<PAGE> 1
As filed with the Securities and Exchange Commission on __________,1997
File No. 333-19583
File No. 811-8015
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM N-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 [X]
Pre-Effective Amendment No. 1 [ ]
---
Post-Effective Amendment No. [ ]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 1
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Exact Name of Registrant)
NATIONAL LIFE INSURANCE COMPANY
(Name of Depositor)
National Life Drive
Montpelier, Vermont 05604
(Address of Depositor's Principal Executive Offices)
Depositor's Telephone Number: (800) 537-7003
D. Russell Morgan, Esq.
Counsel
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
(Name and Address of Agent for Service of Process)
Copy to:
Stephen E. Roth, Esquire
Sutherland, Asbill & Brennan, L.L.P.
1275 Pennsylvania Avenue, N.W.
Washington, D.C. 20004-2404
Approximate Date of Proposed Public Offering: As soon as practicable after
the effective date of the registration statement.
<PAGE> 2
Pursuant to Rule 24f-2 under the Investment Company Act of 1940, the registrant
hereby elects to register an indefinite amount of securities being offered.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration shall become effective on such
date as the Commission, acting pursuant to Section 8(a), may determine.
<PAGE> 3
CROSS REFERENCE SHEET
Pursuant to Rules 481(a) and 495(a)
Showing location in Part A (prospectus) and Part B (statement of additional
information) of registration statement of information required by Form N-4
PART A
ITEM OF FORM N-4 PROSPECTUS CAPTION
1. Cover Page ..................... Cover Page
2. Definitions .................... Definitions
3. Synopsis ....................... Expense Tables;
Introduction
4. Condensed Financial
Information .................. Advertising
5. General
(a) Depositor ................ National Life Insurance
Company
(b) Registrant ............... The Variable Account
(c) Portfolio Company ........ Underlying Fund Options
(d) Fund Prospectus .......... Underlying Fund Options
(e) Voting Rights ............ Voting Rights
(f) Administrators ........... N/A
6. Deductions and Expenses
(a) General .................. Charges and Deductions;
Introduction
(b) Sales Load ............... Charges and Deductions;
Introduction
(c) Special Purchase Plan .... N/A
(d) Commissions .............. Distribution of the
Contracts
(e) Expenses - Registrant .... Charges and Deductions;
Introduction
<PAGE> 4
(f) Fund Expenses ............ Charges and Deductions
(g) Organizational Expenses .. N/A
7. Contracts
(a) Persons with Rights ...... Introduction; Changes to
Variable Account;
Detailed Description of
Contract Provisions;
Contract Rights; Optional
Benefits; Voting Rights
(b) (i) Allocation of
Purchase Payments ... Introduction; Premium
Payments; Free-Look
(ii) Transfers ........... Introduction; Transfers
(iii) Exchanges ........... Transfers; Assignments
(c) Changes .................. Detailed Description of
Contract; Changes to
Variable Account
(d) Inquiries ................ Cover page; Owner
Inquiries
8. Annuity Period ................. Annuity Payment Options
9. Death Benefit .................. Death of Owner; Death of
Annuitant Prior to the
Annuitization Date
10. Purchases and Contract Value
(a) Purchases ................ Introduction; Issuance of
a Contract; Premium
Payments; Free Look;
Transfers
(b) Valuation ................ Definitions; Value of a
Variable Account
Accumulation Unit
(c) Daily Calculation ........ Definitions; Value of a
Variable Account
Accumulation Unit
(d) Underwriter .............. Distribution of the
Contracts
<PAGE> 5
11. Redemptions
(a) - By Owners .............. Transfers; Surrender;
Withdrawals; Payments;
Annuity Payment Options;
Federal Income Tax
Considerations
- By Annuitant ........... Transfers; Surrender;
Withdrawals; Payments;
Annuity Payment Options;
Federal Income Tax
Considerations
(b) Texas ORP ................ N/A
(c) Check Delay .............. N/A
(d) Lapse .................... N/A
(e) Free Look ................ Premium Payments; Free
Look
12. Taxes .......................... Introduction; Required
Distributions for Tax
Sheltered Annuities;
Required Distributions
for Individual Retirement
Annuities; Generation-
Skipping Transfers; Loan
Privilege-Tax Sheltered
Annuities; Surrenders and
Withdrawals under a Tax
Sheltered Annuity
Contact; Federal Income
Tax Considerations.
13. Legal Proceedings .............. Legal Proceedings
14. Table of Contents for the
Statement of Additional
Information ................... Table of Contents of
Statement of Additional
Information
<PAGE> 6
PART A
PROSPECTUS
<PAGE> 7
NATIONAL LIFE INSURANCE COMPANY
HOME 0FFICE
NATIONAL LIFE DRIVE
MONTPELIER, VERMONT 05604
1-800-537-7003
Sentinel Advantage
The Sentinel Advantage contracts described in this prospectus (collectively
referred to as the "Contracts") are individual flexible premium variable annuity
contracts supported by National Variable Annuity Account II (the "Variable
Account"), a separate account of National Life Insurance Company ("National
Life"). The Contracts are sold either as Non-Qualified Contracts; or in
connection with certain retirement plans qualifying for favorable federal income
tax treatment ("Qualified Contracts"). Annuity payments under the Contracts are
deferred until a selected later date. Net Premium Payments are allocated either
to the Fixed Account or to the Variable Account, which is divided into
Subaccounts, each of which invests in shares of one of the underlying Fund
options (each a "Fund") described below:
<TABLE>
<CAPTION>
FUNDS INVESTMENT ADVISOR
- ----- ------------------
<S> <C>
ALGER AMERICAN FUND
Alger American Small Capitalization Portfolio Fred Alger Management, Inc.
Alger American Growth Portfolio Fred Alger Management, Inc.
VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio Fidelity Investments
Growth Portfolio Fidelity Investments
High Income Portfolio Fidelity Investments
Overseas Portfolio Fidelity Investments
VARIABLE INSURANCE PRODUCTS FUND II
Index 500 Portfolio Fidelity Investments
Contrafund Portfolio Fidelity Investments
THE MARKET STREET FUND
Common Stock Portfolio Sentinel Advisors Company
Sentinel Growth Portfolio Sentinel Advisors Company
Aggressive Growth Portfolio Sentinel Advisors Company
Bond Portfolio Sentinel Advisors Company
Managed Portfolio Sentinel Advisors Company
Money Market Portfolio Sentinel Advisors Company
International Portfolio Boston Company Asset Management Co.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Growth Fund II Strong Capital Management, Inc.
STRONG SPECIAL FUND II, INC. Strong Capital Management, Inc.
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund Van Eck Associates Corporation
</TABLE>
This prospectus provides you with the basic information you should know
about the Sentinel Advantage Contracts, the Variable Account and the Fixed
Account before investing. You should read it and keep it for future reference. A
Statement of Additional Information dated , 1997 containing further information
about the Contracts and the Variable Account has been filed with the Securities
and Exchange Commission. You can obtain a copy without charge from National Life
Insurance Company by calling 1-800-537-7003, or writing to National Life at
National Life Drive, Montpelier, Vermont 05604. You may also obtain prospectuses
for each of the underlying Fund options identified above without charge by
calling or writing to the above telephone number or address.
PLEASE READ THIS PROSPECTUS CAREFULLY AND KEEP IT FOR FUTURE REFERENCE. THIS
PROSPECTUS MUST BE ACCOMPANIED BY CURRENT PROSPECTUSES FOR THE FUNDS.
INVESTMENTS IN THESE CONTRACTS ARE NOT DEPOSITS OR OBLIGATIONS OF, AND ARE NOT
GUARANTEED OR ENDORSED BY, THE ADVISER OF ANY OF THE
<PAGE> 8
UNDERLYING FUNDS IDENTIFIED ABOVE, THE U.S. GOVERNMENT, OR ANY BANK OR BANK
AFFILIATE. INVESTMENTS ARE NOT FEDERALLY INSURED BY THE FEDERAL DEPOSIT
INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER GOVERNMENTAL
AGENCY.
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 THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THE STATEMENT OF ADDITIONAL INFORMATION, DATED , 1997, IS INCORPORATED
HEREIN BY REFERENCE. THE TABLE OF CONTENTS FOR THE STATEMENT OF ADDITIONAL
INFORMATION APPEARS ON PAGE OF THE PROSPECTUS.
THE DATE OF THIS PROSPECTUS IS , 1997.
<PAGE> 9
TABLE OF CONTENTS
DEFINITIONS..................................................................
SUMMARY OF CONTRACT EXPENSES.................................................
UNDERLYING FUND ANNUAL EXPENSES..............................................
INTRODUCTION.................................................................
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT, AND THE FUNDS.........
National Life Insurance Company.....................................
The Variable Account................................................
Underlying Fund Options.............................................
DETAILED DESCRIPTION OF CONTRACT PROVISIONS....................................
Issuance of the Contract............................................
Premium Payments....................................................
The Initial Premium Payment................................
Subsequent Premium Payments................................
Allocation of Net Premium Payments.........................
Transfers...........................................................
Value of a Variable Account Accumulation Unit.......................
Net Investment Factor
Determining the Contract Value......................................
Annuitization.......................................................
Maturity Date..............................................
Election of Payment Options................................
Frequency and Amount of Annuity Payments...................
Annuitization - Variable Account....................................
Value of an Annuity Unit...................................
Assumed Investment Rate....................................
Change in Maturity Date....................................
Annuity Payment Options.............................................
Death of Owner......................................................
Death of Annuitant Prior to the Annuitization Date..................
Required Distributions for Qualified Plans and Certain Tax Sheltered
Annuities.........................................................
Required Distributions for Individual Retirement Annuities..........
Generation-Skipping Transfers.......................................
Ownership Provisions................................................
Arbitration.........................................................
CHARGES AND DEDUCTIONS.........................................................
Mortality Risk Charge...............................................
Expense Risk Charge.................................................
Contingent Deferred Sales Charge....................................
Administration Charge...............................................
Annual Contract Fee.................................................
Transfer Charge.....................................................
Premium Taxes.......................................................
Charge for Optional Enhanced Death Benefit Rider....................
Other Charges.......................................................
CONTRACT RIGHTS................................................................
Free Look...........................................................
Loan Privilege - Qualified Contracts and Certain Tax Sheltered
Annuities.........................................................
Surrender and Withdrawal ...........................................
Payments............................................................
Surrenders and Withdrawals Under a Tax Sheltered Annuity Contract...
Telephone Transaction Privilege.....................................
Available Automated Fund Management Features........................
3
<PAGE> 10
Dollar Cost Averaging....................................
Portfolio Rebalancing....................................
Systematic Withdrawals...................................
Contract Rights Under Certain Plans.................................
THE FIXED ACCOUNT..............................................................
Minimum Guaranteed and Current Interest Rates.......................
OPTIONAL ENHANCED DEATH BENEFIT RIDER..........................................
FEDERAL INCOME TAX CONSIDERATIONS..............................................
Non-Qualified Contracts.............................................
Qualified Contracts.................................................
Corporate Pension and Profit-Sharing Plans..........................
Code Section 403(b) Plans...........................................
Deferred Compensation Plans.........................................
Individual Retirement Annuities.....................................
Simple Retirement Accounts..........................................
Diversification.....................................................
Charge for Tax Provisions...........................................
Rollover Distributions..............................................
Restrictions under Qualified Contracts..............................
Gender Neutrality...................................................
VOTING RIGHTS..................................................................
CHANGES TO VARIABLE ACCOUNT....................................................
ADVERTISING....................................................................
DISTRIBUTION OF THE CONTRACTS .................................................
STATEMENTS AND REPORTS.........................................................
OWNER INQUIRIES................................................................
LEGAL PROCEEDINGS..............................................................
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION.......................
4
<PAGE> 11
DEFINITIONS
Accumulation Unit- An accounting unit of measure used to calculate the Variable
Account Contract Value prior to the Annuitization Date.
Annuitant- A person named in the Contract who is expected to become, at
Annuitization, the person upon whose continuation of life any annuity payments
involving life contingencies depends. Unless the Owner is a different individual
who is age 85 or younger, this person must be age 85 or younger at the time of
Contract issuance unless National Life has approved a request for an Annuitant
of greater age. The Owner may change the Annuitant prior to the Annuitization
Date, as set forth in the Contract.
Annuitization- The period during which annuity payments are actually received.
Annuitization Date- The date on which annuity payments actually commence.
Annuity Payment Option- The chosen form of annuity payments. Several options are
available under the Contract.
Annuity Unit- An accounting unit of measure used to calculate the value of
Variable Annuity payments.
Beneficiary- The Beneficiary is the person designated to receive certain
benefits under the Contract upon the death of the Owner or Annuitant prior to
the Annuitization Date. The Beneficiary can be changed by the Owner as set forth
in the Contract.
Cash Surrender Value- An amount equal to Contract Value, minus any applicable
Contingent Deferred Sales Charge, minus any applicable premium tax charge.
Chosen Human Being- An individual named at the time of Annuitization upon whose
continuation of life any annuity payments involving life contingencies depends.
Code- The Internal Revenue Code of 1986, as amended.
Collateral Fixed Account- The portion of the Fixed Account which holds value
which secures a loan on the Contract.
Contract- The Sentinel Advantage individual flexible premium variable annuity
contract described in this prospectus.
Contract Anniversary- An anniversary of the Date of Issue of the Contract.
Contract Value- The sum of the value of all Variable Account Accumulation Units
attributable to the Contract, plus any amount held under the Contract in the
Fixed Account, minus any outstanding loans on the Contract and accrued interest
on such loans.
Contract Year- Each year the Contract remains in force commencing with the Date
of Issue.
Date Of Issue- The date shown as the Date of Issue on the Data Page of the
Contract.
Death Benefit- The benefit payable to the Beneficiary upon the death of the
Owner or the Annuitant.
Distribution- Any payment of part or all of the Contract Value.
Fixed Account- The Fixed Account is made up of all assets of National Life other
than those in the Variable Account or any other segregated asset account of
National Life.
5
<PAGE> 12
Fixed Annuity- An annuity providing for payments which are guaranteed by
National Life as to dollar amount during Annuitization.
Fund- A registered management investment company in which the assets of the
Subaccounts of the Variable Account will be invested.
Home Office- The main office of National Life located at National Life Drive,
Montpelier, Vermont.
Individual Retirement Annuity (IRA)- An annuity which qualifies for favorable
tax treatment under Section 408 of the Code.
Investment Company Act - The Investment Company Act of 1940, as amended from
time to time.
Joint Owners- Two or more persons who own the Contract as tenants in common or
as joint tenants. If joint owners are named, references to "Owner" in this
prospectus will apply to both of the Joint Owners.
Maturity Date- The date on which annuity payments are scheduled to commence. The
Maturity Date is shown on the Data Page of the Contract, and is subject to
change by the Owner, within any applicable legal limits, subject to National
Life's approval.
Monthly Contract Date- The day in each calendar month which is the same day of
the month as the Date of Issue, or the last day of any month having no such
date, except that whenever the Monthly Contract Date would otherwise fall on a
date other than a Valuation Day, the Monthly Contract Date will be deemed to be
the next Valuation Day.
Non-Qualified Contract- A Contract which does not qualify for favorable tax
treatment under the provisions of Sections 401 or 403(a) (Qualified Plans), 408
(IRAs) or 403(b) (Tax-Sheltered Annuities) of the Code.
Owner- The Owner is the person who possesses all rights under the Contract,
including the right to designate and change any designations of the Owner,
Annuitant, Beneficiary, Annuity Payment Option, and the Maturity Date.
Payee- The person who is designated at the time of Annuitization to receive the
proceeds of the Contract upon Annuitization.
Premium Payment- A deposit of new value into the Contract. The term "Premium
Payment" does not include transfers between the Variable Account and Fixed
Account, or among the Subaccounts.
Net Premium Payments- The total of all Premium Payments made under the Contract,
less premium tax deducted from premiums.
Qualified Contract - A Contract which qualifies for favorable tax treatment
under the provisions of Sections 401 or 403(a) (Qualified Plans), 408 (IRAs),
403(b) (Tax-Sheltered Annuities) or 457 of the Code.
Qualified Plans- Retirement plans which receive favorable tax treatment under
Section 401 or 403(a) of the Code.
Subaccounts- Separate and distinct divisions of the Variable Account, to which
specific underlying Fund shares are allocated and for which Accumulation Units
and Annuity Units are separately maintained.
Tax Sheltered Annuity- An annuity which qualifies for favorable tax treatment
under Section 403(b) of the Code.
Valuation Day- Each day the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is restricted.
Unless otherwise indicated, whenever under a
6
<PAGE> 13
Contract an event occurs or a transaction is to be effected on a day that is not
a Valuation Day, it will be deemed to have occurred on the next Valuation Day.
Valuation Period- The time between two successive Valuation Days.
Variable Account- The National Variable Annuity Account II, a separate
investment account of National Life into which Net Premium Payments under the
Contracts are allocated. The Variable Account is divided into Subaccounts, each
of which invests in the shares of a separate underlying Fund.
Variable Annuity- An annuity the accumulated value of which varies with the
investment experience of a separate account.
Withdrawal- A payment made at the request of the Owner pursuant to the right
to withdraw a portion of the Contract Value of the Contract.
7
<PAGE> 14
SUMMARY OF CONTRACT EXPENSES
TRANSACTION EXPENSES
Sales Load Imposed on Purchases...........................None
Premium Taxes.............................................See below(1)
Contingent Deferred Sales Charge (as a percentage of Net
Premium Payments surrendered or withdrawn)(2)
Number of Completed Years from Date of Premium Payment None
0 7%
1 6%
2 5%
3 4%
4 3%
5 2%
6 1%
7 0%
ANNUAL EXPENSES
Mortality and Expense Risk Charge(3).....................................1.25%
Administration Charge....................................................0.15%
----
Total Basic Variable Account Annual Percentage Expenses..................1.40%
Annual Contract Fee(4)...............................................$30
Charges for Optional Enhanced Death Benefit Rider(5).....................0.20%
1 A minority of states assess premium taxes on premiums paid under the
Contract. Where National Life is required to pay this premium tax when a
Premium Payment is made, it may deduct an amount equal to the amount of
premium tax paid from the Premium Payment. National Life currently
intends to make this deduction from Premium Payments only in South
Dakota. In the remaining states which assess premium taxes, a deduction
will be made only upon Annuitization, death of the Owner, or surrender.
See "Premium Taxes", page .
2 Each Contract Year, the Owner may withdraw without a Contingent Deferred
Sales Charge (CDSC) an amount equal to 15% of the Contract Value as of the
most recent Contract Anniversary. In addition, any amount withdrawn in
order for the Contract to meet minimum Distribution requirements under the
Code shall be free of CDSC. Withdrawals may be restricted for Contracts
issued pursuant to the terms of a Tax Sheltered Annuity. This CDSC-free
Withdrawal privilege does not apply in the case of full surrenders, and is
non-cumulative, that is, free amounts not taken during any given Contract
Year cannot be taken as free amounts in a subsequent Contract Year; in
addition, certain states do not permit this CDSC-free Withdrawal
provision, in which case a different CDSC-free Withdrawal provision will
apply (see "Contingent Deferred Sales Charge", page ).
3 The Mortality and Expense Risk Charges and the Administration Charge set
forth above apply exclusively to allocations made to the Subaccount(s) of
the Variable Account. Such charges do not apply to, and will not be
assessed against, allocations made to the Fixed Account.
4 The Annual Contract Fee is assessed only upon Contracts which as of the
Date of Issue, or applicable Contract Anniversary, have a Contract Value
plus any outstanding loan and accrued interest of less than $50,000, and
is not assessed on Contract Anniversaries after the Annuitization Date.
5 This charge, which applies to the Contract Value plus the amount of any
outstanding loan and accrued interest, is assessed only if the Owner
has elected the Enhanced Death Benefit Rider. See "Optional Enhanced
Death Benefit Rider", page .
