumulation Unit Value or Variable Annuity payment value is not reasonably
practicable; or (3) for such other periods as the Securities and Exchange
Commission by order may permit for the protection of the Participants.
CONTRACT DEACTIVATION
Under certain Contracts, Lincoln Life may deactivate a Contract by
prohibiting new contributions and/or new Participants after the date of
deactivation. Lincoln Life will give the Contractholder and the Participants at
least 90 days notice of the date of deactivation.
FREE-LOOK PERIOD
Participants under Sections 403(b), 408 and certain Non-Qualified Plans will
receive an Active Life Certificate upon Lincoln Life's receipt of a duly
completed participation enrollment form. If the Participant chooses not to
participate under the Contract, the Participant may exercise the free-look
right by sending a written notice to Lincoln Life that the Participant does not
wish to participate under the Contract, within 10 days after the date the
Active Life Certificate is received by the Participant. For purposes of
determining the date on which the Participant has sent written notice, the
postmark date will be used.
If a Participant exercises the free-look right in accordance with the
foregoing procedure, Lincoln Life will refund in full the Participant's
aggregate Contributions less aggregate withdrawals made on behalf of the
Participant or, if greater, with respect to Contributions to the Variable
Investment Division, the Participant's Account balance in the Variable
Investment Division on the date the Participant's written notice is received by
Lincoln Life.
GUARANTEED INTEREST DIVISION
GENERAL
Contributions to the Guaranteed Interest Division become part of Lincoln
Life's General Account. The General Account is subject to regulation and
supervision by the New York Insurance Department as well as the insurance laws
and regulations of the jurisdictions in which the Contracts are distributed.
30
<PAGE>
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered the interests in the General Account as a security under the
Securities Act of 1933 and has not registered the General Account as an
investment company under the 1940 Act. Accordingly, neither the General Account
nor any interests therein are subject to regulation under the 1933 Act or the
1940 Act. Lincoln Life has been advised that the staff of the SEC has not made
a review of the disclosures which are included in this prospectus which relate
to the General Account and the Guaranteed Interest Division. These disclosures,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses. This prospectus is generally intended to serve as a
disclosure document only for aspects of the Contract involving the Variable
Investment Division and contains only selected information regarding the
Guaranteed Interest Division. Complete details regarding the Guaranteed
Interest Division are in the Contract.
Amounts contributed to the Guaranteed Interest Division are guaranteed a
minimum interest rate according to contract minimums of at least 3.0%. A
Participant who makes a Contribution to the Guaranteed Interest Division is
credited with interest beginning on the next calendar day following the date of
receipt if all Participant data is complete.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN LINCOLN LIFE'S SOLE
DISCRETION. THE PARTICIPANTS BEAR THE RISK THAT NO INTEREST IN EXCESS OF 3.0%
WILL BE DECLARED.
PARTICIPANT'S ACCOUNT BALANCE IN THE GUARANTEED INTEREST DIVISION
The Participant's Account balance in the Guaranteed Interest Division on any
Valuation Date will reflect the amount and frequency of any Contributions
allocated to the Guaranteed Interest Division, plus any transfers from the
Variable Investment Division and interest credited to the Guaranteed Interest
Division, less any withdrawals, Annual Administration Charges and loan-related
charges allocated to the Guaranteed Interest Division and any transfers to the
Variable Investment Division.
TRANSFERS, TOTAL AND PARTIAL WITHDRAWALS
Special limits apply to transfers and withdrawals from the Guaranteed
Interest Division. During any one calendar year a Participant may make one
withdrawal , OR one transfer to the Variable Investment Division, from the
Guaranteed Interest Division, in any amount not to exceed 20% of the Guaranteed
Interest Division Account balance. Participants stating their intention to
liquidate their entire Guaranteed Interest Division Account balance, or
transfer it to the Variable Investment Division, however, may make one
withdrawal or transfer request for five consecutive calendar years from their
Guaranteed Interest Division Account balance in the following percentages:
<TABLE>
<CAPTION>
YEAR REQUEST RECEIVED PERCENTAGE OF GUARANTEED
BY LINCOLN LIFE INTEREST DIVISION AVAILABLE
--------------------- ---------------------------
<S> <C>
1 20%
2 25%
3 33.33%
4 50%
5 100%
</TABLE>
The five consecutive withdrawals may not be submitted more frequently than
twelve months apart. Lincoln Life also reserves the right to require that any
Participant stating their intention to liquidate their Guaranteed Interest
Division Account balance stop Contributions to the Contract. The above
Liquidation Schedule is subject to the same conditions as other withdrawals.
31
<PAGE>
LOANS
During a Participant's Accumulation Period, a Participant, whose Plan permits
loans, may apply for a loan under the Contract by completing a loan application
available from Lincoln Life. Loans are secured by the Participant's Account
balance in the Guaranteed Interest Division. The amounts and terms of a
Participant loan may be subject to the restrictions imposed under Section 72(p)
of the Code, Title I of ERISA, and any applicable Plans. With respect to Plans
subject to Title I of ERISA, the initial amount of a Participant loan may not
exceed the lesser of 50% of the Participant's vested Account balance in the
Guaranteed Interest Division or $50,000 and must be at least $1,000. A
Participant in a Plan that is not subject to ERISA may borrow up to $10,000 of
their vested Account balance without regard to the 50% limitation stated above.
A Participant may have only one loan outstanding at any time and may not
establish more than one loan in any six month period. More information about
loans, including interest rates and applicable fees and charges, is available
in the Contracts, Active Life Certificates, and the Annuity Loan Agreement as
well as from Lincoln Life.
DEFERRAL PERIODS
If a payment is to be made from the Guaranteed Interest Division, Lincoln
Life may defer the payment for the period permitted by the law of the
jurisdiction in which the Contract is distributed, but in no event, for more
than 6 months after a written election is received by Lincoln Life. During the
period of deferral, interest at the then current interest rate will continue to
be credited to a Participant's Account in the Guaranteed Interest Division.
32
<PAGE>
TABLE OF CONTENTS FOR
STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
DEFINITIONS................................................................
DETERMINATION OF ACCUMULATION UNIT VALUES..................................
DETERMINATION OF VARIABLE ANNUITY PAYMENTS.................................
PERFORMANCE CALCULATIONS...................................................
TAX LAW CONSIDERATIONS.....................................................
DISTRIBUTION OF CONTRACTS..................................................
INDEPENDENT AUDITORS/ACCOUNTANTS...........................................
FINANCIAL STATEMENTS.......................................................
Audited Financial Statements of Lincoln Life
</TABLE>
33
<PAGE>
VARIABLE ANNUITY III
STATEMENT OF ADDITIONAL INFORMATION
MAY 1, 1997
GROUP ANNUITY CONTRACTS
FUNDED THROUGH THE SUB-ACCOUNTS OF
LINCOLN LIFE & ANNUITY
VARIABLE ANNUITY ACCOUNT L
OF
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Definitions............................................................... 2
Determination of Accumulation Unit Values................................. 2
Determination of Variable Annuity Payments................................ 3
Performance Calculations.................................................. 4
Tax Law Considerations.................................................... 8
Distribution of Contracts................................................. 10
Independent Auditors...................................................... 10
Financial Statements...................................................... 10
Audited Financial Statements of Lincoln Life
</TABLE>
This Statement of Additional Information (SAI) is not a prospectus. It should
be read in conjunction with the prospectus for the Group Annuity Contracts
(the "Contracts"), dated May 1, 1997.
A copy of the prospectus to which this SAI relates is available at no charge
by writing to: Lincoln Life & Annuity Company of New York, P.O. Box 9737,
Portland, Maine 04104; or by calling Lincoln Life at 1-800- 893-7168.
NY90023
<PAGE>
DEFINITIONS
ANNUITY CONVERSION FACTOR: The factor applied to the Annuity Conversion Amount
in determining the dollar amount of an annuitant's annuity payments for
Guaranteed Annuities or the initial payment for Variable Annuities.
ANNUITY PAYMENT CALCULATION DATE: For Guaranteed Annuities, this is the first
day of a calendar month. For Variable Annuities, this is the Valuation Date
ten (10) Business Days prior to the first day of a calendar month.
ANNUITY UNIT: An accounting unit of measure that is used in calculating the
amounts of annuity payments to be made from a Sub-Account during the Annuity
Period.
ANNUITY UNIT VALUE: The dollar value of an Annuity Unit in a Sub-Account on
any Valuation Date.
CODE: The Internal Revenue Code of 1986, as amended.
For the purpose of determining whether a given day is a business day, as that
term is defined in the prospectus, local business holidays may include
Veteran's Day (November 11), and a Monday preceding, or Friday following, a
day on which the New York Stock Exchange is not customarily open for business.
DETERMINATION OF ACCUMULATION UNIT VALUES
As described more fully in the prospectus, Contributions are allocated to the
Divisions in accordance with directions from the Employer. A Participant who
makes Contributions which are allocated to the Variable Investment Division is
credited with Accumulation Units. The following examples illustrate the method
by which Lincoln Life determines the Net Investment Factor (NIF) for the
current Valuation Period and the Accumulation Unit Value as of the end of the
current Valuation Period.
DETERMINATION OF NIF:
- --------------------
(a) Assumed Fund net asset value as of the close of the New York Stock
Exchange on June 1 = 10.45.
(b) Assumed Fund net asset value as of the close of the New York Stock
Exchange on June 2 = 10.56 (no capital gains or dividend distributions
or deductions for taxes).
(c) The NIF for the current Valuation Period = (b) divided by (a) times (1-
annual M & E) to the 1/365th power.
(d) 1.010526 x .999966 = 1.0104916.
DETERMINATION OF ACCUMULATION UNIT VALUE:
- ----------------------------------------
The Accumulation Unit Value as of the end of the current Valuation Period is
determined by multiplying the NIF for the current Valuation Period by the
Accumulation Unit Value as of the end of the immediately preceding Valuation
Period.
(a) Assumed Accumulation Unit Value as of the end of the immediately
preceding Valuation Period = 11.125674.
(b) Accumulation Unit Value as of the end of the current Valuation Period =
11.125674 x 1.0104916 (NIF) = 11.2424.
The number of Accumulation Units which are credited to the Participant's
Account for each Sub-Account on each Valuation Date equals the amount of
Contributions allocated to the Sub-Account on each Valuation Date divided by
the Accumulation Unit Value rounded to four decimal places. For example,
(a) Participant's assumed Contribution allocated to a Sub-Account on June 2
= $150.
(b) Number of Accumulation Units credited to Participant = $150 divided by
11.2424 = 13.3423.
2
<PAGE>
DETERMINATION OF VARIABLE ANNUITY PAYMENTS
As stated in the prospectus, the amount of each Variable Annuity payment will
vary depending on the investment experience of the selected Sub-Accounts. The
initial payment amount of the Annuitant's Variable Annuity for each Sub-
Account is determined by dividing his Annuity Conversion Amount in each Sub-
Account as of the initial Annuity Payment Calculation Date ("APCD") by the
Applicable Annuity Conversion Factor as defined as follows:
The Annuity Conversion Factors which are used to determine the initial
payments are based on the 1983 Individual Annuity Mortality Table, set back
four (4) years, and an interest rate in an integral percentage ranging from
zero to six percent (0 to 6.00%) as selected by the Annuitant.
The amount of the Annuitant's subsequent Variable Annuity payment for each
Sub-Account is determined by:
(a) Dividing the Annuitant's initial Variable Annuity payment amount by the
Annuity Unit Value for that Sub-Account selected for his interest rate
option as described above as of his initial APCD; and
(b) Multiplying the resultant number of annuity units by the Annuity Unit
Values for the Sub-Account selected for his interest rate option for his
respective subsequent APCDs.
Each subsequent Annuity Unit Value for a Sub-Account for an interest rate
option is determined by:
Dividing the Accumulation Unit Value for the Sub-Account as of
subsequent APCD by the Accumulation Unit Value for the Sub-Account as of
the immediately preceding APCD;
Dividing the resultant factor by one (1.00) plus the interest rate
option to the n/365 power where n is the number of days from the
immediately preceding APCD to the subsequent APCD; and
Multiplying this factor times the Annuity Unit Value as of the
immediately preceding APCD.
ILLUSTRATION OF CALCULATION OF ANNUITY UNIT VALUE
<TABLE>
<C> <S>
1. Annuity Unit Value as of immediately preceding Annuity Payment
Calculation Date................................................$11.0000
2. Accumulation Unit Value as of Annuity Payment Calculation Date...$20.0000
3. Accumulation Unit Value as of immediately preceding Annuity Payment
Calculation Date................................................$19.0000
4. Interest Rate.......................................................6.00%
5. Interest Rate Factor (30 days).....................................1.0048
6. Annuity Unit Value as of Annuity Payment Calculation Date =
1 times 2 divided by 3 divided by 5.............................$11.5236
</TABLE>
ILLUSTRATION OF ANNUITY PAYMENTS
<TABLE>
<C> <S>
1. Annuity Conversion Amount as of Participant's initial Annuity Payment
Calculation Date.............................................$100,000.00
2. Assumed Annuity Conversion Factor per $1 of Monthly Income for an
individual age 65
selecting a Single Life Annuity with Assumed Interest Rate of
6%...............................................................$138.63
3. Participant's initial Annuity Payment = 1 divided by 2............$721.34
4. Assumed Annuity Unit Value as of Participant's initial Annuity Payment
Calculation Date................................................$11.5236
5. Number of Annuity Units = 3 divided by 4..........................62.5968
6. Assumed Annuity Unit Value as of Participant's second Annuity Payment
Calculation Date................................................$11.9000
7. Participant's second Annuity Payment = 5 times 6..................$744.90
</TABLE>
3
<PAGE>
PERFORMANCE CALCULATIONS
STANDARD TOTAL RETURN CALCULATION
The Variable Investment Division may advertise average annual total return
information calculated according to a formula prescribed by the Securities and
Exchange Commission ("SEC"). Average annual total return shows the average
annual percentage increase, or decrease, in the value of a hypothetical
Contribution allocated to a Sub-Account from the beginning to the end of each
specified period of time. The SEC standardized version of this performance
information is based on an assumed Contribution of $1,000 allocated to a Sub-
Account at the beginning of each period and surrender or withdrawal of the
value of that amount at the end of each specified period, giving effect to any
charges and fees applicable under the Contract. The effect of the Annual
Administration Charge for a period is determined by dividing the total amount
of such charges collected in the previous year by the total average net assets
of the accounts for the previous year, as of the previous month ended;
accounts include accounts available under Variable Annuity III of Lincoln Life
and under corresponding accounts of First UNUM Life Insurance Company, pending
assumption reinsurance by Lincoln Life of Variable Annuity III contracts
issued through such corresponding accounts. This method of calculating
performance further assumes that (i) a $1,000 Contribution was allocated to a
Sub-Account and (ii) no transfers or additional payments were made. Premium
taxes are not included in the term "charges" for purposes of this calculation.