8
<PAGE> 15
UNDERLYING FUND ANNUAL EXPENSES6(AS A PERCENTAGE OF UNDERLYING FUND NET ASSETS,
AFTER EXPENSE REIMBURSEMENT)
<TABLE>
<CAPTION>
Management Total Mutual
Fees, Other Expenses, Fund Expenses,
after expense after expense after expense
reimbursement reimbursement reimbursement
<S> <C> <C> <C>
Alger American Small Capitalization Portfolio 0.75% 0.04% 0.79%
Alger American Growth Portfolio 0.85% 0.03% 0.88%
Fidelity VIP Fund-Equity Income Portfolio 0.51% 0.07% 0.58%
Fidelity VIP Fund-Growth Portfolio 0.61% 0.08% 0.69%
Fidelity VIP Fund-High Income Portfolio 0.59% 0.12% 0.71%
Fidelity VIP Fund-Overseas Portfolio 0.76% 0.17% 0.93%
Fidelity VIP Fund II-Index 500 Portfolio 0.13% 0.15% 0.28%
Fidelity VIP Fund II-Contrafund Portfolio 0.61% 0.13% 0.74%
Market Street Common Stock Portfolio 0.40% 0.40% 0.80%
Market Street Sentinel Growth Portfolio 0.50% 0.40% 0.90%
Market Street Aggressive Growth Portfolio 0.47% 0.21% 0.68%
Market Street Managed Portfolio 0.40% 0.20% 0.60%
Market Street Bond Portfolio 0.35% 0.21% 0.56%
Market Street International Portfolio 0.75% 0.30% 1.05%
Market Street Money Market Portfolio 0.25% 0.19% 0.44%
Strong Special Fund II, Inc. 1.00% 0.20% 1.20%
Strong Growth Fund II 1.00% 1.00% 2.00%
Van Eck Worldwide Bond Fund 1.00% 0.16% 1.16%
</TABLE>
6 The Fund expenses shown above are assessed at the underlying Fund level and
are not direct charges against Variable Account assets or reductions from
Contract Values. These underlying Fund expenses are taken into consideration in
computing each underlying Fund's net asset value, which is the share price used
to calculate the unit values of the Variable Account. The management fees and
other expenses are more fully described in the prospectuses for each individual
underlying Fund. The information relating to the underlying Fund expenses was
provided by the underlying Fund and was not independently verified by National
Life. In the absence of any fee waivers or expense reimbursements, the
Management Fees, Other Expenses, and Total Expenses of the Funds listed below
would have been as follows:
<TABLE>
<CAPTION>
Management Total Mutual
Fees Other Expenses Fund Expenses
<S> <C> <C> <C>
Fidelity VIP Fund II-Index 500 Portfolio 0.28% 0.15% 0.43%
Market Street Common Stock Portfolio 0.40% 1.03% 1.43%
Market Street Sentinel Growth Portfolio 0.50% 1.01% 1.51%
</TABLE>
9
<PAGE> 16
EXAMPLE
The following chart depicts the dollar amount of expenses that would be
incurred under this Contract assuming a $1000 investment and 5% annual return,
and no election of the optional Enhanced Death Benefit Rider. THESE DOLLAR
FIGURES ARE ILLUSTRATIVE ONLY AND SHOULD NOT BE CONSIDERED A REPRESENTATION OF
PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE GREATER OR LESSER THAN THOSE
SHOWN BELOW.
<TABLE>
<CAPTION>
IF YOU SURRENDER YOUR IF YOU DO NOT SURRENDER IF YOU ANNUITIZE YOUR
CONTRACT AT THE END OF YOUR CONTRACT AT THE END OF CONTRACT AT THE END OF
THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
Subaccount* 1 Yr. 3 Yrs. 1 Yr. 3 Yrs. 1 Yr.** 3 Yrs.
- ----------- ------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Alger American Small
Capitalization $ 94 $ 124 $ 24 $ 74 $ 24 $ 74
Alger American Growth 93 121 23 71 23 71
Fidelity VIP Fund-Equity Income 91 115 21 65 21 65
Fidelity VIP Fund-Growth 92 118 22 68 22 68
Fidelity VIP Fund-High Income 92 119 22 69 22 69
Fidelity VIP Fund-Overseas 94 125 24 75 24 75
Fidelity VIP Fund II-Index 500 88 106 18 56 18 56
Fidelity VIP Fund II-Contrafund 93 120 23 70 23 70
Market Street Common Stock 93 121 23 71 23 71
Market Street Sentinel Growth 94 124 24 74 24 74
Market Street Aggressive Growth 92 118 22 68 22 68
Market Street Managed 91 115 21 65 21 65
Market Street Bond 91 114 21 64 21 64
Market Street International 96 129 26 79 26 79
Market Street Money Market 90 110 20 60 20 60
Strong Special Fund II, Inc. 97 133 27 83 27 83
Strong Growth Fund II 105 157 35 107 35 107
Van Eck Worldwide Bond 97 132 27 82 27 82
</TABLE>
For an Owner who has elected the Enhanced Death Benefit Rider (see
"Optional Enhanced Death Benefit Rider", page ), and again assuming a
$1000 investment and 5% annual return, the chart below depicts the annual
expenses that would be incurred under this Contract:
<TABLE>
<CAPTION>
IF YOU SURRENDER YOUR IF YOU DO NOT SURRENDER IF YOU ANNUITIZE YOUR
CONTRACT AT THE END OF YOUR CONTRACT AT THE END OF CONTRACT AT THE END OF
THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD THE APPLICABLE TIME PERIOD
Subaccount* 1 Yr. 3 Yrs. 1 Yr. 3 Yrs. 1 Yr.** 3 Yrs.
- ----------- ------------------------- --------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Alger American Small
Capitalization $ 96 $ 130 $ 26 $ 80 $ 26 $ 80
Alger American Growth 95 127 25 77 25 77
Fidelity VIP Fund-Equity Income 93 121 23 71 23 71
Fidelity VIP Fund-Growth 94 124 24 74 24 74
Fidelity VIP Fund-High Income 94 125 24 75 24 75
Fidelity VIP Fund-Overseas 96 131 26 81 26 81
Fidelity VIP Fund II-Index 500 90 112 20 62 20 62
Fidelity VIP Fund II-Contrafund 95 125 25 75 25 75
Market Street Common Stock 95 127 25 77 25 77
Market Street Sentinel Growth 96 130 26 80 26 80
Market Street Aggressive Growth 94 124 24 74 24 74
Market Street Managed 93 121 23 71 23 71
Market Street Bond 93 120 23 70 23 70
Market Street International 98 135 28 85 28 85
Market Street Money Market 92 116 22 66 22 66
Strong Special Fund II, Inc. 99 139 29 89 29 89
Strong Growth Fund II 107 162 37 112 37 112
Van Eck Worldwide Bond 99 138 29 88 29 88
</TABLE>
10
<PAGE> 17
<TABLE>
<S> <C>
Strong Special Fund II, Inc.
Strong Growth Fund II
</TABLE>
* For purposes of computing the Annual Contract Fee, the Annual Contract Fee
has been converted into a per-dollar per-day charge. The per-dollar per-day
charge has been estimated based on the distribution of National Life's
non-variable single premium deferred annuity block of business, and works out
to 0.06% per annum. The Annual Contract Fee is waived for Contracts with
Contract Values in excess of $50,000.
** The Contract may not be annuitized in the first two years from the Date of
Issue.
The purpose of the Summary of Contract Expenses and Example is to assist
the Owner in understanding the various costs and expenses that will be borne
directly or indirectly when investing in the Contract. The expenses of the
Variable Account as well as those of the underlying Funds are reflected in the
Example. For more complete descriptions of the expenses of the Variable Account,
see "Charges and Deductions", page . For more complete information regarding
expenses paid out of the assets of the underlying Funds, see the underlying Fund
prospectuses. Deductions for premium taxes may also apply but are not reflected
in the Example shown above (see "Premium Taxes", page ). Certain states impose
a premium tax, currently ranging up to 3.5%.
11
<PAGE> 18
INTRODUCTION
These contracts may be offered as: (1) Non-Qualified Contracts, or (2)
Qualified Contracts.
The Contract is available, with certain exceptions, to Owners age 85
and younger. See "Issuance of a Contract", page . The initial Premium Payment
must be at least $5,000 for Non-Qualified Contracts, and in general must be at
least $1500 for Individual Retirement Annuities or Tax Sheltered Annuities
(National Life may at its discretion permit initial Premium Payments lower than
the $1500 minimum if a group of Contracts are being purchased by a group of
individuals and funds are remitted electronically). Subsequent Premium Payments
may be made at any time, but must be at least $100 ($50 for Individual
Retirement Annuities), except that National Life may accept lower Premium
Payments at its discretion if the Premium Payments are remitted electronically.
The cumulative total of all Premium Payments under Contracts issued on the life
of any one Designated Annuitant may not exceed $1,000,000 without the prior
consent of National Life (see "Premium Payments", page ).
If the Contract Value at the Annuitization Date is less than $3,500,
the Contract Value may be distributed in one lump sum in lieu of annuity
payments. If any annuity payment would be less than $100, National Life shall
have the right to change the frequency of payments to such intervals as will
result in payments of at least $100. In no event, however, will annuity payments
be made less frequently than annually (see "Annuitization - Frequency and Amount
of Annuity Payments", page ).
National Life does not deduct a sales charge from Premium Payments made
for these Contracts. However, if a Withdrawal is made with respect to any part
of the Contract Value of such Contracts, or the Contract is surrendered,
National Life will, with certain exceptions, deduct from the Owner's Contract
Value a Contingent Deferred Sales Charge not to exceed 7% of the lesser of the
total of all Net Premium Payments made within 84 months prior to the date of
the request to surrender, or the amount surrendered. This charge, when
applicable, is imposed to permit National Life to recover sales expenses which
have been advanced by National Life (see "Contingent Deferred Sales Charge",
page ).
National Life deducts from the Variable Account an amount, computed
daily, which is equal to an annual rate of 1.40% of the daily net asset value.
This charge consists of a 0.15% Administration Charge and a 1.25% Mortality and
Expense Risk Charge. The Mortality and Expense Risk Charge is for the mortality
and expense risks assumed by National Life under the Contracts. The
Administration Charge will reimburse National Life for the administrative
expenses related to the issue and maintenance of the Contracts (see "Charges and
Deductions, page ). National Life will also assess an Annual Contract fee in
the amount of $30, payable on the Date of Issue and at each Contract
Anniversary thereafter if on the Date of Issue or such Contract Anniversary the
Contract Value plus any outstanding loan and accrued interest is less than
$50,000 (see "Annual Contract Fee", page ).
If a governmental entity imposes premium taxes, National Life will make
a deduction for premium taxes in a corresponding amount. Certain states impose a
premium tax, currently ranging up to 3.5% (see "Premium Taxes", page ).
To be sure that the Owner is satisfied with the Contract, the Owner has
a ten day free look. Some states may require a longer period. Within ten days
of the day the Contract is received, it may be returned to the Home Office of
National Life, at the address shown on page 1 of this prospectus. When the
Contract is received by National Life, National Life will void the Contract and
refund the Contract Value plus any charges assessed at issue, including the
Annual Contract Fee, any applicable charge for the optional Enhanced Death
Benefit Rider, and any premium tax, unless otherwise required by state and/or
federal law.
In the case of Individual Retirement Annuities and Contracts issued in
states that require the return of Premium Payments , National Life will refund
the greater of: (i) Premium Payments or (ii) Contract Value plus any amount
deducted by National Life for state premium taxes. In these cases, National Life
may require that all Contract Value allocated to the Variable Account initially
be held in the Market Street Money Market Subaccount (see "Free Look", page ).
At the end of the free look
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period, Contract Value will be allocated among the Subaccounts of the Variable
Account and the Fixed Account based on the allocation percentages specified in
the application. For this purpose, National Life assumes the free look period
ends 20 days after the date the Contract is issued.
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT, AND THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life, a mutual life insurance company chartered in 1848 under
Vermont law, is authorized to transact life insurance and annuity business in
Vermont and in 50 other jurisdictions. National Life assumes all mortality and
expense risks under the Contracts and its assets support the Contract's
benefits. Financial Statements for National Life are contained in the
Statement of Additional Information.
THE VARIABLE ACCOUNT
The Variable Account was established by National Life on November 1,
1996, pursuant to the provisions of Vermont law. National Life has caused the
Variable Account to be registered with the Securities and Exchange Commission as
a unit investment trust pursuant to the provisions of the Investment Company
Act. Such registration does not involve supervision of the management of the
Variable Account or National Life by the Securities and Exchange Commission.
The Variable Account is a separate investment account of National Life
and, as such, is not chargeable with liabilities arising out of any other
business National Life may conduct. National Life does not guarantee the
investment performance of the Variable Account. Obligations under the Contracts,
however, are obligations of National Life. Income, gains and losses, whether or
not realized, from the assets of the Variable Account are, in accordance with
the Contracts, credited to or charged against the Variable Account without
regard to other income, gains, or losses of National Life.
Net Premium Payments are allocated within the Variable Account among
one or more Subaccounts made up of shares in the underlying Fund options
designated by the Owner. A separate Subaccount is established within the
Variable Account for each of the underlying Fund options that may be designated
by the Owner.
UNDERLYING FUND OPTIONS
Owners may choose from among a number of different Subaccount options.
However, National Life reserves the right to limit the number of different
Subaccounts used in any Contract over its entire life to 17.
Summary information, including the investment objectives for each of
the underlying Funds held in the Subaccounts is set forth below. THERE CAN BE NO
ASSURANCE THAT THE INVESTMENT OBJECTIVES WILL BE ACHIEVED.
THE ALGER AMERICAN FUND
The Alger American Fund is a "series" type Fund registered with the SEC
as a diversified open-end management investment company issuing a
number of series or classes of shares, each of which represents an
interest in a Portfolio of the Alger American Fund. It was organized
on April 6, 1988 as a Massachusetts business trust. Fred Alger
Management, Inc., acts as the Fund's investment advisor.
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, at least 65% in companies with a total market
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capitalization within the range of companies included in the Russell
2000 Growth Index or the S&P SmallCap 600 Index, updated quarterly
(both of the above indexes are broad indexes of small capitalization
stocks).
ALGER AMERICAN GROWTH PORTFOLIO
Investment Objective: To seek long-term capital appreciation by
investing in a diversified, actively managed portfolio of equity
securities, at least 65% in companies with a total market
capitalization of $1 billion or greater.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fund is an open-end, diversified, management investment company
organized as a Massachusetts business trust on November 13, 1981.
Fidelity Management & Research Company ("FMR") is the Fund's manager.
-EQUITY-INCOME PORTFOLIO
Investment Objective: To seek reasonable income by investing primarily
in income-producing equity securities. In choosing these securities FMR
also will consider the potential for capital appreciation. The
Portfolio's goal is to achieve a yield which exceeds the composite
yield on the securities comprising the Standard & Poor's 500 Composite
Stock Price Index.
-GROWTH PORTFOLIO
Investment Objective: Seeks to achieve capital appreciation. This
Portfolio will invest in the securities of both well-known and
established companies, and smaller, less well-known companies which may
have a narrow product line or whose securities are thinly traded. These
latter securities will often involve greater risk than may be found in
the ordinary investment security. FMR's analysis and expertise plays an
integral role in the selection of securities and, therefore, the
performance of the Portfolio. Many securities which FMR believes would
have the greatest potential may be regarded as speculative, and
investment in the Portfolio may involve greater risk than is inherent
in other underlying Funds. It is also important to point out that the
Portfolio makes most sense for you if you can afford to ride out
changes in the stock market, because it invests primarily in common
stocks. FMR also can make temporary investments in securities such as
investment-grade bonds, high-quality preferred stocks and short-term
notes, for defensive purposes when it believes market conditions
warrant.
-HIGH INCOME PORTFOLIO
Investment Objective: Seeks to obtain a high level of current income by
investing primarily in high-risk, lower-rated, high-yielding,
fixed-income securities, while also considering growth of capital. The
Portfolio manager will seek high current income normally by investing
the Portfolio's assets as follows:
- at least 65% in income-producing debt securities
and preferred stocks, including convertible securities; and
- up to 20% in common stocks and other equity
securities when consistent with the Portfolio's primary objective or
acquired as part of a unit combining fixed- income and equity
securities.
The Portfolio's investment strategy may provide the opportunity for
higher than average yields by investing in securities with higher than
average risk, such as lower rated and unrated debt and comparable
equity instruments. For a discussion of the risks associated with such
investments, please see the "Risks of Lower Rated Debt Securities"
section of the Portfolio's prospectus.
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-OVERSEAS PORTFOLIO
Investment Objective: To seek long term growth of capital primarily
through investments in foreign securities. The Overseas Portfolio
provides a means for investors to diversify their own portfolios by
participating in companies and economies outside of the United States.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
The Variable Insurance Products Fund II is an open-end, diversified,
management investment company organized as a Massachusetts business
trust on March 21, 1988. FMR is the Fund's manager.
-INDEX 500 PORTFOLIO
Investment Objective: To seek to match the total return of the Standard
& Poors' Composite Index of 500 Stocks ("S&P 500") while keeping
expenses low. FMR normally invests at least 80% of the fund's assets in
equity securities of companies that compose the S&P 500.
-CONTRAFUND PORTFOLIO
Investment Objective: To seek capital appreciation by investing
primarily in companies that the Fund manager believes to be undervalued
due to an overly pessimistic appraisal by the public. This strategy can
lead to investments in domestic or foreign companies, small and large,
many of which may not be well known. The Fund primarily invests in
common stock and securities convertible into common stock, but it has
the flexibility to invest in any type of security that may produce
capital appreciation.
MARKET STREET FUND, INC.
The Market Street Fund, Inc is a "series" type Fund registered with
the SEC as a diversified open-end management investment company
issuing a number of series or classes of shares, each of which
represents an interest in a Portfolio of the Fund. It was incorporated
under Maryland law on March 21, 1985. Sentinel Advisors Company acts
as the Fund's investment advisor for all portfolios except the
International Fund, whose investment advisor is Providentmutual
Investment Management Company, and whose subadvisor is The Boston
Company Asset Management, Inc.
COMMON STOCK PORTFOLIO
Investment Objective: To seek a combination of long-term growth of
capital and current income with relatively low risk by investing in common
stocks of many well-established companies.
SENTINEL GROWTH PORTFOLIO
Investment Objective: To seek long-term growth of capital through
equity participation in companies having growth potential believed by its
investment adviser to be more favorable than the U.S. economy as a whole,
with a focus on relatively well-established companies.
AGGRESSIVE GROWTH PORTFOLIO
Investment Objective: To seek to achieve a high level of long-term
capital appreciation by investing in securities of a diverse group of
smaller emerging companies.
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BOND PORTFOLIO
Investment Objective: To seek to generate a high level of current
income consistent with prudent investment risk by investing in a
diversified portfolio of marketable debt securities.
MANAGED PORTFOLIO
Investment Objective: To seek to realize as high a level of long-term
total rate of return as is consistent with prudent investment risk by
investing in stocks, bonds, money market instruments or a combination
thereof.
INTERNATIONAL PORTFOLIO
Investment Objective: To seek long-term growth of capital principally
through investments in a diversified portfolio of marketable equity
securities of established non-United States companies.
MONEY MARKET PORTFOLIO
Investment Objective: To seek to provide maximum current income
consistent with capital preservation and liquidity by investing in
high-quality money market instruments. AN INVESTMENT IN THE MONEY MARKET
PORTFOLIO IS NEITHER INSURED NOR GUARANTEED BY THE U.S. GOVERNMENT, AND
THERE CAN BE NO ASSURANCE THAT THE PORTFOLIO WILL BE ABLE TO MAINTAIN A
STABLE NET ASSET VALUE OF $1.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Variable Insurance Funds, Inc. is an open-end management
investment company incorporated in the State of Wisconsin
on December 28, 1990. Strong Capital Management, Inc. ("the Advisor")
is the investment advisor to the Funds.
-GROWTH FUND II
Investment Objective: To seek capital growth. It invests primarily in
equity securities that the advisor believes have above-average growth
prospects.
STRONG SPECIAL FUND II, INC.
The Strong Special Fund II, Inc. is a diversified, open-end management
company, incorporated in Wisconsin on December 28, 1990. The Advisor
is the investment advisor for the Fund.
Investment Objective: To seek capital appreciation through investments
in a diversified portfolio of equity securities.
VAN ECK WORLDWIDE INSURANCE TRUST
Van Eck Worldwide Insurance Trust is an open-end management investment
company organized as a Massachusetts business trust on January 7, 1987. The
investment advisor and manager is Van Eck Associates Corporation.
WORLDWIDE BOND FUND
Investment Objective: To seek high total return through a flexible
policy of investing globally, primarily in debt securities.
National Life has entered into or may enter into agreements with Funds
pursuant to which the adviser or distributor pays National Life a fee based upon
an annual percentage of the average net asset amount invested by National Life
on behalf of the Variable Account and other separate accounts of National Life.
These percentages may differ, and National Life may be paid a greater percentage
by some investment advisers or distributors than other advisers or distributors.
These agreements reflect administrative services provided by National Life.
The underlying Fund options may also be available to registered
separate accounts offering variable annuity and variable life products of other
participating insurance companies, as well as to the
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Variable Account and other separate accounts of National Life. Although National
Life does not anticipate any disadvantages to this, there is a possibility that
a material conflict may arise between the interest of the Variable Account and
one or more of the other separate accounts participating in the underlying
Funds. A conflict may occur due to a change in law affecting the operations of
variable life and variable annuity separate accounts, differences in the voting
instructions of the Owners and those of other companies, or some other reason.
In the event of conflict, National Life will take any steps necessary to protect
Owners and variable annuity payees, including withdrawal of the Variable Account
from participation in the underlying Fund of Funds which are involved in the
conflict.
DETAILED DESCRIPTION OF CONTRACT PROVISIONS
ISSUANCE OF A CONTRACT
If the Owner is a human being, the Contract is available to Owners up to
and including age 85 on the Date of Issue. If the Contract is issued to Joint
Owners, then the oldest of the Joint Owners must be 85 years of age or younger
on the Date of Issue. If the Owner is not a human being, then the age of the
Annuitant governs, and must meet the requirements for Owners set forth above.