Average annual total return is calculated by finding the average annual
compounded rates of return of a hypothetical Contribution that would compare
the Accumulation Unit value on the first day of the specified period to the
ending redeemable value at the end of the period according to the following
formula:
T = (ERV/C) 1/n--1
Where T equals average annual total return, where ERV (the ending redeemable
value) is the value at the end of the applicable period of a hypothetical
Contribution of $1,000 made at the beginning of the applicable period, where C
equals a hypothetical Contribution of $1,000, and where n equals the number of
years.
NON-STANDARDIZED CALCULATION OF TOTAL RETURN PERFORMANCE
In addition to the standardized average annual total return information
described above, we may present total return information computed on bases
different from that standardized method. The Variable Investment Division may
present total return information computed on the same basis as the
standardized method except that charges deducted from the hypothetical
Contribution will not include any Annual Administration Charge. The total
return percentage under this method will be higher than the resulting
percentage from the standardized method.
The Sub-Accounts also may present total return information calculated by
subtracting a Sub-Account's Accumulation Unit Value at the beginning of a
period from the Accumulation Unit Value of that Sub-Account at the end of the
period and dividing that difference (in that Sub-Account's Accumulation Unit
Value) by the Accumulation Unit Value of that Sub-Account at the beginning of
the period. This computation results in a total growth rate for the specified
period which we annualize in order to obtain the average annual percentage
change in the Accumulation Unit Value for the period used. This method of
calculating performance does not take into account the Annual Administration
Charge and premium taxes, and assumes no transfers. Such percentages would be
lower if these charges were included in the calculation.
In addition, the Variable Investment Division may present actual aggregate
total return figures for various periods, reflecting the cumulative change in
value of an investment in the Variable Investment Division for the specified
period.
PERFORMANCE INFORMATION
The tables below provide performance information for each Sub-Account for
specified periods ending December 31, 1996. For the periods prior to the date
the Sub-Accounts commenced operations, performance information for the
Contracts will be calculated based on the performance of the fund portfolios
and the assumption that the Sub-Accounts were in existence for the same
periods as those indicated for the fund portfolios, with the level of Contract
4
<PAGE>
charges that were in effect at the inception of the Sub-Accounts (this is
referred to as "hypothetical performance data"). This information does not
indicate or represent future performance.
TOTAL RETURN
Total returns quoted in sales literature or advertisements reflect all aspects
of a Sub-Account's return. Average annual returns are calculated by
determining the growth or decline in value of a hypothetical historical
investment in the Sub-Account over a stated period of time, and then
calculating the annually compounded percentage rate that would have produced
the same result if the rate of growth or decline had been constant over the
period. Contractholders and participants should recognize that average annual
returns represent averaged returns rather than actual year-to-year
performance.
The respective underlying funds in which the Sub-Accounts invest had
performance history prior to the Sub-Accounts' inception. Performance
information covering those periods reflects a hypothetical performance as if
the funds were part of the Lincoln Life & Annuity Variable Annuity Account L
at that time, using the charges applicable to the Contracts.
Table 1A below assumes a hypothetical investment of $1,000 at the beginning of
the period via the Sub-Account investing in the applicable fund and withdrawal
of the investment on 12/31/96. The rates thus reflect the mortality and
expense risk charge and a pro rata portion of the Annual Administrative
Charge. Table 1B shows the cumulative total return on the same basis.
TABLE 1A -- SUB-ACCOUNT STANDARDIZED "HYPOTHETICAL" AVERAGE ANNUAL TOTAL
RETURN
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fund VIP II: Asset
Manager 9/06/89 12.52 5.91 9.06 N/A 9.16
(Asset Manager)
Calvert Responsibly
Invested 09/02/86 10.57 10.12 8.26 8.62 7.75
Balanced Portfolio
(Socially Responsible)
American Century VP 05/01/91 10.14 8.89 4.57 N/A 7.93
Balanced
(Balanced)
VIP Equity-Income 10/09/86 12.20 16.02 15.67 11.19 10.71
(Equity-Income)
Dreyfus Stock Index 09/29/89 20.33 16.90 12.34 N/A 11.08
(Index Account)
Fund VIP Growth 10/09/86 12.62 13.61 12.90 12.59 12.07
(Growth I)
American Century VP 05/01/91 (6.23) 5.33 4.03 N/A 8.17
Capital Appreciation
(Growth II)
T. Rowe Price
International 03/03/94 12.61 N/A N/A N/A 7.78
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 14.47 15.37 33.60 N/A 45.73
(Small Cap)
</TABLE>
5
<PAGE>
TABLE 1B -- SUB-ACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
LIFE OF
FUND YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS FUND
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund VIP II: Asset
Manager 09/06/89 5.08 12.52 12.52 18.81 54.28 N/A 90.03
(Asset Manager)
Calvert Responsibly
Invested
Balanced Portfolio 09/02/86 2.64 10.57 10.57 33.55 48.73 128.55 116.21
(Socially Responsible)
American Century VP 05/01/91 2.73 10.14 10.14 29.10 25.06 N/A 54.16
Balanced (Balanced)
VIP Equity-Income 10/09/86 5.64 12.20 12.20 56.17 107.07 188.86 183.25
(Equity-Income)
Dreyfus Stock Index
(Index) 09/29/89 7.22 20.33 20.33 59.74 78.90 N/A 114.33
Fund VIP Growth
(Growth I) 10/09/86 1.09 12.62 12.62 46.63 83.44 227.19 221.16
American Century VP
Capital Appreciation 11/20/87 (9.80) (6.23) (6.23) 16.87 21.85 N/A 104.75
(Growth II)
T. Rowe Price
International 03/31/94 3.69 12.61 12.61 N/A N/A N/A 22.92
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 1.53 14.47 14.47 53.56 325.60 N/A 988.60
(Small Cap)
</TABLE>
Tables 2A and 2B show performance information on the same assumptions as
Tables 1A and 1B except that Tables 2A and 2B do not reflect deductions of the
pro rata portion of the Annual Administrative Charge because certain Contracts
and Participants are not assessed such a charge.
TABLE 2A -- SUB-ACCOUNT "HYPOTHETICAL" AVERAGE TOTAL RETURN ASSUMING NO ANNUAL
ADMINISTRATIVE CHARGE
<TABLE>
<CAPTION>
LIFE
FUND 1 YEAR 3 YEARS 5 YEARS 10 YEARS OF FUND
INCEPTION ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C>
Fund VIP II: Asset
Manager 09/06/89 13.24 6.69 9.94 N/A 10.37
(Asset Manager)
Calvert Responsibly
Invested
Balanced Portfolio 09/02/86 11.28 10.92 9.14 9.79 9.10
(Socially Responsible)
American Century VP
Balanced 05/01/91 10.81 9.67 5.44 N/A 8.92
(Balanced)
VIP Equity-Income 10/09/86 12.92 16.84 16.58 12.39 12.08
(Equity-Income)
Dreyfus Stock Index 09/29/89 21.09 17.72 13.28 N/A 12.34
(Index Account)
Fund VIP Growth 10/09/86 13.35 14.42 13.79 13.78 13.45
(Growth I)
American Century VP
Capital Appreciation 11/20/87 (5.43) 6.15 4.91 N/A 9.50
(Growth II)
T. Rowe Price
International
Stock Portfolio 03/31/94 13.34 N/A N/A N/A 8.64
(International Stock)
Dreyfus Small Cap 08/31/90 15.22 16.19 34.58 N/A 47.09
(Small Cap)
</TABLE>
6
<PAGE>
TABLE 2B -- SUB-ACCOUNT "HYPOTHETICAL" CUMULATIVE TOTAL RETURN ASSUMING NO
ANNUAL ADMINISTRATIVE CHARGE
<TABLE>
<CAPTION>
LIFE OF
FUND YEAR TO 1 YEAR 3 YEARS 5 YEARS 10 YEARS FUND
INCEPTION QUARTER DATE ENDING ENDING ENDING ENDING ENDING
DATE 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96 12/31/96
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fund VIP II: Asset 09/06/89 5.76 13.24 13.24 21.44 60.62 N/A 105.91
Manager
(Asset Manager)
Calvert Responsibly
Invested 09/02/86 3.31 11.28 11.28 36.46 54.86 154.52 145.99
Balanced Portfolio
(Socially Responsible)
American Century VP
Balanced 05/01/91 3.40 10.81 10.81 31.92 30.35 N/A 62.41
(Balanced)
VIP Equity-Income 10/09/86 6.32 12.92 12.92 59.50 115.35 221.61 221.09
(Equity-Income)
Dreyfus Stock Index 09/29/89 7.91 21.09 21.09 63.13 86.54 N/A 132.78
(Index)
Fund VIP Growth 10/09/86 1.75 13.35 13.35 49.79 90.81 263.78 263.71
(Growth I)
American Century VP
Capital Appreciation 11/20/87 (9.17) (5.43) (5.43) 19.60 27.09 N/A 128.68
(Growth II)
T. Rowe Price
International 03/31/94 4.37 13.34 13.34 N/A N/A N/A 25.65
Stock Portfolio
(International Stock)
Dreyfus Small Cap 08/31/90 2.20 15.22 15.22 56.84 341.39 N/A 1054.84
(Small Cap)
</TABLE>
Table 3 below shows total return information on a calendar year basis using
the same assumptions as Tables 2A and 2B. The rates of return shown reflect
the mortality and expense risk charge. Similar to Tables 2A and 2B, Table 3
does not reflect deduction of the pro rata portion of the Annual
Administrative Charge because certain Contracts and Participants are not
assessed such a charge.
TABLE 3 -- SUB-ACCOUNT "HYPOTHETICAL" CALENDAR YEAR ANNUAL RETURN ASSUMING NO
ANNUAL ADMINISTRATIVE CHARGE*
<TABLE>
<CAPTION>
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Asset Manager n/a n/a n/a 5.45 21.11 10.53 19.60 -7.20 15.57 13.24
Socially Responsible 5.51 10.42 19.53 2.94 15.02 6.33 6.72 -4.39 28.24 11.28
Balanced n/a n/a n/a n/a n/a -7.17 6.38 -0.58 19.68 10.81
Equity-Income -2.30 21.25 15.95 -16.29 29.88 15.50 16.89 5.80 33.49 12.92
Index n/a n/a n/a -4.69 28.29 5.82 8.02 -0.32 35.16 21.09
Growth I 2.43 14.21 29.95 -12.78 43.78 8.00 17.94 -1.21 33.75 13.35
Growth II n/a -3.41 27.17 -2.40 40.18 -2.52 8.99 -2.34 29.55 -5.43
International Stock n/a n/a n/a n/a n/a n/a n/a n/a 9.86 13.34
Small Cap n/a n/a n/a n/a 156.65 69.25 66.31 6.47 27.85 15.22
</TABLE>
*The above calendar-year returns assume a hypothetical investment of $1,000 on
January 1 of the first full calendar year that the underlying fund was in
existence. The returns assume that the money will be left on account until
retirement. Returns are provided for years before the fund was an available
investment option under the Contract. Returns for those periods reflect a
hypothetical return as if those funds were available under the Contract, and
reflect the deduction of the mortality and expense risk charge. The returns do
not reflect deductions for the pro rata portion of the Annual Administrative
Charge.
SEC regulations require that any product performance data be accompanied by
standardized performance data.
7
<PAGE>
TAX LAW CONSIDERATIONS
RETIREMENT PROGRAMS:
Participants are urged to discuss the income taxes considerations of their
retirement plan with their tax advisors. In many situations special rules may
apply to the plans and/or to the participants. See the Prospectus for a more
complete discussion of tax considerations and for limitations on the following
discussion.
Contributions to retirement programs subject to Sections 401(a), 403(b), 408
and 457(b) may be excludable from a Participant's reportable gross income if
the Contributions do not exceed the limitations imposed under the Code.
Certain plans allow employees to make Elective Salary Deferral Contributions.
Certain Plans allow Employers to make Contributions. The information below is
a brief summary of some the important federal tax considerations that apply to
retirement plans. When there is a written Plan, often the Contribution limits,
withdrawal rights and other provisions of the Plan may be more restrictive
than those allowed by the Code.
Elective Salary Deferral Contributions:
For calendar year 1996 the maximum elective salary deferral contributions to a
401(k) Plan which is a type of 401(a) Plan is limited to $9,500; For a 403(b)
plan the limit is $9,500 unless the employee is a qualified employee; For an
Eligible 457 Plan the limit is $7,500. When an employee is covered by two or
more of these Plans, the elective salary deferral contribution limits for all
the Plans must be coordinated.
Total Salary Deferral & Employer Contributions:
QUALIFIED RETIREMENT PLAN - 401(a) PLAN
- ---------------------------------------
The Code limits the Contributions to a defined contribution 401(a) plan to the
lesser of $30,000 or 25% of compensation.
TAX SHELTERED ANNUITY PLAN - 403(b) Plan
- ----------------------------------------
Total contributions which include both salary deferral contributions and
employer contributions are also limited.
The combined limit is:
(a) the amount determined by multiplying 20 percent of the employee's
includable compensation by the number of years of service, over
(b) the aggregate of the amount contributed by the employer for annuity
contracts and excludable from the gross income of the employee for the
prior taxable year.
Therefore, if the maximum exclusion allowance is less than $9,500 a year, the
employee's elective deferrals plus any other employer Contributions cannot
exceed this lesser amount.