In order to purchase a Contract, an individual must forward an application
to National Life through a licensed National Life agent who is also a registered
representative of Equity Services, Inc. ("ESI"), the principal underwriter of
the Contracts, or another broker/dealer having a Selling Agreement with ESI or a
broker/dealer having a Selling Agreement with such a broker/dealer.
PREMIUM PAYMENTS
The Initial Premium Payment. The initial Premium Payment must be at
least $5,000 for Non-Qualified Contracts, and in general must be at least $1500
for Qualified Contracts (National Life may at its discretion permit initial
Premium Payments lower than the $1500 minimum if a group of Contracts are being
purchased by a group of individuals and funds are remitted electronically).
Subsequent Premium Payments. Subsequent Premium Payments may be made at
any time, but must be at least $100, except that National Life may accept lower
Premium Payments at its discretion if the Premium Payments are remitted
electronically. Subsequent Premium Payments to the Variable Account will be
priced on the basis of the Accumulation Unit Value next computed for the
appropriate Subaccount after the additional Premium Payment is received.
The cumulative total of all Premium Payments under Contracts issued on
the life of any one Annuitant may not exceed $1,000,000 without the prior
consent of National Life.
Premium Payments will not be processed on the following days: New
Year's Day, Presidents' Day, Good Friday, Memorial Day, Independence Day, Labor
Day, Thanksgiving, the day after Thanksgiving and Christmas Day.
Allocation of Net Premium Payments. In the application for the
Contract, the Owner will indicate how Net Premium Payments are to be allocated
among the Subaccounts of the Variable Account and/or the Fixed Account. These
allocations may be changed at any time by the Owner by written notice to
National Life at its Home Office, or if the telephone transaction privilege has
been elected, by telephone instructions (see "Telephone Transaction Privilege",
page ). The percentages of Net Premium Payments that may be allocated to any
Subaccount must be in whole numbers of not less than 5%, and the sum of the
allocation percentages must be 100%. National Life will allocate the initial
Net Premium Payment within two business days after receipt, if the application
and all information necessary for processing the order are complete. If the
application is not properly completed, National Life will retain the initial
Premium Payment for up to five business days while attempting to complete the
application. If the application is not complete at the end of the five day
period, National Life will inform the applicant of the reason for the delay and
the initial Premium Payment will be returned immediately, unless the applicant
specifically consents to National Life retaining the initial Premium Payment
until the application is complete. Once the application is complete, the
initial Net Premium Payment will be allocated as designated by the Owner within
two business days.
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Notwithstanding the foregoing, in jurisdictions where National Life
must refund the greater of aggregate Premium Payments or Contract Value plus any
amount deducted for state premium taxes in the event the Owner exercises the
free look right, any portion of the initial Net Premium Payment to be allocated
to the Variable Account will be allocated to the Market Street Money Market
Subaccount for the free look period following the Date of Issue. At the end of
that period, the amount in the Market Street Money Market Subaccount will be
allocated to the Subaccounts as designated by the Owner based on the proportion
that the allocation percentage for each such Subaccount bears to the sum of the
allocation percentages to the Subaccounts set forth in the Net Premium Payment
allocation schedule then in effect.
National Life will allocate subsequent Net Premium Payments as of the
Valuation Date it receives such Net Premium Payments at its Home Office, based
on the Owner's allocation percentages then in effect. At the time of allocation,
Net Premium Payments are applied to the purchase of shares of the respective
underlying Funds at net asset value for the respective Subaccount(s) and
converted into Accumulation Units.
National Life reserves the right to limit the number of Variable
Account Subaccounts used in a single Contract over the entire life of the
Contract to 17.
The values of the Subaccounts will vary with their investment
experience and the Owner bears the entire investment risk. Owners should
periodically review their allocation percentages in light of market conditions
and the Owner's overall financial objectives.
TRANSFERS
The Owner may transfer the Contract Value among the Subaccounts of the
Variable Account, and between the Variable Account and the Fixed Account,
subject to the limitations set forth below, by making a written transfer request
to National Life, or if the telephone transaction privilege has been elected, by
telephone instructions to National Life. See "Telephone Transaction Privilege",
page . Transfers between and among the Subaccounts of the Variable Account and
the Fixed Account are made as of the Valuation Day that the request for transfer
is received at the Home Office. Transfers to or from the Subaccounts of the
Variable Account may be postponed under certain circumstances. See "Payments,"
page .
National Life currently allows transfers to the Fixed Account of all or
any part of the Variable Account Contract Value, without charge or penalty. With
respect to transfers from the Variable Account to the Fixed Account, National
Life reserves the right to restrict transfers to the Fixed Account to 25% of the
Variable Account Contract Value for any Contract Year determined as of the
most recent Contract Anniversary.
Owners may, once per year within 45 days after the end of the calendar
year, transfer a portion of the unloaned value in the Fixed Account to the
Variable Account. The maximum percentage that may be transferred will be
determined by National Life in its sole discretion prior to the end of the
calendar year, but will not be less than 10% of the Contract Value in the Fixed
Account as of the date the request is made. Following a transfer from the Fixed
Account to the Variable Account, National Life reserves the right to require
that the value so transferred remain in the Variable Account for at least one
year before it may be transferred back to the Fixed Account.
National Life does not permit transfers between the Variable Account
and the Fixed Account after the Annuitization Date.
National Life has no current intention to impose a transfer charge in
the foreseeable future. However, National Life reserves the right, upon prior
notice to Owners, to impose a transfer charge of $25 for each transfer in excess
of twelve transfers in any one Contract Year. See "Transfer Charge", page .
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<PAGE> 25
VALUE OF A VARIABLE ACCOUNT ACCUMULATION UNIT
The value of a Variable Account Accumulation Unit for each Subaccount
was arbitrarily set initially at $10 when the Subaccounts commenced operations.
The value for any subsequent Valuation Period is determined by multiplying the
Accumulation Unit value for each Subaccount for the immediately preceding
Valuation Period by the Net Investment Factor for the Subaccount during the
subsequent Valuation Period. The value of an Accumulation Unit may increase or
decrease from Valuation Period to Valuation Period. No minimum Accumulation Unit
value is guaranteed. The number of Accumulation Units will not change as a
result of investment experience.
Net Investment Factor. Each Subaccount of the Variable Account
has its own Net Investment Factor. The Net Investment Factor measures the daily
investment performance of that Subaccount. The Net Investment Factor may be
greater or less than one; therefore, the value of an Accumulation Unit may
increase or decrease. It should be noted that changes in the Net Investment
Factor may not be directly proportional to changes in the net asset value of
underlying Fund shares, because of the deduction for the Mortality and Expense
Risk Charge and Administration Charge.
Underlying Fund shares in the Variable Account will be valued at their
net asset value. For underlying Funds that credit dividends on a daily basis and
pay such dividends once a month (the Market Street Money Market Portfolio), the
Net Investment Factor allows for the monthly reinvestment of these daily
dividends.
DETERMINING THE CONTRACT VALUE
The Contract Value is the sum of: 1) the value of all Variable Account
Accumulation Units, and 2) amounts allocated and credited to the Fixed Account,
minus any outstanding loans on the Contract and accrued interest on such loans.
When charges or deductions are made against the Contract Value, an appropriate
number of Accumulation Units from the Variable Account and an appropriate amount
from the Fixed Account will be deducted in the same proportion that the Owner's
interest in the Variable Account and Fixed Account bears to the total Contract
Value. Value held in the Fixed Account is not subject to Variable Account
charges (Mortality and Expense Risk and Administration Charges), but may be
subject to Contingent Deferred Sales Charges, the Annual Contract Fee, optional
Enhanced Death Benefit Rider Charge, and premium taxes, if applicable.
ANNUITIZATION
Maturity Date. The Owner selects a Maturity Date at the time of
application. Such date must be at least 2 years after the Date of Issue, unless
otherwise approved. If no specific Maturity Date is selected, the Maturity Date
will be the Owner's age 90 (the Annuitant's age 90 if the Owner is not a human
being); or, if later, ten years after the Date of Issue.
If the Owner requests in writing (see "Ownership Provisions",
page ), and National Life approves the request, the Maturity Date may be
accelerated or deferred.
Election of Payment Options. The Owner may, upon prior written notice
to National Life, at any time prior to the Annuitization Date, elect one of the
Annuity Payment Options. The Contract Value in each Subaccount less any premium
tax previously unpaid, will be applied to provide a Variable Annuity payment
and the Contract Value in the Fixed Account, less any premium tax previously
unpaid, will be applied to provide a Fixed Annuity payment.
If an election of an Annuity Payment Option is not on file with
National Life on the Annuitization Date, the proceeds will be paid as Option 3 -
Payments for Life with 120 months certain. An Annuity Payment Option may be
elected, revoked or changed by the Owner at any time before the Annuitization
Date upon 30 days prior written notice. The Annuity Payment Options available
are described below.
Frequency and Amount of Annuity Payments. Annuity payments will be paid
as monthly installments unless the Owner selects annual, semi-annual or
quarterly installments. However, if the amount to be applied under any Annuity
Payment Option is less than $3,500, National Life shall have the right to pay
such amount in one lump sum in lieu of the payments otherwise provided for. In
addition, if the payments provided for would be or become less than $100,
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<PAGE> 26
National Life shall have the right to change the frequency of payments to such
intervals as will result in payments of at least $100. In no event will National
Life make payments under an annuity option less frequently than annually.
ANNUITIZATION - VARIABLE ACCOUNT
The dollar amount of the first Variable Annuity payment shall be
determined by dividing the Variable Account Contract Value on the Annuitization
Date by 1,000 and applying the result in accordance with the Applicable Annuity
Table. The amount of each Variable Annuity payment will depend on the age of
the Annuitant at the time the first payment is due, and the sex of the
Annuitant, if applicable, unless otherwise required by law.
Subsequent Variable Annuity payments vary in amount in accordance with
the investment performance of the Variable Account. The dollar amount of the
first annuity payment determined as above is divided by the value of an Annuity
Unit as of the Annuitization Date to establish the number of Annuity Units
representing each monthly annuity payment. This number of Annuity Units remains
fixed during the annuity payment period. The dollar amount of the second and
subsequent payments is not predetermined and may change from month to month. The
dollar amount of each subsequent payment is determined by multiplying the fixed
number of Annuity Units by the value of an Annuity Unit for the Valuation Period
in which the payment is due. National Life guarantees that the dollar amount of
each payment after the first will not be affected by variations in mortality
experience from mortality assumptions used to determine the first payment.
Value of an Annuity Unit. The value of an Annuity Unit for a Subaccount
was arbitrarily set initially at $10 when the first underlying Fund shares were
purchased. The value of an Annuity Unit for a Subaccount for any subsequent
Valuation Period is determined by multiplying the value of an Annuity Unit for
the immediately preceding Valuation Period by the applicable Net Investment
Factor for the Valuation Period for which the value of an Annuity Unit is being
calculated, and multiplying the result by an interest factor to neutralize the
assumed investment rate of 3.5% per annum (see "Net Investment Factor", page ).
Assumed Investment Rate. A 3.5% Assumed Investment Rate is built into
the Annuity Tables contained in the Contracts. A higher assumption would mean a
higher initial payment but more slowly rising or more rapidly falling subsequent
payments. A lower assumption would have the opposite effect. If the actual
investment return is at the annual rate of 3.5%, the annuity payments will be
level.
ANNUITIZATION - FIXED ACCOUNT
A Fixed Annuity is an annuity with payments which are guaranteed by
National Life as to dollar amount during the annuity payment period. The amount
of the periodic Fixed Annuity payment will be determined by applying the Fixed
Account Contract Value to the applicable Annuity Table in accordance with the
Annuity Payment Option elected. This will be done at the Annuitization Date on
an age nearest birthday basis.
National Life does not credit discretionary interest to Fixed Annuity
payments during the annuity payment period for annuity options based on life
contingencies. The Annuitant must rely on the Annuity Tables applicable to the
Contracts to determine the amount of such Fixed Annuity payments.
ANNUITY PAYMENT OPTIONS
Any of the following Annuity Payment Options may be elected:
Option 1-Payments for a Stated Time. Monthly payments will be made for
the number of years selected, which may range from 5 years to 30 years.
Option 2-Payments for Life-An annuity payable monthly during the
lifetime of a Chosen Human Being (who may be named at the time of
election of the Payment Option), ceasing with the last payment due
prior to the death of the Chosen Human Being. IT WOULD BE POSSIBLE
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UNDER THIS OPTION FOR THE PAYEE TO RECEIVE ONLY ONE ANNUITY PAYMENT IF
THE CHOSEN HUMAN BEING DIED BEFORE THE SECOND ANNUITY PAYMENT DATE, TWO
ANNUITY PAYMENTS IF THE CHOSEN HUMAN BEING BEFORE THE THIRD ANNUITY
PAYMENT DATE, AND SO ON.
Option 3-Payments for Life with Period Certain-Guaranteed-An annuity
that if at the death of the Chosen Human Being payments have been made
for fewer than 120 or 240 months, as selected, guaranteed annuity
payments will be continued during the remainder of the selected period
to the Payee, or another recipient as chosen by the Payee at the time
the Annuity Payment Option was selected. In the alternative, the
recipient may, at any time, elect to have the present value of the
guaranteed number of annuity payments remaining paid in a lump sum,
computed as of the date on which notice of death of the Chosen Human
Being is received by National Life at its Home Office.
Other Annuity Payment Options may be available.
Some of the stated Annuity Payment Options may not be available in all
states. The Owner may request an alternative non-guaranteed option by giving
notice in writing prior to Annuitization. If such a request is approved by
National Life, it will be permitted under the Contract.
Individual Retirement Annuities and Tax Sheltered Annuities are subject
to the minimum Distribution requirements set forth in the Code.
Under Payment Option 1, the Owner may change to any other Payment
Option at any time. At the time of the change, the remaining value will be
applied to the new Payment Option to determine the amount of the payments. Under
Payment Option 1, the Owner may also fully surrender the Contract at any time or
make Withdrawals at any time or from time to time. A surrender or Withdrawal
will be subject to any applicable Contingent Deferred Sales Charge at the time
of the surrender or Withdrawal.
DEATH OF OWNER
If any Owner or Joint Owner dies prior to the Annuitization Date, then,
unless the Enhanced Death Benefit Rider has been elected, a Death Benefit in an
amount equal to, if such Owner or Joint Owner dies prior to attaining age 81,
the greater of (a) the Contract Value, or (b) the Net Premium Payments made to
the Contract, in each case minus all Withdrawals (including any CDSC deducted
in connection with such Withdrawals), any outstanding loan on the Contract and
accrued interest, and any applicable premium tax charge to be assessed upon
distribution, will be paid to the Beneficiary. If such Owner or Joint Owner
dies after attaining age 81, then the Death Benefit shall be equal to the
Contract Value, minus any applicable premium tax charge.
Unless the Beneficiary is the deceased Owner's (or Joint Owner's)
spouse, the Death Benefit must be distributed within five years of such Owner's
death. The Beneficiary may, however, elect to receive Distribution in the form
of a life annuity or an annuity for a period not exceeding his or her life
expectancy. Such annuity must begin within one year following the date of the
Owner's death, and is currently available only as a Fixed Annuity. If the
Beneficiary is the spouse of the deceased Owner (or Joint Owner), then the
Contract may be continued without any required Distribution. If the deceased
Owner (or Joint Owner) and the Annuitant are the same person, the death of that
person will be treated as the death of the Owner for purposes of determining
the Death Benefit payable.
Qualified Contracts may be subject to specific rules set forth in the
Plan, Contract, or Code concerning Distributions upon the death of the Owner.
DEATH OF ANNUITANT PRIOR TO THE ANNUITIZATION DATE
If an Annuitant who is not an Owner dies prior to the Annuitization
Date, the Contract will mature, and a Death Benefit equal to the Cash Surrender
Value of the Contract will be payable to the Beneficiary, unless, in the case
where the Owner is a human being, a contingent Annuitant has been named or the
Owner names a contingent Annuitant within 90 days of such Annuitant's death, in
which case the Contract may be continued without any required Distribution. If
no Beneficiary is named (or if the Beneficiary predeceases the Annuitant), then
the Death Benefit will be paid to the Owner. If the Owner is not a human being,
then
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<PAGE> 28
the death of the Annuitant will be treated as if it were the death of the Owner,
and the disposition of the Contract will follow the death of the Owner
provisions set forth above.
In any case where a Death Benefit is paid, the value of the Death
Benefit will be determined as of the Valuation Day coincident with or next
following the date National Life receives in writing: (1) due proof of the
Annuitant's or an Owner's (or Joint Owner's) death; (2) an election for
either a single sum payment or an Annuity Payment Option (currently only Fixed
Annuities are available in these circumstances); and (3) any form
required by state insurance laws. If a single sum payment is requested, payment
will be made in accordance with any applicable laws and regulations governing
the payment of Death Benefits. If an Annuity Payment Option is requested,
election must be made by the Beneficiary during the 90-day period commencing
with the date written notice is received by National Life, and as otherwise
required by law. If no election has been made by the end of such 90-day period
commencing with the date written notice is received by National Life, or as
otherwise required by law, the Death Benefit will be paid in a single sum
payment.
REQUIRED DISTRIBUTIONS FOR QUALIFIED PLANS AND TAX SHELTERED ANNUITIES
The entire interest of an Annuitant under a Qualified Plan or a Tax
Sheltered Annuity Contract will be distributed in a manner consistent with the
Minimum Distribution and Incidental Benefit (MDIB) provisions of Section
401(a)(9) of the Code and regulations thereunder, as applicable, and will be
paid, notwithstanding anything else contained herein, to the Owner/Annuitant
under the Annuity Payments Option selected, over a period not exceeding:
(a) the life of the Owner/Annuitant or the lives of the Owner/Annuitant
and the Owner/Annuitant's Beneficiary; or
(b) a period not extending beyond the life expectancy of the
Owner/Annuitant or the life expectancy of the Owner/Annuitant and the
Owner/Annuitant's Beneficiary.
If the Owner/Annuitant's entire interest is to be distributed in equal
or substantially equal payments over a period described in (a) or (b), such
payments will commence not later than the first day of April following the
calendar year in which the Owner/Annuitant attains age 70 1/2 (the required
beginning date). Beginning January 1, 1997, for an Owner/Annuitant other than a
"5 percent owner" (as defined in Code Section 416) in the case of a
governmental plan (as defined in Code Section 414(d)), or church plan (as
defined in Code Section 401(a)(9)(C)), the Required Beginning Date will be the
later of the dates determined under the preceding sentence or April 1 of the
calendar year following the calendar year in which the Annuitant retires.
If the Owner dies prior to the commencement of his or her Distribution,
the interest in the Qualified Plan or Tax Sheltered Annuity must be distributed
by December 31 of the calendar year in which the fifth anniversary of his or her
death occurs unless:
(a) the Owner names his or her surviving spouse as the Beneficiary and such
spouse elects to:
(i) in the case of a Tax-Sheltered Annuity, treat the annuity as
a Tax Sheltered Annuity established for his or her benefit; or
(ii) receive Distribution of the account in nearly equal payments
over his or her life (or a period not exceeding his or her
life expectancy) and commencing not later than December 31 of
the year in which the Owner would have attained age 70 1/2; or
(b) the Owner names a Beneficiary other than his or her surviving spouse
and such Beneficiary elects to receive a Distribution of the account in
nearly equal payments over his or her life (or a period not exceeding
his or her life expectancy) commencing not later than December 31 of
the year following the year in which the Owner dies.
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<PAGE> 29
If the Owner/Annuitant dies after Distribution has commenced,
Distribution must continue at least as rapidly as under the schedule being used
prior to his or her death.
Payments commencing on the Required Beginning Date will not be less
than the lesser of the quotient obtained by dividing the entire interest of the
Owner/Annuitant by the life expectancy of the Owner/Annuitant, or the joint and
last survivor expectancy of the Owner/Annuitant and the Owner/Annuitant's
Designated Beneficiary (whichever is applicable under the applicable Minimum
Distribution or MDIB provisions). Life expectancy and joint and last survivor
expectancy are computed by the use of return multiples contained in Section
1.72-9 of the Treasury Regulations.
Other distribution rules may apply to Section 457 plans.
If the amounts distributed to the Owner are less than those mentioned
above, a penalty tax of 50% is levied on the amount that should have been
distributed for that year.
REQUIRED DISTRIBUTIONS FOR INDIVIDUAL RETIREMENT ANNUITIES
Distribution from an Individual Retirement Annuity must begin not later
than April 1 of the calendar year following the calendar year in which the Owner
attains age 70 1/2. Distribution may be accepted in a lump sum or in nearly
equal payments over: (a) the Owner's life or the lives of the Owner and the
Owner's spouse or designated Beneficiary, or (b) a period not extending beyond
the Owner and the Owner's spouse or designated Beneficiary.
If the Owner dies prior to the commencement of the Distribution, the
interest in the Individual Retirement Annuity must be distributed by December 31
of the calendar year in which the fifth anniversary of the Owner's death occurs
unless:
(a) The Owner has named his or her surviving spouse as the designated
Beneficiary and such spouse elects to:
(i) treat the annuity as an Individual Retirement Annuity established
for his or her benefit; or
(ii) receive Distribution of the account in nearly equal payments over
his or her life (or a period not exceeding his or her life
expectancy) and commencing not later than December 31 of the year
in which the Owner would have attained age 70 1/2; or
(b) The Owner has named a Beneficiary other than his or her surviving
spouse and such Beneficiary elects to receive a Distribution of the
account in nearly equal payments over his or her life (or a period not
exceeding his or her life expectancy) commencing not later than
December 31 of the year following the year in which the Owner dies.