Section 415 of the Code imposes limitations with respect to annual
contributions to all Section 403(b) programs, qualified plans and simplified
employee pensions maintained by the Employer. A Participant's annual
contributions to these programs and defined contribution plans generally
cannot exceed the lesser of $30,000 or 25 percent of the employee's
compensation. This amount is subject to the maximum exclusion allowance and
the salary deferral amount limitations.
ELIGIBLE 457 PLAN - 457(b) PLAN
- -------------------------------
For a 457(b) plan the contribution limit is generally the lesser of $7,500 or
33% of the employee's compensation.
SECTION 457(f) PLANS
- --------------------
These are non-qualified deferred compensation arrangements between an Employer
and its employees. There are no stated limits in the Code regarding this type
of Plan.
8
<PAGE>
INDIVIDUAL RETIREMENT ACCOUNT - IRA OR 408 PLAN
- -----------------------------------------------
For IRA's the maximum deductible contribution is the lesser of $2,000 or 100%
of taxable income. The $2,000 is increased to $4,000 when the IRA covers the
taxpayer and a non-working spouse.
TRANSFERS AND ROLLOVERS:
Participants who receive distributions from their 401(a) or 403(b) contract
may transfer the amount not representing employee contributions to an
Individual Retirement Account or Annuity (IRA) or another Section 401(a) or
403(b) program without including that amount in gross income for the taxable
year in which paid. Note 401(a) distributions may not be transferred to a
403(b) plan or vice versa. If the amount is paid directly to an acceptable
rollover account, Lincoln Life is not required to withhold any amount. In
order for the distribution to qualify for rollover, the distribution must be
made on account of the employee's death, after the employee attains age 59
1/2, on account of the employee's separation from service, or after the
employee has become disabled. The distribution cannot be part of a series of
substantially equal payments made over the life expectancy of the employee or
the joint life expectancies of the employee and his or her spouse or made for
a specified period of 10 years or more. The rollover must be made within sixty
days of the distribution to avoid taxation.
Pursuant to Revenue Ruling 90-24, a Participant, to the extent permitted by
any applicable Contract or Plan, may transfer funds between Section 403(b)
investment vehicles, including both Section 403(b)(1) annuity contracts and
Section 403(b)(7) custodial accounts. Any amount transferred must continue to
be subject to withdrawal restrictions at least as restrictive as that of the
transferring investment vehicle. Lincoln Life considers any total or partial
transfer from a Lincoln Life investment vehicle to a non-Lincoln Life
investment vehicle to be a withdrawal.
Once every twelve months a participant in an IRA may roll the money from one
IRA to another IRA.
The rollover rules are not available to Section 457 Plans; limited transfers
are permitted under Eligible 457 Plans. If the rollover amount is paid
directly to the Participant, the amount distributed may be subject to a 20%
federal tax withholding.
EXCISE TAX ON EARLY DISTRIBUTIONS:
Section 72(t) of the Code provides that any distribution made to a Participant
in a 401(a), 403(b) or 408 plan other than on account of the following events
will be subject to a 10 percent excise tax on the taxable amount distributed:
a) the employee has attained age 59 1/2;
b) the employee has died;
c) the employee is disabled;
d) the employee is 55 and has separated from service (Does not apply to
IRA's).
Distributions which are received as a life annuity where payment is made at
least annually will not be subject to an excise tax. Certain amounts paid for
medical care may also not be subject to an excise tax.
MINIMUM DISTRIBUTION RULES:
The value in a contract under Sections 401(a), 403(b), 408 and Eligible 457
Plans are subject to the distribution rules provided in Section 401(a)(9) of
the Code. Generally, that section requires that an employee must begin
receiving distributions of his post-1986 balance by April 1 of the calendar
year following the calendar year in which the employee attains age 70 1/2.
Such distributions must not exceed the life expectancy of the employee or the
life expectancy of such employee and the designated beneficiary (as defined
under the plan). An employee who attained age 70 1/2 before January 1, 1988
must begin receiving distributions by April 1 of the calendar year following
the later of (a) the calendar year in which the employee attains age 70 1/2 or
(b) the calendar year in which the employee retires. There are special rules
for Section 403(b) Plans.
Amounts contributed to an Eligible 457 contract must be distributed not
earlier than the earliest of: (1) calendar year in which the Participant
attains age 70 1/2, (2) the Participant separates from service with the
Employer, or
9
<PAGE>
(3) when the Participant has an unforeseen emergency. However, in no event may
the distribution begin any later than described in Sections 401(a)(9) and
457(d) of the Code.
Additionally, distribution of an employee's entire account balance (including
pre-1987 funds) must satisfy the minimum distribution incidental benefit
requirement. In general, this requires that death and other non-retirement
benefits payable under the above plans be incidental to the primary purpose of
the program which is to provide deferred compensation to the employee. A payee
is subject to a penalty for failing to receive the required minimum annual
distribution. Section 4974(a) of the Code provides that a payee will be
subject to a penalty equal to 50 percent of the amount by which the required
minimum distribution exceeds the actual amount distributed during the taxable
year.
Additional information on federal income taxation is included in the
prospectus.
DISTRIBUTION OF CONTRACTS
LNC Equity Sales Corporation ("LNC Equity"), an indirect subsidiary of Lincoln
National Corporation, is registered with the Securities and Exchange
Commission as a broker-dealer under the Securities Exchange Act of 1934 and is
a member of the National Association of Securities Dealers, Inc. LNC Equity is
the Variable Investment Division's principal underwriter and also enters into
selling agreements with other unaffiliated broker-dealers authorizing them to
offer the Contracts.
INDEPENDENT AUDITORS
The statutory-basis financial statements of Lincoln Life & Annuity Company of
New York appearing in this SAI and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report also
appearing elsewhere in this document and in the Registration Statement. The
statutory-basis financial statements audited by Ernst & Young LLP have been
included in this document in reliance on their report given on their authority
as experts in accounting and auditing.
FINANCIAL STATEMENTS
This SAI contains statutory-basis financial statements for Lincoln Life. These
financial statements should be considered only as bearing on the ability of
Lincoln Life to meet its obligations under the Contracts. No financial
statements are included for the Variable Investment Division because, as of
December 31, 1996, the Variable Investment Division had not yet commenced
operations.
10
<PAGE>
FINANCIAL STATEMENTS--STATUTORY BASIS
AND OTHER FINANCIAL INFORMATION
LINCOLN LIFE & ANNUITY
COMPANY OF NEW YORK
PERIOD FROM JUNE 6, 1996 (DATE OF INCORPORATION)
TO DECEMBER 31, 1996 WITH
REPORT OF INDEPENDENT AUDITORS
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
FINANCIAL STATEMENTS--STATUTORY BASIS AND OTHER FINANCIAL INFORMATION
PERIOD FROM JUNE 6, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors F-1
Audited Financial Statements
Balance Sheet--Statutory Basis F-2
Statement of Operations--Statutory Basis F-3
Statement of Changes in Capital and Surplus--Statutory Basis F-4
Statement of Cash Flows--Statutory Basis F-5
Notes to Financial Statements--Statutory Basis F-6
Other Financial Information
Report of Independent Auditors on Other Financial Information F-12
Supplemental Schedule of Selected Financial Data--Statutory Basis F-13
Note to Supplemental Schedule of Selected Financial Data--Statutory Basis F-14
</TABLE>
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
Lincoln Life & Annuity Company of New York
We have audited the accompanying statutory-basis balance sheet of Lincoln Life
& Annuity Company of New York (a wholly owned subsidiary of The Lincoln
National Life Insurance Company) as of December 31, 1996, and the related
statutory-basis statements of operations, changes in capital and surplus, and
cash flows for the period from June 6, 1996 (date of incorporation) to
December 31, 1996. 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 audit.