If the Owner dies after Distribution has commenced, the Distribution
must continue at least as rapidly as under the schedule being used prior to the
Owner's death, except to the extent that a surviving spouse Beneficiary may
elect to treat the Contract as his or her own, in the same manner as is
described in section (a)(i) of this provision.
If the amounts distributed to the Owner are less than those mentioned
above, a penalty tax of 50% is levied on the amount that should have been
distributed for that year.
A pro-rata portion of all Distributions will be included in the gross
income of the person receiving the Distribution and taxed at ordinary income tax
rates. The portion of the Distribution which is taxable is based on the ratio
between the amount by which non-deductible Premium Payments exceed prior
non-taxable Distributions and total account balances at the time of the
Distribution. The Owner must annually report the amount of non-deductible
Premium Payments, the amount of any Distribution, the amount by which
non-deductible Premium Payments for all years exceed non-taxable Distributions
for all years and the total balance of all Individual Retirement Annuities.
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<PAGE> 30
Individual Retirement Annuity Distributions will not receive the
benefit of the tax treatment of a lump sum Distribution from a Qualified Plan.
If the Owner dies prior to the time Distribution of the Owner's interest in the
annuity is completed, the balance will also be included in the Owner's gross
estate.
GENERATION-SKIPPING TRANSFERS
National Life may determine whether the Death Benefit or any other
payment constitutes a direct skip as defined in Section 2612 of the Code, and
the amount of the tax on the generation-skipping transfer resulting from such
direct skip. If applicable, the payment will be reduced by any tax National Life
is required to pay by Section 2603 of the Code.
A direct skip may occur when property is transferred to or a Death
Benefit is paid to an individual two or more generations younger than the Owner.
OWNERSHIP PROVISIONS
Unless otherwise provided, the Owner has all rights under the Contract.
IF THE PURCHASER NAMES SOMEONE OTHER THAN HIMSELF OR HERSELF AS OWNER, THE
PURCHASER WILL HAVE NO RIGHTS UNDER THE CONTRACT. If Joint Owners are named,
each Joint Owner will possess an undivided interest in the Contract. The death
of any Joint Owner will trigger the provisions of the Contract relating to the
death of the Owner. Unless otherwise provided, when Joint Owners are named, the
exercise of any ownership right in the Contract (including the right to
surrender the Contract or make a Withdrawal, to change the Owner, the Annuitant,
a Contingent Annuitant, the Beneficiary, the Annuity Payment Option or the
Maturity Date) shall require a written indication of an intent to exercise that
right, signed by all Joint Owners.
Prior to the Annuitization Date, the Owner may name a new Owner. Such
change may be subject to state and federal gift taxes, and may also result in
current federal income taxation (see "Taxes"). Any change of Owner will
automatically revoke any prior Owner designation. Any request for change of
Owner must be (1) made by proper written application, (2) received and recorded
by National Life at its Home Office, and (3) may include a signature guarantee
as specified in the "Surrender" provision. The change will become effective as
of the date the written request is signed. A new choice of Owner will not apply
to any payment made or action taken by National Life prior to the time it was
received and recorded.
The Owner may request a change in the Annuitant or Contingent Annuitant
before the Annuitization Date. Such a request must be made in writing on a form
acceptable to National Life and must be signed by the Owner and the person to be
named as Annuitant or Contingent Annuitant. Any such change is subject to
underwriting and approval by National Life.
ARBITRATION
Except where otherwise required by state law, the Contract provides
that any controversy under the Contract shall be settled by arbitration in the
state of residence of the Owner, in accordance with the rules of the American
Arbitration Association or any similar rules to which the parties agree. Any
award rendered through arbitration will be final on all parties, and the award
may be enforced in court.
The purpose of the arbitration is to provide an alternative dispute
resolution mechanism for investors that may be more efficient and less costly
than court litigation. Owners should be aware, however, that arbitration is, as
noted above, final and binding on all parties, and that the right to seek
remedies in court is waived, including the right to jury trial. Pre-arbitration
discovery is generally more limited than and different from court discovery
procedures, and the arbitrator's award is not required to include factual
findings or legal reasoning. Any party's right to appeal or to seek modification
of rulings by the arbitrators is strictly limited.
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<PAGE> 31
CHARGES AND DEDUCTIONS
All of the charges described in this section apply to Variable Account
allocations. Allocations to the Fixed Account are subject to Contingent Deferred
Sales Charges, the Annual Contract Fee and Premium Tax deductions and the
charge for the Enhanced Death Benefit Rider, if applicable, but are not
subject to charges exclusive to the Variable Account: the Mortality and
Expense Risk Charge and the Administration Charge.
National Life deducts the charges described below to cover its costs and
expenses, services provided and risks assumed under the Contracts. National Life
incurs certain costs and expenses for the distribution and administration of the
Contracts and for providing the benefits payable thereunder. More particularly,
the administrative services include: processing applications for and issuing
the Contracts, processing purchases and redemptions of Fund shares as required
(including automatic withdrawal services), maintaining records, administering
annuity payouts, furnishing accounting and valuation services (including the
calculation and monitoring of daily Subaccount values), reconciling and
depositing cash receipts, providing Contract confirmations, providing toll-free
inquiry services and furnishing telephone transaction privileges. The risks
National Life assumes include: the risk that the actual life-span of persons
receiving annuity payments under Contract guarantees will exceed the assumptions
reflected in National Life's guaranteed rates (these rates are incorporated in
the Contract and cannot be changed); the risk that Death Benefits, or the
Enhanced Death Benefit under the optional Enhanced Death Benefit Rider, will
exceed the actual Contract Value, the risk that more Owners than expected will
qualify for waivers of the Contingent Deferred Sales Charge; and the risk that
National Life's costs in providing the services will exceed its revenues from
the Contract charges (which cannot be changed by National Life). The amount of a
charge will not necessarily correspond to the costs associated with providing
the services or benefits indicated by the designation of the charge. For
example, the Contingent Deferred Sales Charge collected may not fully cover all
of the distribution expenses incurred by National Life.
DEDUCTIONS FROM THE VARIABLE ACCOUNT
We deduct from the Variable Account an amount, computed daily, which is
equal to an annual rate of 1.40% of the daily net asset value. The charge
consists of a 0.15% Administration Charge and a 1.25% Mortality and Expense Risk
Charge.
CONTINGENT DEFERRED SALES CHARGE
No deduction for a sales charge is made from the Premium Payments for
these Contracts. However, if a Withdrawal is made with respect to any part of
the Contract Value of such a Contract or a Contract is surrendered, National
Life will, with certain exceptions, deduct a Contingent Deferred Sales Charge
not to exceed 7% of the lesser of the total of all Net Premium Payments made
within 84 months prior to the date of the request to surrender, or the amount
withdrawn.
The Contingent Deferred Sales Charge is calculated by multiplying the
applicable Contingent Deferred Sales Charge percentages noted below by the Net
Premium Payments that are withdrawn or surrendered. For purposes of calculating
the Contingent Deferred Sales Charge, Withdrawals or surrenders are considered
to come first from the oldest Net Premium Payment made to the Contract, then
the next oldest Net Premium Payment and so forth, with any earnings
attributable to such Net Premium Payments considered withdrawn only after all
Net Premium Payments made to the Contract have been considered withdrawn (no
Contingent Deferred Sales Charge is ever assessed with respect to a Withdrawal
or surrender of earnings). For tax purposes, a surrender is usually treated as
a withdrawal of earnings first. This charge will apply in the amounts set forth
below to Net Premium Payments within the time periods set forth.
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<PAGE> 32
The Contingent Deferred Sales Charge applies to Premium Payments as
follows:
<TABLE>
<CAPTION>
NUMBER OF COMPLETED CONTINGENT DEFERRED NUMBER OF COMPLETED CONTINGENT DEFERRED
YEARS FROM DATE OF SALES CHARGE YEARS FROM DATE OF SALES CHARGE
PREMIUM PAYMENT PERCENTAGE PREMIUM PAYMENT PERCENTAGE
- ---------------- ---------- --------------- -----------
<S> <C> <C> <C>
0 7% 4 3%
1 6% 5 2%
2 5% 6 1%
3 4% 7 0%
</TABLE>
In any Contract Year after the first Contract Year, except in the
states referred to in the last sentence of this paragraph, the Owner may effect
Withdrawals without a Contingent Deferred Sales Charge ("CDSC") of an aggregate
amount equal to 15% of the Contract Value as of the most recent Contract
Anniversary. This CDSC-free Withdrawal privilege does not apply to full
surrenders of the Contract, and if a full surrender is made within one year of
exercising a CDSC-free Withdrawal, then the Contingent Deferred Sales Charge
which would have been assessed at the time of the Withdrawal will be assessed at
the time of surrender. The CDSC-free feature is also non-cumulative; so that
free amounts not taken during any given Contract Year cannot be taken as free
amounts in a subsequent Contract Year. In addition, any amount withdrawn in
order to meet minimum Distribution requirements under the Code shall be free of
CDSC. The Owner may be subject to a tax penalty if the Owner takes Withdrawals
prior to age 59 1/2 (see "Federal Income Tax Considerations"). In any states
which require that any CDSC-free Withdrawal provision be available on full
surrenders as well as Withdrawals, the CDSC-free Withdrawal provision will apply
to full surrenders but will be limited to 10% of the Contract Value as of the
most recent Contract Anniversary for both Withdrawals and full surrenders.
In addition, no Contingent Deferred Sales Charge will be deducted: (1)
upon the Annuitization of Contracts, (2) upon payment of a death benefit
pursuant to the death of the Owner, or (3) from any values which have been held
under a Contract for at least 84 months. No Contingent Deferred Sales Charge
applies upon the transfer of value among the Subaccounts or between the Fixed
Account and the Variable Account.
When a Contract is held by a charitable remainder trust, the amount
which may be withdrawn from this Contract without application of a Contingent
Deferred Sales Charge, after the first Contract Year, shall be the larger of
(a) or (b), where (a) is the amount which would otherwise be available for
Withdrawal without application of a Contingent Deferred Sales Charge; and
where (b) is the difference between the Contract Value as of the last Contract
Anniversary and the Net Premium Payments made to the Contract less all
Withdrawals and less any outstanding loan and accrued interest, as of the last
Contract Anniversary.
National Life will waive the Contingent Deferred Sales Charge if the
Owner dies, or if the Owner annuitizes (in such a case, however, the Owner may
not elect a settlement option under which he or she has the right to receive a
lump sum prior to seven years after the date of the last Premium Payment, unless
a Contingent Deferred Sales Charge is paid at the time of payment of the lump
sum).
National Life will also waive the CDSC if, following the first Contract
Anniversary, the Owner has been confined to an eligible nursing home (as
defined in the Contract) for at least the 90 consecutive days ending on the
date of the Withdrawal request.
ANNUAL CONTRACT FEE
For Contracts with a Contract Value plus any outstanding loan and accrued
interest of less than $50,000 as of the Date of Issue, or any subsequent
Contract Anniversary prior to the Annuitization Date, National Life will assess
an Annual Contract Fee of $30.00. This fee will be assessed annually in advance
on the Date of Issue and thereafter on each Contract Anniversary on which the
Contract Value plus any outstanding loan and accrued interest is less than
$50,000, until the Annuitization Date. No Annual Contract Fee will be assessed
after the Annuitization Date. This fee will be taken pro rata from all
Subaccounts of the Variable Account and the unloaned portion of the Fixed
Account.
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<PAGE> 33
TRANSFER CHARGE
Currently, unlimited transfers are permitted among the Subaccounts, and
transfers between the Fixed Account and the Variable Account are permitted
within the limits described on page , in each case without charge. National Life
has no present intention to impose a transfer charge in the foreseeable future.
However, National Life reserves the right to impose in the future a transfer
charge of $25 on each transfer in excess of twelve transfers in any Contract
Year.
If imposed, the transfer charge will be deducted from the amount being
transferred. All transfers requested on the same Valuation Day are treated as
one transfer transaction. Any future transfer charge will not apply to transfers
resulting from loans, and any transfers made pursuant to the Dollar Cost
Averaging and Portfolio Rebalancing features. These transfers will not count
against the twelve free transfers in any Contract Year.
PREMIUM TAXES
If a governmental entity imposes premium taxes, National Life will make
a deduction for premium taxes in a corresponding amount. Certain states impose a
premium tax, currently ranging up to 3.5%. National Life will pay premium taxes
at the time imposed under applicable law. Where National Life is required to
pay this premium tax when a premium is paid, it may deduct an amount equal to
premium taxes from the Premium Payment. National Life currently intends to make
this deduction from Premium Payments only in South Dakota. In the remaining
states which assess premium taxes, National Life currently expects to make its
deduction for premium taxes at the time of Annuitization, death of the Owner,
or surrender, although it also reserves the right to make such a deduction at
the time it pays premium taxes to the applicable taxing authority.
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER
Annual charges are made if the Owner has elected the optional Enhanced
Death Benefit Rider. See "Optional Enhanced Death Benefit Rider," page .
The annual charge for the Enhanced Death Benefit Rider is 0.20% of Contract
Value as of the date the charge is deducted plus the amount of any outstanding
loan and accrued interest. The annual charge will be deducted at issue (or at
the time of election, if elected subsequent to issue), and then on each
Contract Anniversary thereafter, up to and including age 80 on an age-nearest
birthday basis as of the relevant Contract Anniversary. After age 80, the
charge will be discontinued. The charge will be taken pro rata from the
Subaccounts of the Variable Account and the unloaned portion of the Fixed
Account.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset value.
The net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds. The fees and expenses for the Funds are
described briefly in connection with a general description of each Fund.
More detailed information is contained in the Funds' prospectuses which
accompany this prospectus.
CONTRACT RIGHTS
FREE LOOK
The Owner may revoke the Contract at any time between the Date of Issue
and the date 10 days after receipt of the Contract, and receive a refund of the
Contract Value plus any charges assessed at issue, including the Annual
Contract Fee, charge for the Optional Enhanced Death Benefit Rider, and any
premium tax, unless otherwise required by state and/or federal law. Some states
may require a longer period. Where the Contract Value is refunded, the Owner
will have borne the investment risk and been entitled to the benefit of the
investment performance of the chosen Subaccounts during the time the Contract
was in force.
In the case of Individual Retirement Annuities and states that require
the return of Premium Payments, National Life will refund the greater of: (i)
Premium Payments or (ii) Contract Value plus
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<PAGE> 34
any amount deducted by National Life for state premium taxes. National Life may
require that all Contract Value allocated to the Variable Account initially be
held in the Market Street Money Market Subaccount. At the end of the free look
period, Contract Value will be allocated among the Subaccounts of the Variable
Account and the Fixed Account based on the allocation percentages specified in
the application. For this purpose, National Life assumes the free look period
ends 20 days after the date the Contract is issued.
In order to revoke the Contract, it must be mailed or delivered to the
Home Office of National Life at the mailing address shown on page 1 of this
prospectus. Mailing or delivery must occur on or before 10 days after receipt of
the Contract for revocation to be effective, except where National Life required
the allocation of Contract Value to the Market Street Money Market Subaccount
for the free look period. In order to revoke the Contract, if it has not been
received, written notice must be mailed or delivered to the Home Office of
National Life at the mailing address shown on page 1 of this prospectus.
The liability of the Variable Account under this provision is limited
to the Contract Value in each Subaccount on the date of revocation. Any
additional amounts refunded to the Owner will be paid by National Life.
LOAN PRIVILEGE - QUALIFIED CONTRACTS AND CERTAIN TAX SHELTERED ANNUITIES
Prior to the Annuitization Date, the Owner of a Qualified Contract
under Section 401(a) (which includes Section 401(k) plans) or 403(a) of the
Code, or a Section 403(b) Tax Sheltered Annuity Contract which is under the
administration of an ERISA fiduciary may receive a loan subject to the terms of
the Contract, the Plan, and the Code, which may impose restrictions on loans.
In the future, National Life may extend the loan privilege to all section
403(b) Contracts, but there can be no assurance that it will do so.
Loans from eligible Contracts are available beginning one year
after the Date of Issue. The Owner may borrow a minimum of $1500. The maximum
loan balance which may be outstanding at any time is 50% of the Contract Value,
but not more than $50,000. The $50,000 limit will be reduced by the highest loan
balances owed during the prior one-year period, which may be more than the
amount outstanding at the time of the loan if an interest payment or principal
repayment has been made. Only one loan may be outstanding with respect to any
one Contract at any time. Loans may only be secured by the Contract Value.
All loans are made from the Collateral Fixed Account. An amount equal
to the principal amount of the loan will be transferred to the Collateral Fixed
Account. Unless instructed to the contrary by the Owner, National Life will
transfer to the Collateral Fixed Account an amount equaling the loan from the
Subaccounts of the Variable Account and unloaned portion of the Fixed Account in
the same proportion that such amounts bear to the total Contract Value. No
withdrawal charges are deducted at the time of the loan, or on any transfers to
the Collateral Fixed Account. If the Owner provides specific instructions, loan
amounts must be taken first from the Variable Account, and may only be taken
from the unloaned portion of the Fixed Account to the extent that the Contract
Value in the Variable Account is insufficient to provide the loan. If the loan
cannot be processed in accordance with instructions provided by the Owner, then
the loan will not be processed until National Life receives further instructions
from the Owner.
Until the loan has been repaid in full, that portion of the Collateral
Fixed Account equal to the outstanding loan balance shall be credited on each
Contract Anniversary with interest at an annual rate declared from time to time
by National Life, but will never be less than an annual rate of 3.0%. Specific
loan terms are disclosed at the time of loan application or loan issuance.
Loans must be repaid in substantially level payments, not less
frequently than quarterly, within five years. Loans used to purchase the
principal residence of the Owner must be repaid within 15 years. During the loan
term, the outstanding balance of the loan will continue to accrue interest at
an annual rate specified in the loan agreement. Once established, this interest
rate will be fixed for the life of the loan. Loan repayments will consist of
principal and interest in amounts set forth in the loan agreement. Loan
principal repayments will, on the day they are received, be allocated among the
Fixed Account and Subaccounts of the Variable Account in accordance with the
allocation of Net Premium Payments then in effect.
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<PAGE> 35
If the Contract is surrendered while the loan is outstanding, the Owner
will receive the Cash Surrender Value. If the Owner/Annuitant dies while the
loan is outstanding, the Death Benefit will also be reduced to reflect the
amount of the loan outstanding plus accrued interest. If annuity payments start
while the loan is outstanding, the Contract Value will be reduced by the amount
of the outstanding loan plus accrued interest. Until the loan is repaid,
National Life reserves the right to restrict any transfer of the Contract which
would otherwise qualify as a transfer as permitted in the Code.
If a loan payment is not made when due, interest will continue to
accrue. If a loan payment is not made within 31 days of when it was due, then a
Withdrawal will be processed in an amount equal to that payment, and applied
to the amount due. This amount may be taxable to the borrower, and may be
subject to the early withdrawal tax penalty.
Loans may also be subject to additional limitations or restrictions
under the terms of the employer's plan. Loans permitted under this Contract may
still be taxable in whole or part if the participant has additional loans from
other plans or contracts. National Life will calculate the maximum nontaxable
loan based on the information provided by the participant or the employer.
Loan repayments must be identified as such or else they will be treated
as Premium Payments and will not be used to reduce the outstanding loan
principal or interest due. National Life reserves the right to modify the term
or procedures associated with the loan privilege in the event of a change in the
laws or regulations relating to the treatment of loans. National Life also
reserves the right to assess a loan processing fee. Individual Retirement
Annuities and Non-Qualified Contracts are not eligible for loans (See
"Non-Qualified Contracts" page __ and "Individual Retirement Annuities"
page __.).
All activity relating to loans and the administration of any loan
program are the responsibility of the trustee or plan administrator under the
ERISA plan.
SURRENDER AND WITHDRAWAL
At any time prior to the Annuitization Date or thereafter if Payment
Option 1 has been elected, the Owner may, upon proper written application by
the Owner deemed by National Life to be in good order, surrender the Contract
Value. "Proper written application" means that the Owner must request the
surrender in writing and include the Contract. National Life may require that
the signature(s) be guaranteed by a member firm of a major stock exchange or
other depository institution qualified to give such a guaranty.
National Life will, upon receipt of any such written request, pay to
the Owner the Cash Surrender Value. The Cash Surrender Value will reflect any
applicable Contingent Deferred Sales Charge (see "Contingent Deferred Sales
Charge"), as well as any outstanding loan and accrued interest and, in certain
states, a premium tax charge (see "Premium Taxes", page ). The Cash Surrender
Value may be more or less than the total of Premium Payments made by a Owner,
depending on the market value of the underlying Fund shares, the amount of any
applicable Contingent Deferred Sales Charge, and other factors.
National Life will normally not permit Withdrawal or surrender of Premium
Payments made by check within the 15 calendar days prior to the date the request
for Withdrawal or surrender is received.
At any time before the death of the Owner and after 30 days from the
Date of Issue, the Owner may make a Withdrawal of a portion of the Contract
Value. The minimum Withdrawal is $500, and the maximum Withdrawal is
that amount which would leave $3500 in remaining Contract Value. If the amount
requested is more than the maximum or less than the minimum, the Withdrawal
will not be processed until National Life receives further instructions from
the Owner.
Generally, Withdrawals in the first Contract Year and Withdrawals in
excess of 15% (10% in certain states) of Contract Value as of the most recent
Contract Anniversary in any Contract Year are subject to the Contingent
Deferred Sales Charge.
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See "Contingent Deferred Sales Charge", page . Withdrawals will be deemed to be
taken from Net Premium Payments in chronological order, with the oldest Net
Premium Payment being withdrawn first. This method will tend to minimize the
amount of the Contingent Deferred Sales Charge.
The Withdrawal will be taken from the Subaccounts of the Variable
Account based on the instructions of the Owner at the time of the Withdrawal
(however, during the first Contract Year, National Life may require that
Withdrawal be taken pro rata from the Subaccounts of the Variable Account and
the unloaned portion of the Fixed Account). If the Owner provides specific
instructions, amounts must be deducted first from the Variable Account, and may
only be deducted from the unloaned portion of the Fixed Account to the extent
that the Contract Value in the Variable Account is insufficient to accomplish
the Withdrawal. If specific allocation instructions are not provided by the
Owner, the Withdrawal will be deducted pro rata from the Subaccounts of the
Variable Account and from the unloaned portion of the Fixed Account. Any
Contingent Deferred Sales Charge associated with a Withdrawal will be deducted
from the Subaccounts of the Variable Account and from the Fixed Account based
on the allocation percentages of the Withdrawal itself, except that any amount
that would be so deducted from a Subaccount which is in excess of the available
value in that Subaccount will be deducted pro rata among the remaining
Subaccounts and the unloaned portion of the Fixed Account. If the Withdrawal
cannot be processed in accordance with instructions provided by the Owner, then
it will not be processed until National Life receives further instructions from
the Owner.
A surrender or a Withdrawal may have tax consequences. See "Federal Income
Tax Considerations", page .
PAYMENTS
National Life will pay any funds surrendered or withdrawn from
the Variable Account within 7 days of receipt of such request in National Life's
Home Office. However, National Life reserves the right to suspend or postpone
the date of any payment of any benefit or values for any Valuation Period (1)
when the New York Stock Exchange ("Exchange") is closed, (2) when trading on the
Exchange is restricted, (3) when an emergency exists as a result of which
disposal of securities held in the Variable Account is not reasonably
practicable or it is not reasonably practicable to determine the value of the
Variable Account's net assets, or (4) during any other period when the
Securities and Exchange Commission, by order, so permits for the protection of
security holders, provided that applicable rules and regulations of the
Securities and Exchange Commission shall govern as to whether the conditions
prescribed in (2) and (3) exist. National Life reserves the right to delay
payment of any amounts allocated to the Fixed Account which are payable as a
result of a surrender, Withdrawal or loan for up to six months after it has
received written request in a form satisfactory to it.
SURRENDERS AND WITHDRAWALS UNDER A TAX SHELTERED ANNUITY CONTRACT
Where the Contract has been issued as a Tax Sheltered Annuity, the
Owner may surrender or make a Withdrawal of part or all of the Contract Value
at any time this Contract is in force prior to the earlier of the
Annuitization Date or the death of the Designated Annuitant except as provided
below:
A. The surrender or Withdrawal of Contract Value attributable to
contributions made pursuant to a salary reduction agreement (within
the meaning of Code Section 402(g)(3)(A) or (C)), or transfers from a
Custodial Account described in Section 403(b)(7) of the Code, may be
executed only:
1. when the Owner attains age 59 1/2, separates from service, dies, or
becomes disabled (within the meaning of Code Section 72(m)(7)); or
2. in the case of hardship (as defined for purposes of Code Section 401
(k)), provided that any surrender of Contract Value in the case of
hardship may not include any income attributable to salary reduction
contributions.
B. The surrender and Withdrawal limitations described in A. above for
Tax Sheltered Annuities apply to:
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1. salary reduction contributions to Tax Sheltered Annuities
made for plan years beginning after December 31, 1988;
2. earnings credited to such contracts after the last plan year
beginning before January 1, 1989, on amounts attributable to
salary reduction contributions; and
3. all amounts transferred from 403(b)(7) Custodial Accounts (except
that earnings, and employer contributions as of December 31, 1988
in such Custodial Accounts may be withdrawn in the case of
hardship).
C. Any Distribution other than the above, including exercise of a
contractual ten-day free look provision (when available) may result in
the immediate application of taxes and penalties and/or retroactive
disqualification of a Qualified Contract or Tax Sheltered Annuity.
A premature Distribution may not be eligible for rollover treatment. To
assist in preventing disqualification in the event of a ten-day free look,
National Life will agree to transfer the proceeds to another contract which
meets the requirements of Section 403(b) of the Code, upon proper direction by
the Owner. The foregoing is National Life's understanding of the withdrawal
restrictions which are currently applicable under Section 403(b)(11) and Revenue
Ruling 90-24. Such restrictions are subject to legislative change and/or
reinterpretation from time to time. Distributions pursuant to Qualified Domestic
Relations Orders will not be considered to be a violation of the restrictions
stated in this provision.
The Contract surrender and Withdrawal provisions may also be modified
pursuant to the plan terms and Code tax provisions for Qualified Contracts.
TELEPHONE TRANSACTION PRIVILEGE
If the telephone transaction privilege has been elected, either on the
application for the Contract or by thereafter providing a proper written
authorization to National Life, an Owner or his or her National Life agent, if
the Owner has so provided on the application or by written authorization, may
effect changes in Net Premium Payment allocation, transfers, initiate dollar
cost averaging or portfolio rebalancing, and, in the case of Tax Deferred
Annuity Contracts, loans of up to $10,000, by providing instructions to
National Life at its Home Office over the telephone. National Life reserves the
right to suspend telephone transaction privileges at any time, for any reason,
if it deems such suspension to be in the best interests of Contract Owners.
National Life will employ reasonable procedures to confirm that
instructions communicated by telephone are genuine. If National Life follows
these procedures it will not be liable for any losses due to unauthorized or
fraudulent instructions. National Life may be liable for any such losses if
those reasonable procedures are not followed. The procedures to be followed for
telephone transfers will include one or more of the following: requiring some
form of personal identification prior to acting on instructions received by
telephone, providing written confirmation of the transaction, and making a tape
recording of the instructions given by telephone.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
National Life currently offers, at no charge to Owners, the following
automated fund management features. However, National Life is not legally
obligated to continue to offer these features, and although it has no current
intention to do so, it may cease offering one or more of such features at any
time, after providing 60 days prior written notice to all Owners who are
currently utilizing the features being discontinued. Only one automated fund
management feature is available under any single Contract at one time.
Dollar Cost Averaging. This feature permits an Owner to automatically
transfer funds from the Money Market Subaccount to any other Subaccounts on a
monthly basis. It may be elected at issue by marking the appropriate box on the
initial application, and completing the appropriate instructions, or, after
issue, by filling out similar information on a change request form and sending
it to the Home Office.
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If this feature is elected, the amount to be transferred will be taken
from the Money Market Subaccount and transferred to the Subaccount or
Subaccounts designated to receive the funds, each month on the Monthly Contract
Date (starting with the Monthly Contract Date next succeeding the Date of Issue,
or next succeeding the date of an election subsequent to purchase), until the
amount in the Money Market Fund is depleted. The minimum monthly transfer by
Dollar Cost Averaging is $100, except for the transfer which reduces the amount
in the Money Market Subaccount to zero. An Owner may discontinue Dollar Cost
Averaging at any time by sending an appropriate change request form to the Home
Office.
This feature allows an Owner to move funds into the various investment
classes on a more gradual and systematic basis than the frequency on which
Premium Payments ordinarily are made. The periodic investment of the same amount
will result in higher numbers of units being purchased when unit prices are
lower, and lower numbers of units being purchased when unit prices are higher.
This will result, over time, in a lower cost per unit than the average of the
unit costs on the days on which the automated purchases are made. This technique
will not, however, assure a profit or protect against a loss in declining
markets. Moreover, for the dollar cost averaging technique to be effective,
amounts should be available for allocation from the Money Market Subaccount
through periods of low price levels as well as higher price levels.
Portfolio Rebalancing. This feature permits an Owner to automatically
rebalance the value in the Subaccounts on a monthly, quarterly, semi-annual or
annual basis, based on the Owner's premium allocation percentages in effect at
the time of the rebalancing. It may be elected at issue by marking the
appropriate box on the initial application, or, after issue, by completing a
change request form and sending it to the Home Office.
In Contracts utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer will take place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages,
starting with the Monthly Contract Date three, six or twelve months after the
Date of Issue, and then on each Monthly Contract Date three, six or twelve
months thereafter. Contracts electing Portfolio Rebalancing after issue will
have the first automated transfer occur as of the Monthly Contract Date on or
next following the date that the election is received at the Home Office, and
subsequent rebalancing transfers will occur every three, six or twelve months
from such date. An Owner may discontinue Portfolio Rebalancing at any time by
submitting an appropriate change request form to the Home Office.
In the event that an Owner changes the Contract's premium allocation
percentages, Portfolio Rebalancing will automatically be discontinued unless the
Owner specifically directs otherwise.
Portfolio Rebalancing will result in periodic transfers out of Subaccounts
that have had relatively favorable investment performance in relation to the
other Subaccounts to which a Contract allocates premiums, and into Subaccounts
which have had relatively unfavorable investment performance in relation to the
other Subaccounts to which the Contract allocates premiums.
Systematic Withdrawals- At any time after one year from the Date of
Issue, and provided that the Contract Value at the time of initiation of the
program is at least $15,000, the Owner may elect in writing on a form provided
by National Life to take systematic Withdrawals of a specified dollar amount (of
at least $100) on a monthly, quarterly, semi-annual or annual basis. The Owner
may provide specific instructions as to how the systematic Withdrawals are to be
taken, but the Withdrawals must be taken first from the Subaccounts of the
Variable Account, and may only be taken from the unloaned portion of the Fixed
Account to the extent that the Contract Value in the Variable Account is
insufficient to accomplish the Withdrawal. If the Owner has not provided
specific instructions, or if such specific instructions cannot be carried out,
National Life will process the Withdrawals by taking on a pro-rata basis
Accumulation Units from all of the Subaccounts in which the Owner has an
interest and the unloaned portion of the Fixed Account. Each systematic
Withdrawal is subject to federal income taxes on the taxable portion. In
addition, a 10% federal penalty tax may be assessed on systematic Withdrawals if
the Owner is under age 59 1/2. If directed by the Owner, National Life will
withhold federal income taxes from each systematic Withdrawal. A systematic
Withdrawal program will
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terminate automatically when a systematic Withdrawal would cause the remaining
Contract Value to be $3,500 or less. If a systematic Withdrawal would cause the
Contract Value to be $3,500 or less, then that systematic Withdrawal transaction
will not be processed. The Owner may discontinue systematic Withdrawals at any
time by notifying National Life in writing.
A Contingent Deferred Sales Charge may apply to systematic Withdrawals
in accordance with the considerations set forth in "Contingent Deferred Sales
Charge", page . If the Owner withdraws amounts pursuant to a systematic
Withdrawal program, then, in most states, the Owner may withdraw in each
Contract Year without a CDSC an amount up to 15% of the Contract Value as of the
most recent Contract Anniversary (a different CDSC-free Withdrawal provision may
apply in certain states - see "Contingent Deferred Sales Charge, page ). Both
Withdrawals at the specific request of the Owner and Withdrawals pursuant to a
systematic Withdrawal program will count toward the limit of the amount that may
be withdrawn in any Contract Year free of the CDSC. In addition, any amount
withdrawn from any Individual Retirement Annuity Contract in order to meet
minimum Distribution requirements shall be free of CDSC.
CONTRACT RIGHTS UNDER CERTAIN PLANS
Contracts may be purchased in connection with a plan sponsored by an
employer. In such cases, all rights under the Contract rest with the Owner,
which may be the employer or other obligor under the plan, and benefits
available to participants under the plan will be governed solely by the
provisions of the plan. Accordingly, some of the options and elections under the
Contract may not be available to participants under the provisions of the plan.
In such cases, participants should contact their employers for information
regarding the specifics of the plan.
THE FIXED ACCOUNT
Net Premium Payments under the Fixed Account portion of the Contract
and transfers to the Fixed Account portion become part of the general account
of National Life, which support insurance and annuity obligations. Because of
exemptive and exclusionary provisions, interests in the general account have
not been registered under the Securities Act of 1933 ("Securities Act"), nor is
the general account registered as an investment company under the Investment
Company Act. Accordingly, neither the general account nor any interest therein
are generally subject to the provisions of the Securities Act or Investment
Company Act, and we have been advised that the staff of the Securities and
Exchange Commission has not reviewed the disclosures in this prospectus which
related to the guaranteed interest portion. Disclosures regarding the Fixed
Account portion of the Contract and the general account, 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.
The Fixed Account is made up of all the general assets of National
Life, other than those in the Variable Account and any other segregated asset
account. Fixed Account Net Premium Payments will be allocated to the Fixed
Account by election of the Owner at the time of purchase, or by a later change
in allocation of Net Premium Payments. National Life will invest the assets of
the Fixed Account in those assets chosen by National Life and allowed by
applicable law.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Contract Value held in the Fixed Account which is not held in a
Collateral Fixed Account is guaranteed to accumulate at a minimum effective
annual interest rate of 3.0%. National Life may credit the non-loaned Contract
Value in the Fixed Account with current rates in excess of the minimum
guarantee but is not obligated to do so. These current interest rates are
influenced by, but do not necessarily correspond to, prevailing general market
interest rates. Since National Life, in its sole discretion, anticipates
changing the current interest rate from time to time, allocations to the Fixed
Account made at different times are likely to be credited with different
current interest rates. An interest rate will be declared by National Life
each month to apply to amounts allocated or transferred to the Fixed Account
in that month. The rate declared on such amounts will remain in effect for
twelve months. At the end of the 12-month period, National Life reserves the
right to declare a new current interest rate on such amounts and accrued
interest thereon (which may be a
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different current interest rate than the current interest rate on new
allocations to the Fixed Account on that date). Any interest credited on the
amounts in the Fixed Account in excess of the minimum guaranteed rate of 3.0%
per year will be determined in the sole discretion of National Life. The Owner
assumes the risk that interest credited may not exceed the guaranteed minimum
rate.
Amounts deducted from the unloaned portion of the Fixed Account for
Optional Benefits charges, the Annual Contract Fee, loans or transfers to the
Variable Account are, for the purpose of crediting interest, accounted for on
a last in, first out basis. Amounts deducted from the unloaned portion of the
Fixed Account for Withdrawals are accounted for on a first in, first out basis
for such purpose.
National Life reserves the right to change the method of crediting
interest from time to time, provided that such changes do not have the effect
of reducing the guaranteed rate of interest below 3.0% per annum or shorten
the period for which the interest rate applies to less than 12 months.
OPTIONAL ENHANCED DEATH BENEFIT RIDER
The Enhanced Death Benefit Rider, which is subject to the restrictions
and limitations set forth in the Contract Rider, may be included in a Contract
at the option of the Owner. Election of this optional benefit involves an
additional cost. This Rider may not be available in all states.
If the Owner has elected the Enhanced Death Benefit Rider, then the
following enhanced death benefit will be payable to the Beneficiary if the
Owner (or the first of Joint Owners) dies prior to reaching age 81 (on an age
nearest birthday basis): the highest of (a) Contract Value; (b) the total of
all Net Premium Payments less all Withdrawals, and less any outstanding loan
and accrued interest, and (c) the largest Contract Value as of any prior
Contract Anniversary after the Enhanced Death Benefit Rider was applicable to
the Contract, plus any Net Premium Payments and less any Withdrawals,
(including any CDSC deducted in connection with such Withdrawals) loan and
accrued interest, in each case since such Contract Anniversary, and in each
case calculated as of the date National Life receives due proof of death. Any
applicable premium tax charge payable on the death of the Owner will be applied
to reduce the value of the above determined enhanced death benefit (see
"Premium Taxes, page ).
If the Owner (or the first of Joint Owners) dies at age 81 or later,
the death benefit will not be enhanced, and will be an amount equal to Contract
Value, less any applicable premium tax charge.
The Enhanced Death Benefit Rider will be available at issue to Owners
age 75 and younger. It will be available after issue to Owners age 75 or
younger only as of a Contract Anniversary, and only if at the time of the Rider
is requested, the Contract Value is greater than the total of all Net Premium
Payments less all Withdrawals. The annual charge for this Rider is 0.20% of
Contract Value. After the Owner reaches age 80, on an age nearest birthday
basis, the charge will be discontinued. See "Charges for Optional Enhanced
Death Benefit Rider", page .
The Enhanced Death Benefit will be distributed in the same manner as
the normal Death Benefit. See "Death of Owner", page .
FEDERAL INCOME TAX CONSIDERATIONS
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INFORMATION CONTAINED HEREIN SHOULD NOT BE SUBSTITUTED FOR THE ADVICE
OF A PERSONAL TAX ADVISER.
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 issued by National life. Any
person concerned about these tax implications should consult a competent tax
advisor before initiating any transaction. This discussion is based upon our
understanding of the present federal income tax laws, as they are currently
interpreted by the Internal Revenue Service. 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 Internal Revenue Service. Moreover, no
attempt has been made to consider any applicable state or other tax laws.
Section 72 of the Code governs taxation of annuities in general. That
section sets forth different rules for: (1) Qualified Plans; (2) Individual
Retirement Annuities and Individual Retirement Accounts; (3) Tax Sheltered
Annuities; or (4) Non-Qualified Contracts. Each type of annuity is discussed
below.
NON-QUALIFIED CONTRACTS
The rules applicable to Non-Qualified Contracts provide that a portion
of each annuity payment received is excludable from taxable income based on the
ratio between the Owner's investment in the Contract and the expected return on
the Contract. The maximum amount excludable from income is the investment in the
Contract. If the Annuitant dies prior to excluding from income the entire
investment in the Contract, the Annuitant's final tax return may reflect a
deduction for the balance of the investment in the Contract.
Distributions made from the Contract prior to the Annuitization Date
are includible in gross income and taxable to the Owner to the extent that the
cash value of the Contract exceeds the Owner's investment at the time of the
Distribution. Distributions, for this purpose, include surrenders, Withdrawals,
dividends, loans, or any portion of the Contract which is assigned or pledged;
or for Contracts issued after April 22, 1987, any portion of the Contract
transferred by gift. For these purposes, a transfer by gift may occur upon
Annuitization if the Owner and the Annuitant are not the same individual. In
determining the taxable amount of a Distribution, all annuity contracts issued
by the same company to the same Owner during any 12 month period, will be
treated as one annuity contract. Additional limitations on the use of multiple
contracts may be imposed by Treasury regulations.
In general, certain Non-Qualified Contracts held by entities other than
individuals are taxed currently on the earnings on the Contract. There are
exceptions for immediate annuities and certain Contracts owned for the benefit
of an individual. An immediate annuity, for purposes of this discussion, is a
single premium Contract on which payments begin within one year of purchase. Any
non-individual (such as a trust) contemplating the purchase of a Non-Qualified
Contract should consult a tax advisor prior to such purchase.
Code Section 72 also provides for a penalty, equal to 10% of any
Distribution which is includible in gross income, if such Distribution is made
prior to attaining age 59 1/2 or the death or disability of the Owner. The
penalty also does not apply if the Distribution is one of a series of
substantially equal periodic
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payments made over the life or life expectancy (or joint lives or life
expectancies) of the taxpayer (and the taxpayer's Beneficiary), or for the
purchase of an immediate annuity, or is allocable to an investment in the
Contract before August 14, 1982. An Owner wishing to begin taking Distributions
to which the 10% tax penalty does not apply should forward a written request to
National Life. Upon receipt of a written request from the Owner, National Life
will inform the Owner of the procedures pursuant to National Life policy and
subject to limitations of the Contract including but not limited to first year
withdrawals.
In order to qualify as an annuity Contract under Section 72 of the
Code, the Contract must provide that the entire interest in the Contract be
distributed upon the death of any Owner before the Annuitization Date. In such
case, the Beneficiary generally must receive this Distribution within 5 years
of such Owner's death. However, the Beneficiary may elect for payments to be
made over their life or life expectancy if such payments begin within one year
from the death of the Owner. If the Beneficiary is the surviving spouse of the
deceased Owner, such spouse may be treated as the Owner and the Contract may be
continued throughout the life of the surviving spouse. In the event any Owner
dies on or after the Annuitization Date and before the entire interest has been
distributed, the remaining portion must be distributed at least as rapidly as
under the method of Distribution being used as of the date of such Owner's
death (see "Required Distribution For Tax Sheltered Annuities"). If the Owner
is not an individual, the death of the Annuitant (or a change in the Annuitant)
will result in a Distribution pursuant to these rules, regardless of whether a
Contingent Annuitant has been named.