We conducted our audit 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 audit provides a reasonable basis
for our opinion.
The Company presents its financial statements in conformity with accounting
practices prescribed or permitted by the New York Insurance Department. The
variances between such practices and generally accepted accounting principles
and the effects on the accompanying financial statements are described in Note
1.
In our opinion, because of the materiality of the effects of the variances
between generally accepted accounting principles and the accounting practices
referred to in the preceding paragraph, the financial statements referred to
above are not intended to and do not present fairly, in conformity with
generally accepted accounting principles, the financial position of Lincoln
Life & Annuity Company of New York at December 31, 1996 or the results of its
operations and cash flows for the period from June 6, 1996 to December 31,
1996.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Lincoln Life &
Annuity Company of New York at December 31, 1996 and the results of its
operations and its cash flows for the period from June 6, 1996 to December 31,
1996 in conformity with accounting practices prescribed or permitted by the
New York Insurance Department.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 1, 1997
F-1
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
BALANCE SHEET--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31,
------------
1996
- ----------------------------------------------------------------------
<S> <C>
ADMITTED ASSETS
Cash and invested assets:
Bonds $604,353,271
Policy loans 40,609,076
Cash and short-term investments 19,335,007
- ----------------------------------------------------------------------
Total cash and invested assets 664,297,354
Accrued investment income 9,022,375
Electronic data processing equipment 103,557
- ----------------------------------------------------------------------
Total admitted assets $673,423,286
- ----------------------------------------------------------------------
LIABILITIES AND CAPITAL AND SURPLUS
Liabilities:
Policyholders' funds $601,117,439
Other liabilities 16,351,624
Federal income taxes 1,445,538
Asset valuation reserve 1,128,548
Interest maintenance reserve 3,204,140
- ----------------------------------------------------------------------
Total liabilities 623,247,289
Capital and surplus:
Common stock, $100 par value:
Authorized, issued and outstanding--20,000 shares
(owned by The Lincoln National Life Insurance Company) 2,000,000
Paid-in surplus 69,000,000
Unassigned surplus--deficit (20,824,003)
- ----------------------------------------------------------------------
Total capital and surplus 50,175,997
- ----------------------------------------------------------------------
Total liabilities and capital and surplus $673,423,286
- ----------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-2
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENT OF OPERATIONS--STATUTORY BASIS
PERIOD FROM JUNE 6, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
REVENUES:
Premiums and deposits $631,355,849
Net investment income 10,769,172
Amortization of the interest maintenance reserve 205,255
Surrender charges 310,991
Other revenues 18,347
- -----------------------------------------------------------------------------
Total revenues 642,659,614
BENEFITS AND EXPENSES:
Benefits paid or provided to policyholders 640,912,693
Commissions 18,931,151
General expenses 1,754,158
Insurance taxes, licenses and fees 47,046
- -----------------------------------------------------------------------------
Total benefits and expenses 661,645,048
- -----------------------------------------------------------------------------
Loss from operations before federal income taxes and net real-
ized capital losses (18,985,434)
Federal income tax benefit (391,144)
- -----------------------------------------------------------------------------
Loss from operations before net realized capital losses (18,594,290)
Net realized capital losses (855)
- -----------------------------------------------------------------------------
Net loss $(18,595,145)
- -----------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-3
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENT OF CHANGES IN CAPITAL AND SURPLUS--STATUTORY BASIS
PERIOD FROM JUNE 6, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
<TABLE>
<CAPTION>
Unassigned Total
Common Paid-In Surplus-- Capital And
Stock Surplus Deficit Surplus
- -------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCES AT JUNE 6, 1996 $ -- $ -- $ -- $ --
Add (deduct):
Capital paid-in 2,000,000 -- -- 2,000,000
Surplus paid-in -- 69,000,000 -- 69,000,000
Net loss -- -- (18,595,145) (18,595,145)
Increase in nonadmitted
assets -- -- (1,100,310) (1,100,310)
Increase in asset valuation
reserve -- -- (1,128,548) (1,128,548)
- -------------------------------------------------------------------------------
BALANCES AT DECEMBER 31,
1996 $2,000,000 $69,000,000 $(20,824,003) $ 50,175,997
- -------------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-4
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
STATEMENT OF CASH FLOWS--STATUTORY BASIS
PERIOD FROM JUNE 6, 1996 (DATE OF INCORPORATION) TO DECEMBER 31, 1996
<TABLE>
<S> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 631,355,849
Investment income received 1,837,439
Benefits paid (23,169,165)
Operating and administrative expenses paid (2,195,908)
Other income received and expenses paid, net (18,393,813)
- ---------------------------------------------------------------------------
Net cash provided by operating activities 589,434,402
- ---------------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 366,021,652
Purchase of investments (965,220,343)
Net increase in policy loans and premium notes (40,609,076)
- ---------------------------------------------------------------------------
Net cash used in investing activities (639,807,767)
- ---------------------------------------------------------------------------
FINANCING AND MISCELLANEOUS ACTIVITIES
Capital and surplus paid-in 71,000,000
Other (1,291,628)
- ---------------------------------------------------------------------------
Net cash provided by financing and miscellaneous activities 69,708,372
- ---------------------------------------------------------------------------
Total cash and short-term investments at December 31, 1996 $ 19,335,007
- ---------------------------------------------------------------------------
</TABLE>
See accompanying notes.
F-5
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
- ------------
Lincoln Life & Annuity Company of New York (the "Company") is a wholly owned
subsidiary of The Lincoln National Life Insurance Company ("Lincoln Life"),
which is a wholly owned subsidiary of Lincoln National Corporation. The
Company was organized under the laws of the state of New York on June 6, 1996
for purposes of future operations as a life insurance company.
The Company received approval from the New York Insurance Department (the
"Department") to operate as a licensed insurance company in the state of New
York on September 27, 1996. The Company's operations consist of group 403(b)
tax-qualified annuity business acquired from UNUM Corporation affiliates on
October 1, 1996. The purchase was completed in the form of an indemnity
reinsurance transaction with an initial ceding commission of $15,600,000 which
the Department required the Company to record as an expense in the 1996
statement of operations. Upon novation, which has taken place on specific
dates through April 1, 1997, the indemnity reinsurance agreements for general
accounts were replaced with assumption reinsurance agreements and the acquired
separate accounts were recorded via assumption reinsurance agreements.
Subsequent to December 31, 1996 and through April 1, 1997, $586,447,000 of
policyholder funds were novated to the Company consisting of $471,198,000 of
general account policyholder funds previously reinsured under indemnity
reinsurance agreements and $115,249,000 of separate account policyholder
funds. Effective October 1, 1996 and prior to novation, the Company
administered and managed the separate account business.