National Life is required to withhold tax from certain Distributions to
the extent that such Distribution would constitute income to the Owner. The
Owner is generally entitled to elect not to have federal income tax withheld
from any such Distribution, but may be subject to penalties in the event
insufficient federal income tax is withheld during a calendar year.
Generally, the taxable portion of any Distribution from a Contract to a
nonresident alien of the United States is subject to tax withholding at a rate
equal to thirty percent (30%) of such amount or, if applicable, a lower treaty
rate. A payment may not be subject to withholding where the recipient
sufficiently establishes that such payment is effectively connected to the
recipient's conduct of a trade or business in the United States and such payment
is includible in the recipient's gross income.
National Life may be required to determine whether the Death Benefit or
any other payment constitutes a direct skip as defined in Section 2612 of the
Code, and the amount of the tax on the generation-skipping transfer resulting
from such direct skip. If applicable, such payment will be reduced by any tax
National Life is required to pay by Section 2603 of the Code. A direct skip may
occur when property is transferred to or a Death Benefit is paid to an
individual two or more generations younger than the Owner.
Amounts may be distributed from a Contract because of an Owner's death
or the death of the Annuitant. Generally, such amounts are includible in the
income of the recipient as follows: (i) if distributed in a lump sum, they are
taxed in the same manner as a surrender of the Contract, or (ii) if distributed
under a Payment Option, they are taxed in the same way as annuity payments.
A transfer or assignment of ownership of a Contract, the designation of
an Annuitant of other than the Owner, the selection or change of certain
Maturity Dates, or the exchange of a Contract may result in certain tax
consequences to the Owner that are not discussed herein. An Owner contemplating
any such transfer, assignment or exchange, should consult a tax advisor as to
the tax consequences.
QUALIFIED CONTRACTS
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
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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); distribution
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.
National 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 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. Federal income tax withholding will generally be made from
Distributions under Qualified Contracts, unless the participant elects not to
have tax withheld. Withholding is required from certain tax distributions (see
"Rollover Distributions", page ). Purchasers of Contracts for use with any
retirement plan should consult their legal counsel and tax adviser regarding the
suitability of the Contract.
Distributions to participants from Qualified Plans or Tax Sheltered
Annuities are generally taxed when received. A portion of each Distribution for
such Annuities is excludable from income based on the ratio between the after
tax investment of the Owner/Annuitant in the Contract and the value of the
Contract at the time of the withdrawal or Annuitization. For Qualified Plans,
thereafter the tax investment of the Owner/Annuitant may be zero.
Distributions from Individual Retirement Annuities and Contracts owned
by Individual Retirement Accounts are also generally taxed when received. The
portion of each such payment which is excludable is based on the ratio between
the amount by which nondeductible Premium Payments to all such Contracts exceeds
prior non-taxable Distributions from such Contracts, and the total account
balances in such Contracts at the time of the Distribution. The Owner of such
Individual Retirement Annuities or the Designated Annuitant under Contracts held
by Individual Retirement Accounts must annually report to the Internal Revenue
Service the amount of nondeductible Premium Payments, the amount of any
Distribution, the amount by which nondeductible Premium Payments for all years
exceed non-taxable Distributions for all years, and the total balance in all
Individual Retirement Annuities and Accounts. Owners should consult a financial
consultant, legal counsel or tax advisor to discuss in detail the taxation and
the use of the Contracts.
CORPORATE PENSION AND PROFIT-SHARING PLANS
Code section 401(a) permits employers to establish various types of
retirement plans for employees, and permits self-employed individuals to
establish retirement plans for themselves and their employees. These retirement
plans may permit the purchase of the Contracts to accumulate retirement savings
under the plans. Adverse tax consequences to the plan, to the participant or to
both may result if this Contract is assigned or transferred to any individual as
a means to provide benefit payments.
CODE SECTION 403(b) PLANS
Under Code section 403(b), payments made by public school systems and
certain tax-exempt organizations to purchase annuity contracts for their
employees are excludable from the gross income of the employee, subject to
certain limitations. However, these payments may be subject to FICA (Social
Security) taxes.
Code section 403(b)(11) restricts the distribution under Code section
403(b) annuity contracts of: (1) elective contributions made in years beginning
after December 31, 1988; (2) earnings on those contributions; and (3) earnings
in such years on amounts held as of the last year beginning before January 1,
1989. Distribution of those amounts may only occur upon death of the employee,
attainment of age 59 1/2, separation from service, disability, or financial
hardship. In addition, income attributable to elective contributions may not be
distributed in the case of hardship. Employee loans may be available, subject to
certain restrictions (see "Loan Privilege - Tax-Sheltered Annuities", page ).
DEFERRED COMPENSATION PLANS
Code section 457 provides for certain deferred compensation plans. These
plans may be offered with respect to service for state governments, local
governments, political subdivisions, agencies, instrumentalities and certain
affiliates of such entities, and tax-exempt organizations. These plans are
subject to various restrictions on contributions and distributions. The plans
may permit participants to specify the form of investment for their deferred
compensation account. In general, with respect to non-governmental plans all
investments are owned by the sponsoring employer and are subject to the claims
of the general creditors of the employer. Depending on the terms of the
particular plan, a non-government employer may be entitled to draw on deferred
amounts for purposes unrelated to its section 457 plan obligations. In general,
all amounts received under a section 457 plan are taxable.
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INDIVIDUAL RETIREMENT ANNUITIES
The Contract may be purchased as an Individual Retirement Annuity under
Section 408(b) of the Code. The Owner should seek competent advice as to the
tax consequences associated with the use of a Contract as an Individual
Retirement Annuity.
Recent changes to the Code permit the rollover of most Distributions
from Qualified Plans to other Qualified Plans or Individual Retirement Accounts.
Most Distributions from Tax-Sheltered Annuities may be rolled into another
Tax-Sheltered Annuity or Individual Retirement Account. Distributions which may
not be rolled over are those which are:
1. one of a series of substantially equal annual (or more frequent)
payments made: (a) over the life (or life expectancy) of the employee,
(b) the joint lives (or joint life expectancies) of the employee and
the employee's designated Beneficiary, or (c) for a specified period of
ten years or more, or
2. a required minimum Distribution.
Any Distribution eligible for rollover will be subject to federal tax
withholding at a rate of twenty percent (20%) unless the Distribution is
transferred directly to an appropriate plan as described above.
Individual Retirement Accounts and Individual Retirement Annuities may
not provide life insurance benefits. If the Death Benefit exceeds the greater of
the cash value of the Contract or the sum of all Premium Payments (less any
surrender, the sum of all Withdrawals, or any outstanding loan and accrued
interest on such loan), it is possible the Internal Revenue Service could
determine that the Individual Retirement Account or Individual Retirement
Annuity did not qualify for the desired tax treatment.
The Internal Revenue Service has not reviewed the Contract for qualification as
an IRA and has not generally ruled whether a Death Benefit provision such as the
provision in the Contract comports with IRA qualification requirements.
SIMPLE RETIREMENT ACCOUNTS
Beginning January 1, 1997, certain small employers may establish Simple
Retirement Accounts as provided by Section 408(p) of the Code, under which
employees may elect to defer up to $6000 (as increased for cost of living
adjustments) as a percentage of compensation. The sponsoring employer is
required to make a matching contribution on behalf of contributing employees.
Distributions from a Simple Retirement Account are subject to the same
restrictions that apply to IRA distributions and are taxed as ordinary income.
Subject to certain exceptions, premature distributions prior to age 59 1/2 are
subject to a 10% penalty tax, which is increased to 25% if the distribution
occurs within the first two years after the commencement of the employee's
participation in the plan. The failure of the Simple Retirement Account to meet
Code requirements may result in adverse tax consequences.
DIVERSIFICATION
The Internal Revenue Service has promulgated regulations under Section
817(h) of the Code relating to diversification standards for the investments
underlying a variable annuity contract. The regulations provide that a variable
annuity contract which does not satisfy the diversification standards will not
be treated as an annuity contract, unless the failure to satisfy the regulations
was inadvertent, the failure is corrected, and the Owner or National Life pays
an amount to the Internal Revenue Service. The amount will be based on the tax
that would have been paid by the Owner if the income, for the period the
contract was not diversified, had been received by the Owner. If the failure to
38
<PAGE> 45
diversify is not corrected in this manner, the Owner of an annuity contract will
be deemed the owner of the underlying securities and will be taxed on the
earnings of his or her account. National Life believes, under its interpretation
of the Code and regulations thereunder, that the investments underlying this
Contract meet these diversification standards.
In certain circumstances, owners of variable annuity contracts have
been considered for Federal income tax purposes to be the owners of the assets
of the Variable Account supporting their contracts due to their ability to
exercise investment control over those assets. When this is the case, the
contract owners have been currently taxed on income and gains attributable to
the variable account assets. There is little guidance in this area, and some
features of the Contracts, such as the flexibility of an Owner to allocate Net
Premium Payments and transfer Contract Value, have not been explicitly addressed
in published rulings. While National Life believes that the Contracts do not
give Owners investment control over Variable account assets, National Life
reserves the right to modify the Contracts as necessary to prevent an Owner from
being treated as the owner of the variable Account assets supporting the
Contract.
TAX LEGISLATION. In past years, legislation has been proposed in the
U.S. Congress which would have adversely modified the federal taxation of
certain annuity contracts. For example, one such proposal would have adversely
affected annuity contracts that do not have "substantial life contingencies" by
taxing income as it is credited to the annuity contract. Although Congress is
not now actively considering any legislation regarding the taxation of annuity
contracts, there is no way of knowing if legislation affecting the taxation of
annuity contracts will, at some time, be enacted, or the extent to which any
change in the taxation of annuity contracts would be retroactive in effect
(i.e., effective prior to the date of enactment).
CHARGE FOR TAX PROVISIONS
National Life is no longer required to maintain a capital gain reserve
liability on Non-Qualified Contracts since capital gains attributable to assets
held in the Variable Account for such Contracts are not taxable to National
Life. However, National Life reserves the right to implement and adjust the tax
charge in the future, if the tax laws change.
ROLLOVER DISTRIBUTIONS
The Code permits the rollover of most Distributions from Qualified
Plans to other Qualified Plans, Individual Retirement Accounts, or Individual
Retirement Annuities. Most Distributions from Tax Sheltered Annuities may be
rolled into another Tax Sheltered Annuity, an Individual Retirement Account, or
an Individual Retirement Annuity. Distributions which may not be rolled over
are those which are:
1. one of a series of substantially equal annual (or more frequent)
payments made: (a) over the life (or life expectancy) of the employee,
(b) the joint lives (or joint life expectancies) of the employee and
the employee's designated Beneficiary, or (c) for a specified period of
ten years or more, or
2. a required minimum Distribution.
Any Distribution eligible for rollover will be subject to federal tax
withholding at a 20 percent rate unless the Distribution is transferred directly
to an appropriate plan as described above. Owner's should consult a financial
consultant to discuss in detail a particular tax situation and the use of the
Contracts.
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.
GENDER NEUTRALITY
In 1983, the United States Supreme Court held that optional annuity
benefits provided under an employee's deferred compensation plan could not,
under Title VII of the Civil Rights Act of 1964 vary between men and women on
the basis of sex. The Court applied its decision to benefits derived from
contributions made on or after August 1, 1983. Lower federal courts have since
held that the Title VII prohibition of sex-distinct benefits may apply at an
earlier date. In addition, some states prohibit using sex-distinct mortality
tables.
39
<PAGE> 46
The Contract uses sex-distinct actuarial tables, unless state law
requires the use of sex-neutral actuarial tables. As a result, the Contract
generally provides different benefits to men and women of the same age.
Employers and employee organizations which may consider buying Contracts in
connection with any employment-related insurance or benefits program should
consult their legal advisors to determine whether the Contract is appropriate
for this purpose.
VOTING RIGHTS
Voting rights under the Contracts apply only with respect to Net
Premium Payments or accumulated amounts allocated to the Variable Account.
In accordance with its view of present applicable law, National Life
will vote the shares of the underlying Funds held in the Variable Account at
regular and special meetings of the shareholders of the underlying Funds. These
shares will be voted in accordance with instructions received from Owners who
have an interest in the Variable Account. If the Investment Company Act or any
regulation thereunder should be amended or if the present interpretation
thereof should change, and as a result National Life determines that it is
permitted to vote the shares of the underlying Funds in its own right, it may
elect to do so.
The person having the voting interest under a Contract shall be the
Owner. The number of underlying Fund shares attributable to each Owner is
determined by dividing the Owner's interest in each respective Subaccount of the
Variable Account by the net asset value of the underlying Fund corresponding to
the Subaccount.
The number of shares which a person has the right to vote will be
determined as of the date to be chosen by National Life not more than 90 days
prior to the meeting of the underlying Fund. Voting instructions will be
solicited by written communication at least 21 days prior to such meeting.
Underlying Fund shares held in the Variable Account as to which no
timely instructions are received will be voted by National Life in the same
proportion as the voting instructions which are received with respect to all
Contracts participating in the Variable Account.
Each person having a voting interest will receive periodic reports
relating to the underlying Fund, proxy material and a form with which to give
such voting instructions.
CHANGES TO VARIABLE ACCOUNT
National Life reserves the right to create one or more new separate
accounts, combine or substitute separate accounts, or to add new investments
Funds for use in the Contracts at any time. In addition, if the shares of the
underlying Funds described in this prospectus should no longer be available for
investment by the Variable Account or if, in the judgment of National Life's
management, further investment in such underlying Fund shares should become
inappropriate, National Life may eliminate Subaccounts, combine two or more
Subaccounts or substitute one or more underlying Funds for other underlying
Fund shares already purchased or to be purchased in the future by Premium
Payments under the Contract. No substitution of securities in the Variable
Account may take place without prior approval of the Securities and Exchange
Commission, and under such requirements as it may impose. National Life may
also operate the Variable Account as a management investment company under the
Investment Company Act, deregister the Variable Account under the Investment
Company Act if such registration is no longer required, transfer all or part of
the assets of the Variable Account to another separate account or to the Fixed
Account (subject to obtaining all necessary regulatory approvals), and make any
other changes reasonably necessary under the Investment Company Act or
applicable state law.
ADVERTISING
A "yield" and "effective yield" may be advertised for the Market Street
Money Market Portfolio Subaccount. "Yield" is a measure of the net dividend and
interest income earned over a specific seven-day period (which period will be
stated in the advertisement) expressed as a percentage of the offering price of
the Subaccount's units. Yield is an annualized figure, which means that it is
assumed that the Subaccount generates the same level of net income over a
52-week period. The "effective yield" is calculated similarly but includes the
effect of assumed compounding, calculated under rules prescribed by the
Securities and Exchange Commission. The effective yield will be slightly higher
than yield due to this compounding effect.
40
<PAGE> 47
National Life may also from time to time advertise the performance of
the Subaccount of the Variable Account relative to the performance of other
variable annuity Subaccounts or underlying Funds with similar or different
objectives, or the investment industry as a whole. Other investments to which
the Subaccounts may be compared include, but are not limited to: precious
metals; real estate; stocks and bonds; closed-end funds; CDs; bank money market
deposit accounts and passbook savings; and the Consumer Price Index.
The Subaccounts of the Variable Account may also be compared to certain
market indexes, which may include, but are not limited to: S&P 500;
Shearson/Lehman Intermediate Government/Corporate Bond Index; Shearson/Lehman
Long-Term Government/Corporate Bond Index; Donoghue Money Fund Average; U.S.
Treasury Note Index; Bank Rate Monitor National Index of 2 Year CD Rates; and
Dow Jones Industrial Average.
Normally these rankings and ratings are published by independent
tracking services and publications of general interest including, but not
limited to: Lipper Analytical Services, Inc., CDA/ Wiesenberger, Morningstar,
Donoghue's; magazines such as Money, Forbes, Kiplinger's Personal Finance
Magazine, Financial World, Consumer Reports, Business Week, Time, Newsweek,
National Underwriter, U.S. News and World Report; rating services such as LIMRA,
Value, Best's Agent Guide, Western Annuity Guide, Comparative Annuity Reports;
and other publications such as the Wall Street Journal, Barron's, Investor's
Daily, and Standard & Poor's Outlook. In addition, Variable Annuity Research &
Data Service (The VARDS Report) is an independent rating service that ranks over
500 variable annuity funds based upon total return performance. These rating
services and publications rank the performance of the underlying Funds against
all underlying Funds over specified periods and against funds in specified
categories. The rankings may or may not include the effects of sales or other
charges.
National Life is also ranked and rated by independent financial rating
services, among which are Moody's, Standard & Poor's and A.M. Best. The purpose
of these ratings is to reflect the financial strength or claims-paying ability
of National Life. The ratings are not intended to reflect the investment
experience or financial strength of the Variable Account. National Life may
advertise these ratings from time to time. In addition, National Life may
include in certain advertisements, endorsements in the form of a list of
organizations, individuals or other parties which recommend National Life or the
Contracts. Furthermore, National Life may occasionally include in advertisements
comparisons of currently taxable and tax deferred investment programs, based on
selected tax brackets, or discussions of alternative investment vehicles and
general economic conditions.
National Life may from time to time advertise several types of
historical performance for the Subaccounts of the Variable Account. National
Life may advertise for the Subaccounts standardized "average annual total
return", calculated in a manner prescribed by the Securities and Exchange
Commission, and nonstandardized "total return". "Average annual total return"
will show the percentage rate of return of a hypothetical initial investment of
$1,000 for at least the most recent one, five and ten year period, or for a
period covering the time the underlying Fund option held in the Subaccount has
been in existence, if the underlying Fund option has not been in existence for
one of the prescribed periods. This calculation reflects the deduction of all
applicable charges made to the Contracts except for premium taxes, which may be
imposed by certain states.
Nonstandardized "total return" will be calculated in a similar manner
and for the same time periods as the average annual total return except total
return will assume an initial investment of $10,000 and will not reflect the
deduction of any applicable Contingent Deferred Sales Charge, which, if
reflected, would decrease the level of performance shown. The Contingent
Deferred Sales Charge is not reflected because the Contracts are designed for
long term investment. An assumed initial investment of $10,000 will be used
because that figure more closely approximates the size of a typical Contract
than does the $1,000 figure used in calculating the standardized average annual
total return quotations.
41
<PAGE> 48
The tables below provide performance information for each Subaccount
for specified periods ending December 31, 1996. Because all the Subaccounts had
not commenced operations as of that date, performance information for the
Contracts will be calculated based on the performance of the Fund portfolios and
the assumption that the Subaccounts were in existence for the same periods with
the level of Contract charges that were in effect at the inception of the
Subaccounts.
All performance information and comparative material advertised by
National Life is historical in nature and is not intended to represent or
guarantee future results. An Owner's Contract Value at redemption may be more or
less than original cost.
Below are quotations of standardized average annual total return and
non-standardized total return calculated as described above, for each of the
Subaccounts available within the Variable Account for which there is significant
investment history. These figures are based upon historical earnings and are not
necessarily representative of future results. The first set of charts assumes
that the Enhanced Death Benefit Rider has not been elected by the Owner.
NON-STANDARDIZED TOTAL RETURN
<TABLE>
<CAPTION>
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
12/31/96 12/31/96 12/31/96 12/31/96 EFFECTIVE
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 2.67% 9.42% N/A % 18.48% 9/21/88
Alger American Growth 11.73 14.97 N/A 16.96 1/9/89
Fidelity VIP Fund-Equity Income 12.65 16.29 12.11 N/A 10/9/86
Fidelity VIP Fund-Growth 13.07 13.51 13.50 N/A 10/9/86
Fidelity VIP Fund-High Income 12.39 13.32 9.53 N/A 9/19/85
Fidelity VIP Fund-Overseas 11.53 7.56 N/A 6.32 1/28/87
Fidelity VIP Fund II-Index 500 20.97 N/A N/A 15.37 8/27/92
Fidelity VIP Fund II-Contrafund 19.48 N/A N/A 28.38 1/3/95
Market Street Common Stock N/A N/A N/A 16.50 3/18/96
Market Street Sentinel Growth N/A N/A N/A 12.88 3/18/96
Market Street Aggressive Growth 19.27 6.62 N/A 11.95 5/1/89
Market Street Managed 9.38 9.51 7.31 N/A 12/12/85
Market Street Bond (0.02) 4.61 5.09 N/A 2/24/84
Market Street International 9.29 8.28 N/A 7.55 11/1/91
Market Street Money Market 3.69 2.57 4.11 N/A 2/24/84
Strong Special Fund II, Inc. 16.46 N/A N/A 17.22 5/8/92
Strong Growth Fund II N/A N/A N/A N/A 1/1/97
Van Eck Worldwide Bond 1.04 2.42 N/A 5.15 9/1/89
</TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
12/31/96 12/31/96 12/31/96 12/31/96 EFFECTIVE
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization (4.33)% 9.00% N/A % 18.48% 9/21/88
Alger American Growth 4.73 14.62 N/A 16.96 1/9/89
Fidelity VIP Fund-Equity Income 5.65 15.96 12.11 N/A 10/9/86
Fidelity VIP Fund-Growth 6.07 13.15 13.50 N/A 10/9/86
Fidelity VIP Fund-High Income 5.93 12.95 9.53 N/A 9/19/85
Fidelity VIP Fund-Overseas 4.53 7.11 N/A 6.32 1/28/87
Fidelity VIP Fund II-Index 500 13.97 N/A N/A 14.94 8/27/92
Fidelity VIP Fund II-Contrafund 12.48 N/A N/A 26.02 1/3/95
Market Street Common Stock N/A N/A N/A 7.45 3/18/96
Market Street Sentinel Growth N/A N/A N/A 3.89 3/18/96
Market Street Aggressive Growth 12.27 6.15 N/A 11.95 5/1/89
Market Street Managed 2.38 9.09 7.31 N/A 12/12/85
Market Street Bond (7.02) 4.10 5.09 N/A 2/24/84
Market Street International 2.29 7.84 N/A 7.26 11/1/91
Market Street Money Market (3.31) 2.02 4.11 N/A 2/24/84
Strong Special Fund II, Inc. 9.46 N/A N/A 16.85 5/8/92
Strong Growth Fund II N/A N/A N/A N/A 1/1/97
Van Eck Worldwide Bond (5.96) 1.87 N/A 5.15 9/1/89
</TABLE>
42
<PAGE> 49
The following quotations of standardized and non-standardized total
return assume that the Owner has elected the Enhanced Death Benefit Rider:
NON-STANDARDIZED TOTAL RETURN
<TABLE>
<CAPTION>
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
12/31/96 12/31/96 12/31/96 12/31/96 EFFECTIVE
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 2.47% 9.20% N/A % 18.24% 9/21/88
Alger American Growth 11.50 14.74 N/A 16.73 1/9/89
Fidelity VIP Fund-Equity Income 12.43 16.06 11.88 N/A 10/9/86
Fidelity VIP Fund-Growth 12.84 13.29 13.28 N/A 10/9/86
Fidelity VIP Fund-High Income 12.17 13.10 9.31 N/A 9/19/85
Fidelity VIP Fund-Overseas 11.31 7.35 N/A 6.11 1/28/87
Fidelity VIP Fund II-Index 500 20.73 N/A N/A 15.13 8/27/92
Fidelity VIP Fund II-Contrafund 19.25 N/A N/A 28.13 1/3/95
Market Street Common Stock N/A N/A N/A 16.26 3/18/96
Market Street Sentinel Growth N/A N/A N/A 12.64 3/18/96
Market Street Aggressive Growth 19.03 6.41 N/A 11.73 5/1/89
Market Street Managed 9.16 9.29 7.09 N/A 12/12/85
Market Street Bond (0.22) 4.40 4.88 N/A 2/24/84
Market Street International 9.08 8.06 N/A 7.33 11/1/91
Market Street Money Market 3.48 2.36 3.90 N/A 2/24/84
Strong Special Fund II, Inc. 16.23 N/A N/A 16.99 5/8/92
Strong Growth Fund II N/A N/A N/A N/A 1/1/97
Van Eck Worldwide Bond 0.84 2.22 N/A 4.94 9/1/89
</TABLE>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN
<TABLE>
<CAPTION>
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
12/31/96 12/31/96 12/31/96 12/31/96 EFFECTIVE
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization (4.53)% 8.78% N/A % 18.24% 9/21/88
Alger American Growth 4.50 14.39 N/A 16.73 1/9/89
Fidelity VIP Fund-Equity Income 5.43 15.73 11.88 N/A 10/9/86
Fidelity VIP Fund-Growth 5.84 12.92 13.28 N/A 10/9/86
Fidelity VIP Fund-High Income 5.17 12.73 9.31 N/A 9/19/85
Fidelity VIP Fund-Overseas 4.31 6.89 N/A 6.11 1/28/87
Fidelity VIP Fund II-Index 500 13.73 N/A N/A 14.70 8/27/92
Fidelity VIP Fund II-Contrafund 12.25 N/A N/A 25.76 1/3/95
Market Street Common Stock N/A N/A N/A 7.21 3/18/96
Market Street Sentinel Growth N/A N/A N/A 3.66 3/18/96
Market Street Aggressive Growth 12.03 5.94 N/A 11.73 5/1/89
Market Street Managed 2.16 8.87 7.09 N/A 12/12/85
Market Street Bond (7.22) 3.89 4.88 N/A 2/24/84
Market Street International 2.08 7.62 N/A 7.04 11/1/91
Market Street Money Market (3.52) 1.81 3.90 N/A 2/24/84
Strong Special Fund II, Inc. 9.23 N/A N/A 16.62 5/8/92
Strong Growth Fund II N/A N/A N/A N/A 1/1/97
Van Eck Worldwide Bond 6.16 1.66 N/A 4.94 9/1/89
</TABLE>
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the contracts is ESI, which is an
SEC-registered broker-dealer firm which is a member of the National Association
of Securities Dealers, Inc. ESI is a wholly-owned subsidiary of National Life.
It distributes a full line of securities products, including mutual funds, unit
investment trusts, and variable insurance contracts, and provides individual
securities brokerage
43
<PAGE> 50
services. The maximum commission payable for selling the Contracts will
generally be 6.5%; however, during an introductory period of approximately six
months to be announced by National Life, the maximum commission payable on
Contracts purchased in such state will be 7.0%.
STATEMENTS AND REPORTS
National Life will mail to Owners, at their last known address of
record, any statements and reports required by applicable laws or regulations.
Owners should therefore give National Life prompt notice of any address change.
National Life will send a confirmation statement to Owners each time a
transaction is made affecting the Owner's Variable Account Contract Value, such
as making additional Premium Payments, transfers, exchanges or Withdrawals.
Quarterly statements are also mailed detailing the Contract activity during the
calendar quarter. Instead of receiving an immediate confirmation of transactions
made pursuant to some types of periodic payment plans (such as a dollar cost
averaging program) or salary reduction arrangement, the Owner may receive
confirmation of such transactions in their quarterly statements. The Owner
should review the information in these statements carefully. All errors or
corrections must be reported to National Life immediately to assure proper
crediting to the Owner's Contract. National Life will assume all transactions
are accurately reported on quarterly statements or confirmation statements
unless the Owner notifies National Life otherwise within 30 days after receipt
of the statement. National Life will also send to Owners each year an annual
report and a semi-annual report containing financial statements for the Variable
Account, as of December 31 and June 30, respectively.
OWNER INQUIRIES
Owner inquiries may be directed to National Life Insurance Company by
writing to it at National Life Drive, Montpelier, Vermont 05604, or calling
1-800-527-7003.
LEGAL PROCEEDINGS
There are no material legal proceedings involving National Life or the
Variable Account, other than ordinary routine litigation incidental to the
business to which National Life is a party or to which any of its property is
the subject. ESI is not engaged in any litigation of any material nature.
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
National Life Insurance Company.......................................
Additional Contract Provisions........................................
The Contract.................................................
Misstatement of Age or Sex...................................
Dividends....................................................
Assignment...................................................
Calculation of Yields and Total Returns...............................
Money Market Subaccount Yields...............................
Other Subaccount Yields......................................
Average Annual Total Returns.................................
Other Total Returns..........................................
Effect of the Annual Contract Fee on Performance Data........
Distribution of the Contracts ........................................
Safekeeping of Account Assets.........................................
State Regulation......................................................
Records and Reports...................................................
Legal Matters.........................................................
Experts
Other Information.....................................................
Financial Statements
1996-1995 Financial Statements...............................
1995-1994 Statutory Basis Financial Statements...............
44
<PAGE> 51
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 52
PART B
ITEM OF FORM N-4 PART B CAPTION
15. Cover Page ......................Cover Page
16. Table of Contents ...............Table of Contents
17. General Information and
History ........................NATIONAL LIFE INSURANCE
COMPANY
18. Services
(a) Fees and Expenses of
Registrant ................Charges and Deductions
(prospectus)
(b) Management Contracts ......N/A
(c) Custodian .................Safekeeping of Account
Assets
Independent Public
Accountant ................Experts
(d) Assets of Registrant ......The Variable Account
(prospectus)
(e) Affiliated Persons ........N/A
(f) Principal Underwriter .....Distribution of the
Contracts
19. Purchase of Securities
Being Offered ..................Distribution of the
Contracts
Offering Sales Load ............N/A
20. Underwriters ....................Distribution of the
Contracts
21. Calculation of Performance
Data ............................Calculation of Yields and
Total Returns
22. Annuity Payments ................Annuity Payment Options
(prospectus)
23. Financial Statements ............Financial Statements
<PAGE> 53
PART C -- OTHER INFORMATION
ITEM OF FORM N-4 PART C CAPTION
24. Financial Statements
and Exhibits ...................Financial Statements and
Exhibits
(a) Financial Statements .......(a) Financial Statements
(b) Exhibits ...................(b) Exhibits
25. Directors and Officers
of the Depositor ................Directors and Officers of
the Depositor
26. Persons Controlled By or
Under Common Control with the
Depositor or Registrant ........Persons Controlled By or
Under Common Control with
the Depositor or
Registrant
27. Number of Contractowners ........Number of Contract Owners
28. Indemnification .................Indemnification
29. Principal Underwriters ..........Principal Underwriter
30. Location of Accounts
and Records .....................Location of Books and
Records
31. Management Services .............Management Services
32. Undertakings ....................Undertakings and
Representations
Signature Page ..................Signatures
<PAGE> 54
NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF ADDITIONAL INFORMATION
NATIONAL VARIABLE ANNUITY ACCOUNT II
THE SENTINEL ADVANTAGE VARIABLE ANNUITY CONTRACT
OFFERED BY
NATIONAL LIFE INSURANCE COMPANY
National Life Drive
Montpelier, Vermont 05604
This Statement of Additional Information expands upon subjects
discussed in the current Prospectus for the above-named Sentinel Advantage
Variable Annuity Contract ("Contract") offered by National Life Insurance
Company. You may obtain a copy of the Prospectus dated ________________ by
calling 1-800-537-7003, or writing to National Life Insurance Company, One
National Life Drive, Montpelier, Vermont 05604. Definitions of terms used in
the current Prospectus for the Contract are incorporated in this Statement of
Additional Information.
THIS STATEMENT OF ADDITIONAL INFORMATION IS
NOT A PROSPECTUS AND SHOULD BE READ ONLY IN
CONJUNCTION WITH THE PROSPECTUS FOR THE CONTRACT.
Dated __________, 1997
1
<PAGE> 55
TABLE OF CONTENTS
National Life Insurance Company.................................................
Additional Contract Provisions..................................................
The Contract...........................................................
Misstatement of Age or Sex.............................................
Dividends..............................................................
Assignment.............................................................
Calculation of Yields and Total Returns.........................................
Money Market Subaccount Yields.........................................
Other Subaccount Yields................................................
Average Annual Total Returns...........................................
Other Total Returns....................................................
Effect of the Annual Contract Fee on Performance Data..................
Distribution of the Contracts ..................................................
Safekeeping of Account Assets...................................................
State Regulation................................................................
Records and Reports.............................................................
Legal Matters...................................................................
Experts
Other Information...............................................................
Financial Statements
1996-1995 Financial Statements.........................................
1995-1994 Statutory Basis Financial Statements.........................
2
<PAGE> 56
NATIONAL LIFE INSURANCE COMPANY
National Life Insurance Company ("National Life") has operated as a
mutual life insurance company since 1848 under a charter granted by the State of
Vermont, and has done business continuously as "National Life Insurance
Company."
ADDITIONAL CONTRACT PROVISIONS
The Contract
The entire contract is made up of the Contract and the application. The
statements made in the application are deemed representations and not
warranties. National Life cannot use any statement in defense of a claim or to
void the Contract unless it is contained in the application and a copy of the
application is attached to the Contract at issue.
Misstatement of Age or Sex
If the age or sex of the Chosen Human Being has been misstated, the
amount which will be paid is that which is appropriate to the correct age
and sex.
If an underpayment is made because of an error in age or sex, the
underpayment, with interest at 6% compounded annually, will be paid in one sum
by National Life.
Dividends
The Contract is participating; however, no dividends are expected to be
paid on the Contract. If dividends are ever declared, they will be paid in cash.
Assignment
Where permitted, the Owner may assign some or all of the rights under
the Contract at any time during the lifetime of the Annuitant prior to the
Annuitization Date. Such assignment will take effect upon receipt and recording
by National Life at its Home Office of a written notice executed by the Owner.
National Life assumes no responsibility for the validity or tax consequences of
any assignment. National Life shall not be liable as to any payment or other
settlement made by National Life before recording of the assignment. Where
necessary for the proper administration of the terms of the Contract, an
assignment will not be recorded until National Life has received sufficient
direction from the Owner and assignee as to the proper allocation of Contract
rights under the assignment.
Any portion of Contract Value which is pledged or assigned shall be
treated as a Distribution and shall be included in gross income to the extent
that the cash value exceeds the investment in the Contract for the taxable year
in which assigned or pledged. In addition, any Contract Values assigned may,
under certain conditions, be subject to a tax penalty equal to 10% of the amount
which is included in gross income.
3
<PAGE> 57
entire Contract Value may cause the portion of the Contract Value which exceeds
the total investment in the Contract and previously taxed amounts to be included
in gross income for federal income tax purposes each year that the assignment is
in effect. Qualified Contracts are not eligible for assignment.
CALCULATION OF YIELDS AND TOTAL RETURNS
From time to time, National Life may disclose yields, total returns,
and other performance data pertaining to the Contracts or a Subaccount. Such
performance data will be computed, or accompanied by performance data computed,
in accordance with the standards defined by the Securities and Exchange
Commission.
Because of the charges and deductions imposed under a Contract, the
yield for the Subaccounts will be lower than the yield for their respective
Portfolios. The calculations of yields, total returns, and other performance
data do not reflect the effect of any premium tax that may be applicable to a
particular Contract. Premium taxes currently rate from 0% to 3.5% of premium
based on the state in which the Contract is sold.
Money Market Subaccount Yields
From time to time, advertisements and sales literature may quote the
current annualized yield of the Money Market Subaccount for a seven-day period
in a manner which does not take into consideration any realized or unrealized
gains or losses on shares of the Market Street Money Market Portfolio or on its
portfolio securities.
This current annualized yield is computed by determining the net change
(exclusive of realized gains and losses on the sale of securities and unrealized
appreciation and depreciation) at the end of the seven-day period in the value
of a hypothetical account under a Contract having a balance of 1 unit of the
Money Market Subaccount at the beginning of the period, dividing such net change
in account value by the value of the hypothetical account at the beginning of
the period to determine the base period return, and annualizing this quotient on
a 365-day basis. The net change in account value reflects: 1) net income from
the Portfolio attributable to the hypothetical account; and 2) charges and
deductions imposed under the Contract which are attributable to the hypothetical
account. The charges and deductions include the per unit charges for the
hypothetical account for: 1) the Annual Contract Fee; 2) Administration Charge;
and 3) the Mortality and Expense Risk Charge. For purposes of calculating
current yields for a Contract, an average per unit Annual Contract Fee is used
based on the $30 Annual Contract Fee deducted at the beginning of each Contract
Year. For the class of Contracts with the Enhanced Death Benefit Rider, the
charge for that optional benefit will be included. Current Yield will be
calculated according to the following formula:
Current Yield = ((NCS - ES) /UV) x (365/7)
Where:
NCS = the net change in the value of the Portfolio
(exclusive of realized gains or losses on the sale of
securities and unrealized appreciation and
4
<PAGE> 58
depreciation) for the seven-day period attributable
to a hypothetical account having a balance of 1
Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven-day period.
UV = The unit value on the first day of the seven-day period.
The effective yield of the Money Market Subaccount determined on a
compounded basis for the same seven-day period may also be quoted.
The effective yield is calculated by compounding the unannualized base
period return according to the following formula:
365/7
Effective Yield = (1 + (NCS - ES)/UV)) - 1
Where:
NCS = the net change in the value of the Portfolio (exclusive
of realized gains or losses on the sale of securities and
unrealized appreciation and depreciation) for the seven-
day period attributable to a hypothetical account having
a balance of 1 Subaccount unit.
ES = per unit expenses attributable to the hypothetical
account for the seven day period.
UV = The unit value on the first day of the seven-day period.
Because of the charges and deductions imposed under the Contract, the
yield for the Money Market Subaccount will be lower than the yield for the
Market Street Money Market Portfolio.
The current yield for the Money Market Subaccount as of December 31,
1996 was 3.66%, and the effective yield for that Subaccount as of the same date
was 3.72%. These yields were calculated based on the performance of the Market
Street Money Market Portfolio for the seven days ended December 31, 1996, and
the assumption that the Money Market Subaccount was in existence for this
period with the level of Contract charges that was in effect at the inception
of the Money Market Subaccount.
The current and effective yields on amounts held in the Money Market
Subaccount normally will fluctuate on a daily basis. THEREFORE, THE DISCLOSED
YIELD FOR ANY GIVEN PAST PERIOD IS NOT AN INDICATION OR REPRESENTATION OF FUTURE
YIELDS OR RATES OF RETURN. The Money Market Subaccount's actual yield is
affected by changes in interest rates on money market securities, average
portfolio maturity of the Market Street Money Market Portfolio, the types of
quality of portfolio securities held by the Market Street Money Market Portfolio
and the Market Street Money Market Portfolio's operating expenses. Yields on
amounts held in the Money Market Subaccount may also be presented for periods
other than a seven-day period.
Other Subaccount Yields
From time to time, sales literature or advertisements may quote the
current annualized yield of one or more of the Subaccounts (except the Money
Market Subaccount) for a Contract for 30-day or one-month periods. The
annualized yield of a Subaccount refers to income generated by the Subaccount
over a specific 30-day or one-month period. Because the yield is annualized, the
yield generated by a Subaccount during a 30-day or one-month period is assumed
to be generated each period over a 12-month period.
5
<PAGE> 59
The yield is computed by: 1) dividing the net investment income of the
Portfolio attributable to the Subaccount units less Subaccount expenses for the
period; by (2) the maximum offering price per unit on the last day of the period
times the daily average number of units outstanding for the period; by 3)
compounding that yield for a six-month period; and by 4) multiplying that result
by 2. Expenses attributable to the Subaccount include the Annual Contract Fee,
the Administration Charge and the Mortality and Expense Risk Charge. For the
class of Contracts with the Enhanced Death Benefit Rider, the charge for that
optional benefit will be included. For purposes of calculating the 30-day or
one -month yield, an average Annual Contract Fee per dollar of Contract Value
in the Variable Account is used to determine the amount of the charge
attributable to the Subaccount for the 30-day or one-month period. The 30-day
or one-month yield is calculated according to the following formula:
6
Yield = 2 x (((NI - ES)/(U x UV)) + 1) -1)
Where:
NI = net income of the Portfolio for the 30-day or one-month period
attributable to the Subaccount's units.
ES = expenses of the Subaccount for the 30-day or one-month period.
U = the average number of units outstanding.
UV = the unit value at the close (highest) of the last day in the
30-day or one-month period.
Because of the charges and deductions imposed under the Contracts, the
yield for the Subaccount will be lower than the yield for the corresponding
Fund.
The yield on the amounts held in the Subaccounts normally will
fluctuate over time. Therefore, the disclosed yield for any given past period is
not an indication or representation of future yields or rates of return. The
Subaccount's actual yield is affected by the types and quality of portfolio
securities held by the Portfolio and its operating expenses.
Yield calculations do not take into account the Surrender Charge under
the Contract equal to from 1% to 7% of premiums paid during the seven years
prior to the surrender or Withdrawal (including the year in which the surrender
is made) on amounts surrendered or withdrawn under the Contract. A Surrender
Charge will not be imposed on Withdrawals in any Contract Year on an amount up
to 15% of the Contract Value as of the most recent Contract Anniversary.
However, if a Contract is subsequently surrendered within a year after taking a
Withdrawal that benefits from the CDSC-free provision, then a CDSC will be
assessed at the time of the surrender as if the surrender had been taken as a
single step.
Average Annual Total Returns
6
<PAGE> 60
From time to time, sales literature or advertisements may also quote
average annual total returns for periods prior to the date the Variable Account
commenced operations. For those periods, performance information for the
Contracts will be calculated based on the performance of the Fund Portfolios and
the assumption that the Subaccounts were in existence for the same periods with
the level of Contract charges that were in effect at the inception of the
Subaccounts.
Average annual total returns represent the average annual compounded
rates of return that would equate an initial investment of $1,000 under a
Contract to the redemption value of that investment as of the last day of each
of the periods. The ending date for each period for which total return
quotations are provided will be for the most recent month-end practicable,
considering the type and media of the communication and will be stated in the
communication.
For purposes of calculating average annual total return, an average
per dollar Annual Contract fee attributable to the hypothetical account for the
period is used. The calculation also assumes surrender of the Contract at the
end of the period for the return quotation. Total returns will therefore
reflect a deduction of the CDSC for any period less than seven years. The
average annual total return will then be calculated according to the following
formula:
TR = ( ( ERV/P) 1/N) - 1
Where:
TR = the average annual total return net of Subaccount
recurring charges.
ERV= the ending redeemable value (net of any applicable
surrender charge) of the hypothetical account at the end
of the period.