The group tax-qualified annuities are sold to not-for-profit organizations
throughout New York State by independent brokers.
USE OF ESTIMATES
- ----------------
Preparation of financial statements requires management to make estimates and
assumptions that affect amounts reported in the financial statements and
accompanying notes. Actual results could differ from these estimates.
BASIS OF PRESENTATION
- ---------------------
The accompanying statutory-basis financial statements have been prepared in
conformity with accounting practices prescribed or permitted by the
Department. "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, may
differ from company to company within a state and may change in the future.
The NAIC currently is in the process of recodifying statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which
is expected to be completed in 1998, will likely change, to some extent,
prescribed statutory accounting practices, and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements.
Statutory accounting practices differ from generally accepted accounting
principles ("GAAP"). The more significant variances from GAAP are as follows:
INVESTMENTS
- -----------
Bonds are reported at amortized cost or market value based on their NAIC
rating. For GAAP, the Company's bonds are classified as available-for-sale
and, accordingly, are reported at fair value with changes in the fair values
reported directly in shareholder's equity after adjustments for deferred
income taxes.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of bonds attributable to changes in
the general level of interest rates and amortizes those deferrals over the
F-6
<PAGE>
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
INVESTMENTS (Continued)
- -----------
remaining period to maturity of the individual security sold. The net deferral
is reported as the "interest maintenance reserve" in the accompanying balance
sheet. Realized capital gains and losses are reported in income net of federal
income tax and transfers to the interest maintenance reserve. The "asset
valuation reserve" is determined by an NAIC prescribed formula and is reported
as a liability rather than unassigned surplus. Under GAAP, realized capital
gains and losses are reported in the income statement on a pretax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged to
income.
NONADMITTED ASSETS
- ------------------
Certain assets designated as "nonadmitted," principally start-up and
organizational costs and furniture and equipment, are excluded from the
accompanying balance sheet and are charged directly to unassigned surplus.
PREMIUMS
- --------
Premiums and deposits are reported as premiums and deposits revenues; whereas,
under GAAP, such premiums and deposits are treated as liabilities and policy
charges represent revenues.
REINSURANCE
- -----------
Commissions on business assumed are reported as an expense; whereas, under
GAAP the reinsurance transaction would be treated as a purchase of a business
and the ceding commission would represent the purchase price which would be
allocated to the assets and liabilities acquired at their respective fair
values. The excess of liabilities over assets acquired would be treated as
goodwill.
INCOME TAXES
- ------------
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
A reconciliation of the Company's capital and surplus and net income (loss)
determined in accordance with statutory accounting practices with amounts
determined in accordance with GAAP is as follows:
<TABLE>
<CAPTION>
Capital and
Surplus Net Income (Loss)
- ------------------------------------------------------------------------------
December 31, Period Ended
1996 December 31, 1996
- ------------------------------------------------------------------------------
<S> <C> <C>
Amounts as reported on a statutory basis $ 50,175,997 $(18,595,145)
Add (deduct):
Net unrealized gain on bonds 215,899 --
Interest maintenance reserve 3,204,140 3,204,140
Asset valuation reserve 1,128,548 --
Difference between GAAP and statutory-basis
policyholders' funds (15,536,418) (15,536,418)
Present value of in-force--statutory reserve
adjustment 19,124,794 19,124,794
Present value of in-force--ceding commissions 17,956,362 17,956,362
Deferred federal income taxes (1,290,978) (1,215,413)
Nonadmitted assets 1,100,310 --
- ------------------------------------------------------------------------------
Amounts on a GAAP basis $ 76,078,654 $ 4,938,320
- ------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE>
NOTE 1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(CONTINUED)
INCOME TAXES (CONTINUED)
- ------------
Other significant accounting practices are as follows:
INVESTMENTS
- -----------
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect actual
payments to date and anticipated future payments. The net investment in the
securities is adjusted to the amount that would have existed had the new
effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition.
Realized capital gains and losses are determined using the specific-
identification method. Changes in admitted asset carrying amounts of bonds are
credited or charged directly in unassigned surplus.
ELECTRONIC DATA PROCESSING EQUIPMENT
- ------------------------------------
Electronic data processing equipment is reported at cost, less accumulated
depreciation. Electronic data processing equipment is depreciated on a
straight-line basis over the useful life of the asset.
PREMIUMS
- --------
Premiums for general account annuity business are recognized as revenue when
deposited.
BENEFITS
- --------
Liabilities related to policyholders' funds left on deposit with the Company
generally are equal to fund balances less applicable surrender charges, and do
not differ materially from reserve practices prescribed by the Department.
VULNERABILITY FROM CONCENTRATIONS
- ---------------------------------
The Company is licensed to conduct life insurance business in the state of New
York. Currently, its only product is sold through independent brokers in the
group 403(b) marketplace, primarily to higher-education institutions and non-
profit healthcare organizations.
NOTE 2. INVESTMENTS
The major categories of net investment income for the period from June 6, 1996
to December 31, 1996 are summarized as follows:
<TABLE>
<S> <C>
INCOME:
Bonds $ 9,427,203
Policy loans 439,305
Cash and short-term investments 1,024,525
- --------------------------------------------
Total investment income 10,891,033
Investment expenses 121,861
- --------------------------------------------
Net investment income $10,769,172
- --------------------------------------------
</TABLE>
F-8
<PAGE>
NOTE 2. INVESTMENTS (CONTINUED)
INCOME (Continued)
The cost or amortized cost, gross unrealized gains and losses and the fair
value of investments in bonds at December 31, 1996 are summarized as follows:
<TABLE>
<CAPTION>
Cost or Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
- ---------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $374,672,586 $1,065,584 $(2,174,439) $373,563,731
U.S. government 66,997,162 582,337 -- 67,579,499
Foreign government 4,992,530 56,125 -- 5,048,655
Mortgage-backed 157,690,993 762,919 (76,627) 158,377,285
- ---------------------------------------------------------------------
$604,353,271 $2,466,965 $(2,251,066) $604,569,170
- ---------------------------------------------------------------------
</TABLE>
Fair value for bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services or, in the case of private placements, are
estimated by discounting expected future cash flows using a current market
rate applicable to the coupon rate, credit quality and maturity of the
investments.
A summary of the cost or amortized cost and fair value of investments in bonds
at December 31, 1996, by contractual maturity, is as follows:
<TABLE>
<CAPTION>
Cost or
Amortized Fair
Cost Value
- -----------------------------------------------------
<S> <C> <C>
Maturity:
In 1998-2001 $155,301,576 $155,141,174
In 2002-2006 215,774,433 214,946,565
After 2006 75,586,269 76,104,146
Mortgage-backed securities 157,690,993 158,377,285
- -----------------------------------------------------
Total $604,353,271 $604,569,170
- -----------------------------------------------------
</TABLE>
The expected maturities may differ from the contractual maturities in the
foregoing table because certain borrowers may have the right to call or prepay
obligations with or without call or prepayment penalties.
Proceeds from sales of investments in bonds were $365,646,000. Gross gains of
$4,871,624 and gross losses of $2,443 were realized on those sales. Net gains
of $376,041 were realized on sales of short-term investments.
Realized capital losses are reported net of federal income taxes on realized
capital gains of $1,836,682 and amounts transferred to the interest
maintenance reserve of $3,409,395.
At December 31, 1996, investments in bonds with an admitted asset value of
$500,222 were on deposit with the Department to satisfy regulatory
requirements.
At December 31, 1996, the Company did not have a material concentration of
financial instruments in a single investee, industry or geographic location.
NOTE 3. FEDERAL INCOME TAXES
The effective federal income tax rate for financial reporting purposes differs
from the prevailing statutory tax rate principally due to differences in
ceding commissions for tax return and financial statement purposes.
F-9
<PAGE>
NOTE 4. ANNUITY RESERVES
At December 31, 1996, the Company's annuity reserves and deposit fund
liabilities that are subject to discretionary withdrawal (with adjustment),
and subject to discretionary withdrawal (without adjustment), are summarized
as follows:
<TABLE>
<CAPTION>
Amount Percent
- ------------------------------------------------------------------------------
<S> <C> <C>
Subject to discretionary withdrawal (with adjustment) at
book value, less surrender charge $240,965,892 40.1
Subject to discretionary withdrawal (without adjustment)
at book value with minimal or no charge or adjustment 360,151,547 59.9
- ------------------------------------------------------------------------------
Total annuity reserves and deposit fund liabilities $601,117,439 100.0%
- ------------------------------------------------------------------------------
</TABLE>
NOTE 5. CAPITAL AND SURPLUS
The Company was initially capitalized on August 12, 1996 with a capital
contribution from Lincoln Life in the amount of $2,000,000. Additional paid-in
surplus from Lincoln Life in the amounts of $6,000,000, $62,000,000 and
$1,000,000 was received on September 16, 1996, September 24, 1996 and
September 26, 1996, respectively.
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount of
capital and surplus maintained by a life insurance company is to be determined
based on the various risk factors. At December 31, 1996, the Company exceeds
the RBC requirements.
The payment of dividends by the Company requires 30 day advance notice to the
Department.
NOTE 6. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
LEASES
- ------
The Company leases office space and equipment under lease agreements that
expire at various intervals over the next seven years and are subject to
renewal options at market rates prevailing at the time of renewal. Rental
expense for all operating leases was $32,252 for the period from June 6, 1996
to December 31, 1996. Future minimum rental commitments are as follows:
<TABLE>
<S> <C>
1997 $ 120,192
1998 132,620
1999 194,760
2000 194,760
2001 189,227
Thereafter 296,201
- ----------------------
$1,127,760
- ----------------------
</TABLE>
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values and,
accordingly, the estimates shown are not necessarily indicative of the amounts
that would be realized in a one-time, current market exchange of all of the
Company's financial instruments.
BONDS
- -----
Fair values of bonds are based on quoted market prices, where available. For
securities not actively traded, fair values are estimated using values
obtained from independent pricing services or, in the case of private
placements, are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and maturity
of the investments.
F-10
<PAGE>
NOTE 7. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
POLICY LOANS
- ------------
The estimated fair value of investments in policy loans was calculated on a
composite discounted cash flow basis using Treasury interest rates consistent
with the maturity durations assumed. These durations were based on historical
experience.
CASH AND SHORT-TERM INVESTMENTS
- -------------------------------
The carrying value of cash and short-term investments approximates fair value.
POLICYHOLDER FUNDS
- ------------------
The fair values of policyholder funds are based on their approximate surrender
values.
The carrying values and estimated fair values of the Company's financial
instruments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Carrying Fair
Assets (Liabilities) Value Value
- --------------------------------------------------------------
<S> <C> <C>
Bonds $ 604,353,271 $ 604,569,170
Policy loans 40,609,076 40,609,076
Cash and short-term investments 19,335,007 19,335,007
Policyholders' funds (601,117,439) (595,106,265)
</TABLE>
NOTE 8. TRANSACTIONS WITH AFFILIATES
The Company has entered into agreements with Lincoln Life to receive 403(b)
processing services and other support related to legal, technology,
accounting, and other corporate services. Fees paid to Lincoln Life for such
services were $931,000 for the period from June 6, 1996 to December 31, 1996.
The Company has also entered into an agreement with Lincoln Life to provide
403(b) processing services primarily related to banking and cash management.
Fees received from Lincoln Life for such services were $229,000 for the period
from June 6, 1996 to December 31, 1996.
The Company has an investment management agreement with an affiliate, Lincoln
Investment Management, Inc., for investment advisory and asset management
services. Fees paid for such investment services were $122,000 for the period
from June 6, 1996 to December 31, 1996.
F-11
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
Lincoln Life & Annuity Company of New York
Our audit was conducted for the purpose of forming an opinion on the
statutory-basis financial statements taken as a whole. The accompanying
supplemental schedule of selected statutory-basis financial data is presented
to comply with the National Association of Insurance Commissioners' Annual
Statement Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the auditing
procedures applied in our audit of the statutory-basis financial statements
and, in our opinion, is fairly stated in all material respects in relation to
the statutory-basis financial statements taken as a whole.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 1, 1997
F-12
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
SUPPLEMENTAL SCHEDULE OF SELECTED
FINANCIAL DATA--STATUTORY BASIS
<TABLE>
<CAPTION>
December 31,
1996
- ---------------------------------------------------------------------
<S> <C>
Investment income earned:
Government bonds $ 5,867,864
Other bonds (unaffiliated) 3,559,339
Policy loans 439,305
Cash on hand and on deposit 14,454
Short-term investments 1,010,071
- ---------------------------------------------------------------------
Gross investment income $ 10,891,033
- ---------------------------------------------------------------------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 20,143,625
Over 1 year through 5 years 207,390,447
Over 5 years through 10 years 255,112,940
Over 10 years through 20 years 88,596,367
Over 20 years 41,308,363
- ---------------------------------------------------------------------
Total by maturity $612,551,742
- ---------------------------------------------------------------------
Bonds by class (statement value):
Class 1 $446,047,877
Class 2 166,503,865
- ---------------------------------------------------------------------
Total by class $612,551,742
- ---------------------------------------------------------------------
Total bonds publicly traded $598,074,987
- ---------------------------------------------------------------------
Total bonds privately placed $ 14,476,755
- ---------------------------------------------------------------------
Short-term investments (cost or amortized cost) $ 8,198,471
- ---------------------------------------------------------------------
Cash on deposit $ 11,136,536
- ---------------------------------------------------------------------
Deposit funds and dividend accumulations:
- ---------------------------------------------------------------------
Deposit funds account balance $601,117,439
- ---------------------------------------------------------------------
</TABLE>
F-13
<PAGE>
LINCOLN LIFE & ANNUITY COMPANY OF NEW YORK
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
FINANCIAL DATA--STATUTORY BASIS
NOTE--BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis financial data as
of December 31, 1996 and for the period from June 6, 1996 (date of
incorporation) to December 31, 1996 for purposes of complying with paragraph 9
of the Annual Audited Financial Reports in the General section of the National
Association of Insurance Commissioners' Annual Statement Instructions and
agrees to or is included in the amounts reported in Lincoln Life & Annuity
Company of New York's 1996 Statutory Annual Statement as filed with the New
York Insurance Department.
F-14