P = a hypothetical initial payment of $1,000.
N = the number of years in the period.
The Funds have provided the total return information, including the
Fund total return information used to calculate the total returns of the
Subaccounts for periods prior to the inception of the Subaccounts. The Alger
American Fund, Variable Insurance Products Fund, Variable Insurance Product
Fund II, Strong Special Fund II, Inc. and Strong Variable Insurance Funds Inc.
are not affiliated with National Life.
Average annual total return may be calculated either taking into
account or not taking into account the impact of the Enhanced Death Benefit
Rider.
7
<PAGE> 61
Such average annual total return information for the Subaccounts is set
forth in the Prospectus.
Other Total Returns
From time to time, sales literature or advertisements may also quote
average annual total returns that do not reflect the Surrender Charge. These are
calculated in exactly the same way as average annual total returns described
above, except that the ending redeemable value of the hypothetical account for
the period is replaced with an ending value for the period that does not take
into account any charges on amounts surrendered or withdrawn, and that the
initial investment is assumed to be $10,000 rather than $1,000. Such information
is also set forth in the Prospectus.
National Life may disclose Cumulative Total Returns in conjunction with
the standard formats described above. The Cumulative Total Returns will be
calculated using the following formula:
CTR = (ERV/P) - 1
Where:
CTR = The Cumulative Total Return net of Subaccount recurring
charges for the period.
ERV = The ending redeemable value of the hypothetical investment
at the end of the period.
P = A hypothetical single payment of $1,000.
Effect of the Annual Contract Fee on Performance Data
The Contract provides, for all Contracts with a Contract Value of less
than $50,000 on the Date of Issue or any subsequent Contract Anniversary, for a
$30 Annual Contract Fee to be deducted annually at the beginning of each
Contract Year, from the Subaccounts and the unloaned portion of the Fixed
Account based on the proportion that the value of each such account bears to
the total Contract Value. For purposes of reflecting the Annual Contract Fee in
the yield and total return quotations, the Annual Contract Fee is converted
into a per-dollar per-day charge. The per-dollar per-day charge has been
estimated based on the distribution of National Life's non-variable single
premium deferred annuity block of business.
8
<PAGE> 62
The per-dollar per-day average charge will then be adjusted to reflect the
basis upon which the particular quotation is calculated.
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the Contracts is Equity Services, Inc., a
wholly-owned subsidiary of the Company. The Contracts will be offered on a
continuous basis and will be sold by licensed insurance agents in the states
where the Contracts may lawfully be sold. Such agents will be representatives of
broker-dealers registered under the Securities Exchange Act of 1934 who are
members of the National Association of Securities Dealers, Inc. Broker-dealers
other than Equity Services, Inc. will have executed Selling Agreements with
Equity Services, Inc.
SAFEKEEPING OF ACCOUNT ASSETS
National Life holds the title to the assets of the Variable Account. The
assets are kept physically segregated and held separate and apart from the
Company's General Account assets and from the assets in any other separate
account.
Records are maintained of all purchases and redemptions of Fund shares
held by each of the Subaccounts.
STATE REGULATION
National Life is subject to regulation and supervision by the Insurance
Department of the State of Vermont which periodically examines its affairs. It
is also subject to the insurance laws and regulations of all jurisdictions where
it is authorized to do business. A copy of the Contract form has been filed
with, and where required approved by, insurance officials in each jurisdiction
where the Contracts are sold. National Life is required to submit annual
statements of its operations, including financial statements, to the insurance
departments of the various jurisdictions in which it does business for the
purposes of determining solvency and compliance with local insurance laws and
regulations.
RECORDS AND REPORTS
National Life will maintain all records and accounts relating to the
Variable Account. As presently required by the Investment Company Act of 1940
and regulations promulgated thereunder, reports containing such information as
may be required under the Act or by any other applicable law or regulation will
be sent to Contract Owners semi-annually at the last address known to the
Company.
LEGAL MATTERS
All matters relating to Vermont law pertaining to the Contracts,
including the validity of the Contracts and National Life's authority to issue
the Contracts, have been passed upon by D. Russell Morgan, Counsel of
National Life. Sutherland, Asbill & Brennan L.L.P.
9
<PAGE> 63
of Washington, D.C. has provided advice on certain matters relating to the
Federal securities laws.
EXPERTS
The financial statements of National Life as of and for the years
ended December 31, 1996 and 1995, and the statutory basis financial statements
of National Life as of and for the years ended December 31, 1995 and 1994,
which are included in this Statement of Additional Information and in the
registration statement, have been audited by Price Waterhouse LLP, independent
auditors, of National Life Building - 2nd Floor, One National Life Drive,
Montpelier, Vermont 05602, as set forth in their report included herein, and
are included herein in reliance upon such report and upon the authority of such
firm as experts in accounting and auditing.
OTHER INFORMATION
A registration statement has been filed with the SEC under the
Securities Act of 1933 as amended, with respect to the Contracts discussed in
this Statement of Additional Information. Not all the information set forth in
the registration statement, amendments and exhibits thereto has been included in
this Statement of Additional Information. Statements contained in this Statement
of Additional Information concerning the content of the Contracts and other
legal instruments are intended to be summaries. For a complete statement of the
terms of these documents, reference should be made to the instruments filed with
the SEC at 450 Fifth Street, N.W., Washington, DC 20549.
FINANCIAL STATEMENTS
National Life's financial statements as of and for the years ended
December 31, 1996 and 1995 and the statutory basis financial statements as of
and for the years ended December 31, 1995 and 1994, which are included in this
Statement of Additional Information, should be considered only as bearing on
National Life's ability to meet its obligations under the Contracts. They
should not be considered as bearing on the investment performance of the assets
held in the Variable Account.
10
<PAGE> 64
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
* * * * *
DECEMBER 31, 1996 AND 1995
F-1
<PAGE> 65
[PRICE WATERHOUSE LLP LETTERHEAD]
Report of Independent Accountants
April 15, 1997
To the Board of Directors and
Policyowners of National Life Insurance Company
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statements of operations and policyowners' equity, and cash flows
present fairly, in all material respects, the financial position of National
Life Insurance Company and its subsidiaries at December 31, 1996 and 1995, and
the results of their operations and their cash flows for the years then ended
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for the
opinion expressed above.
As discussed in Note 2, the Company changed its accounting policies to adopt
pronouncements of the Financial Accounting Standards Board, which are effective
for 1996 financial statements and require restatement of all prior periods
presented.
/s/ PRICE WATERHOUSE LLP
F-2
<PAGE> 66
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
DECEMBER 31,
- ---------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 268,235 $ 310,905
Debt and equity securities
Available-for-sale, at fair value 4,393,046 3,240,480
Held-to-maturity, at amortized cost 590,700 477,708
Mortgage loans 907,024 649,892
Policy loans 796,193 735,852
Real estate investments 99,442 97,612
Other invested assets 78,596 25,733
- ---------------------------------------------------------------------------------------------------------
Total cash and invested assets 7,133,236 5,538,182
Deferred policy acquistion costs 421,584 327,629
Due and accrued investment income 120,753 96,852
Premiums and fees receivable 25,874 23,648
Deferred income taxes 33,514 1,924
Amounts recoverable from reinsurers 190,873 161,997
Present value of future profits of insurance acquired 80,957 -
Property and equipment, net 64,302 62,418
Other assets 51,453 49,810
Separate account assets 181,771 177,890
- ---------------------------------------------------------------------------------------------------------
Total assets $ 8,304,317 $ 6,440,350
=========================================================================================================
LIABILITIES:
Policy liabilities:
Policy benefit liabilities $ 3,701,597 $ 3,484,844
Policyowners' account balances 3,051,973 1,431,386
Policyowners' deposits 37,524 36,642
Policy claims payable 31,217 25,545
Policyowners' dividends 51,792 47,025
Other liabilities and accrued expenses 394,127 396,407
Debt 82,682 69,679
Separate account liabilities 165,234 167,162
- ---------------------------------------------------------------------------------------------------------
Total liabilities 7,516,146 5,658,690
- ---------------------------------------------------------------------------------------------------------
MINORITY INTERESTS 39,263 1,569
POLICYOWNERS' EQUITY:
Net unrealized gain on available-for-sale securities 28,867 77,173
Retained earnings 720,041 702,918
- ---------------------------------------------------------------------------------------------------------
Total policyowners' equity 748,908 780,091
- ---------------------------------------------------------------------------------------------------------
Total liabilities, minority interests and policyowners' equity $ 8,304,317 $ 6,440,350
=========================================================================================================
</TABLE>
F-3
The accompanying notes are an integral part of these financial statements.
<PAGE> 67
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS AND POLICYOWNERS' EQUITY
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ----------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
REVENUES:
Insurance premiums $ 406,286 $ 418,227
Universal life and investment-type policy charges 41,745 36,900
Net investment income 517,268 396,079
Realized investment (losses) gains (2,070) 33,925
Investment advisory fees 42,256 34,278
Other income 21,278 19,845
- ----------------------------------------------------------------------------------------------------
Total revenue 1,026,763 939,254
- ----------------------------------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Policy benefits 297,564 278,123
Policyowners' dividends 105,690 98,952
Interest credited to policyowners' account balances 170,955 90,037
Increase in reserves 166,668 187,433
Operating expenses 148,716 124,425
Commissions and expense allowances 95,517 80,050
Deferral of acquisition costs (53,600) (44,331)
Amortization of deferred policy acquisition costs 40,248 42,234
- ----------------------------------------------------------------------------------------------------
Total benefits and expenses 971,758 856,923
- ----------------------------------------------------------------------------------------------------
Income before income taxes and minority interests 55,005 82,331
Income taxes 31,957 31,365
Minority interests in subsidiary earnings 5,925 2,968
- ----------------------------------------------------------------------------------------------------
NET INCOME 17,123 47,998
RETAINED EARNINGS:
Beginning of year 702,918 654,920
- ----------------------------------------------------------------------------------------------------
End of year $ 720,041 $ 702,918
====================================================================================================
NET UNREALIZED GAIN (LOSS) ON AVAILABLE-FOR-SALE SECURITIES:
Beginning of year $ 77,173 $ (23,195)
Change during year (48,306) 100,368
- ----------------------------------------------------------------------------------------------------
End of year $ 28,867 $ 77,173
====================================================================================================
</TABLE>
F-4
The accompanying notes are an integral part of these financial statements.
<PAGE> 68
NATIONAL LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOW
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
- ------------------------------------------------------------------------------------------------------------
(In Thousands) 1996 1995
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 17,123 $ 47,998
Adjustments to reconcile net income to net cash provided by operations:
Change in due and accrued investment income (1,502) (4,785)
Realized investment gains (2,070) (33,925)
Change in policy benefit liabilities 144,723 146,727
Change in deferred policy acquisition costs (9,956) (2,097)
Depreciation 4,283 3,709
Change in policyowners' dividends 4,975 (5,102)
Change in deferred income taxes (13,646) (9,771)
Other (8,538) 30,154
- ------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 135,392 172,908
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of investments 2,157,236 1,814,927
Investment maturities and repayments 340,412 89,919
Cost of investments acquired (2,714,560) (2,126,075)
Acquisition of LSW National Holdings, net (81,551) -
Other 4,793 27,587
- ------------------------------------------------------------------------------------------------------------
Net cash used by investing activities (293,670) (193,642)
- ------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Policyowners' account balances:
Deposits, including interest credited 535,932 279,889
Withdrawals, including policy charges (418,775) (239,354)
Net (decrease) increase in borrowings under repurchase agreements (51,013) 51,013
Net increase in securities lending liabilities 31,717 31,489
Other 17,747 3,012
- ------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities 115,608 126,049
- ------------------------------------------------------------------------------------------------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (42,670) 105,315
CASH AND CASH EQUIVALENTS:
Beginning of year 310,905 205,590
- ------------------------------------------------------------------------------------------------------------
End of year $ 268,235 $ 310,905
============================================================================================================
</TABLE>
F-5
The accompanying notes are an integral part of these financial statements.
<PAGE> 69
NATIONAL LIFE INSURANCE COMPANY and SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996 and 1995
NOTE 1 - NATURE OF OPERATIONS
National Life Insurance Company (National Life) was chartered in 1848 and is
among ten oldest insurance companies and the 25 largest mutual life insurance
companies in the United States. National Life is also known by its registered
trade name "National Life of Vermont". National Life employs about 1,000 people
in its home office in Montpelier, Vermont. As a mutual life insurance company,
National Life has no shareholders. With its affiliates and subsidiaries,
National Life offers a broad range of financial services and products,
including life insurance, annuities, disability income insurance and mutual
funds.
National Life primarily develops and distributes traditional and universal
individual life insurance and annuity products. National Life markets its
products primarily to small business owners, professionals and high net worth
individuals by providing financial solutions in the form of estate, business
succession and retirement planning, deferred compensation and other key
executive fringe benefit plans. Insurance and annuity products are primarily
distributed through about 50 general agencies in major metropolitan areas
throughout the United States. National Life also distributes its products
through brokers and banks. National Life has more than 250,000 policyowners and
is licensed to do business in all 50 states and the District of Columbia.
About 27% of National Life's total collected premiums are from residents of New
York and California.
Through affiliates National Life also distributes and provides investment
advisory and administrative services to the Sentinel Funds, a family of twelve
mutual funds that is one of America's oldest mutual funds. The Sentinel Funds'
$2.3 billion of net assets are managed on behalf of about 102,300 individual,
corporate and institutional shareholders worldwide.
During 1996, National Life acquired a majority interest in Life Insurance
Company of the Southwest (LSW), a Dallas, Texas based financial services
company specializing in annuities. LSW is licensed in all states but New York.
LSW's customer focus has been mainly on teachers and employees of non-profit
institutions, with particular concentration in the west and the southwest.
About 60% of LSW's total collected premiums are from residents of California,
Texas and Florida.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying consolidated financial statements of National Life and
subsidiaries have been prepared in conformity with generally accepted
accounting principles (GAAP).
The consolidated financial statements include the accounts of National Life
Insurance Company and its subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
F-6
<PAGE> 70
ACCOUNTING CHANGES
Prior to these 1996 financial statements, National Life prepared its financial
statements in accordance with statutory accounting practices prescribed or
permitted by the State of Vermont Department of Banking, Insurance, Securities
and Health Care Administration, its domicillary insurance regulator. Prior to
1996, statutory basis financial statements were considered in conformity with
GAAP for mutual life insurance companies.
In 1993 through 1995, the Financial Accounting Standards Board and the American
Institute of Certified Public Accountants issued certain pronouncements that
redefined generally accepted accounting principles for mutual life insurance
companies. Beginning in 1996, statutory basis financial statements are no
longer considered in conformity with GAAP.
The accompanying GAAP financial statements apply all applicable authoritative
accounting pronouncements required to meet the new standards. The 1995
information included in these financial statements has been restated on a GAAP
basis to enhance comparability with the 1996 information, consistent with the
transition provisions of the new accounting standards. The cumulative effect on
1995 beginning policyowners' equity was as follows (in thousands):
<TABLE>
<CAPTION>
Effect on beginning
policyowners' equity
- --------------------------------------------------------------------------------------------
<S> <C>
Asset valuation reserve $ 49,681
Interest maintenance reserve 31,663
Surplus notes (69,675)
Non-admitted assets 16,492
Investments 7,294
Deferred policy acquisition costs 437,516
Deferred income taxes 33,292
Policy liabilities (174,976)
Policyowners' dividends 60,945
Benefit plans (40,113)
Net unrealized loss on available-for-sale securities (23,195)
Other changes, net (14,133)
- --------------------------------------------------------------------------------------------
Increase in policyowners' equity from conversion to GAAP 314,791
Statutory surplus, December, 31, 1994; as previously reported 316,934
- --------------------------------------------------------------------------------------------
GAAP policyowners' equity, January 1, 1995 $ 631,725
============================================================================================
January 1, 1995:
Net unrealized loss on available-for-sale securities $ (23,195)
Retained earnings 654,920
- --------------------------------------------------------------------------------------------
Total policyowners' equity $ 631,725
============================================================================================
</TABLE>
INVESTMENTS
Cash and cash equivalents include highly liquid debt instruments purchased with
remaining maturities of three months or less.
Debt and equity securities are designated as available-for-sale or
held-to-maturity where the company has the ability and intent to hold
securities to maturity. Available-for-sale securities are reported at estimated
fair value. Held-to-maturity securities are reported at amortized cost. Debt
and equity securities that experience declines in value that are other than
temporary are written down with a corresponding charge to realized losses.
Mortgage loans are reported at amortized cost, less valuation allowances for
the excess, if any, of the
F-7
<PAGE> 71
amortized cost of impaired loans over the estimated fair value of the related
collateral. Changes in valuation allowances are included in realized gains and
losses.
Policy loans are reported at their unpaid balance and are fully collateralized
by related cash surrender values.
Real estate investments are reported at depreciated cost. Real estate acquired
in satisfaction of debt is transferred to real estate at the lower of the
recorded investment in the loan, including accrued interest, or estimated fair
value.
Realized investment gains and losses are recognized using the specific
identification method and include changes in valuation allowances. Changes in
the estimated fair values of available-for-sale debt and equity securities are
reflected in policyowners' equity after adjustments for related deferred policy
acquisition costs, present value of future profits of insurance acquired and
income taxes.
DEFERRED POLICY ACQUISITION COSTS
Commissions and other costs of acquiring new business that vary with and are
primarily related to the production of new business are generally deferred.
Deferred policy acquisition costs for participating life insurance, universal
life insurance and investment-type annuities are amortized in relation to
estimated gross margins or profits. Amortization is adjusted retrospectively
for actual experience and when estimates of future gross margins or profits are
revised. Balances of deferred policy acquisition costs for these products are
adjusted for related unrealized gains and losses on available-for-sale
securities through policyowners' equity, net of related income taxes.
Deferred policy acquisition costs for non-participating term life insurance and
disability income insurance is amortized in relation to premium income using
assumptions consistent with those used in computing policy benefit liabilities.
Balances of deferred policy acquisition costs are regularly evaluated for
recoverability from product margins or profits.
PRESENT VALUE OF FUTURE PROFITS OF INSURANCE ACQUIRED
Present value of future profits of insurance acquired is the
actuarially-determined present value of future projected profits from policies
in force at the date of their acquisition, and is amortized in relation to
gross profits of those policies.
PROPERTY AND EQUIPMENT
Property and equipment is reported at depreciated cost. Real property is
depreciated over 40 years using the straight line method. Furniture and
equipment is depreciated using accelerated depreciation methods over 7 years
and 5 years, respectively.
SEPARATE ACCOUNTS
Separate accounts are segregated funds relating to certain variable annuity and
variable life policies, and National Life's pension plans. Separate account
assets are primarily common stocks, bonds, mortgage loans, and real estate and
are carried at estimated fair value. Separate account liabilities reflect
separate account policyowners' interests in separate account assets, include
the actual investment performance of the respective accounts and are not
guaranteed. Separate account results relating to these policyowners' interests
are excluded from revenues and expenses.
F-8
<PAGE> 72
POLICY LIABILITIES
Policy benefit liabilities for participating life insurance are developed using
the net level premium method, with interest and mortality assumptions used in
calculating policy cash surrender values. Participating life insurance terminal
dividends are accrued in relation to gross margins.
Policy benefit liabilities for non-participating life insurance, disability
income insurance and certain annuities are developed using the net level
premium method, with assumptions for interest, mortality, morbidity,
withdrawals and expenses based principally on company experience.
Policyowners' account balances for universal life insurance and investment-type
annuities represent amounts that inure to the benefit of the policyowners
(before surrender charges).
POLICYOWNERS' DIVIDENDS
Policyowners' dividends are the pro-rata amount of dividends earned that will
be paid or credited at the next policy anniversary. Dividends are based on a
scale that seeks to reflect the relative contribution of each group of policies
to National Life's overall operating results. The dividend scale is approved
annually by National Life's Board of Directors.
RECOGNITION OF INSURANCE INCOME AND RELATED EXPENSES
Premiums from traditional life and certain annuities are recognized as revenue
when due from the policyowner. Benefits and expenses are matched with income by
providing for policy benefit liabilities and the deferral and amortization of
policy acquisition costs so as to recognize profits over the life of the
policies.
Premiums from universal life and investment-type annuities are reported as
increases in policyowners' account balances. Revenues for these policies
consist of mortality charges, policy administration charges and surrender
charges deducted from policyowners' account balances. Policy benefits charged
to expense include benefit claims in excess of related policyowners' account
balances.
Premiums from disability income policies are recognized as revenue over the
period to which the premiums relate.
FEDERAL INCOME TAXES
National Life files a consolidated federal income tax return that includes all
of its wholly-owned subsidiaries. Current federal income taxes are charged or
credited to operations based upon amounts estimated to be payable or
recoverable as a result of taxable operations for the current year. Deferred
income tax assets and liabilities are recognized based on temporary differences
between financial statement carrying amounts and income tax bases of assets and
liabilities using enacted income tax rates and laws.
F-9
<PAGE> 73
NOTE 3 - INVESTMENTS
DEBT AND EQUITY SECURITIES
The amortized cost and estimated fair values of debt and equity securities at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Cost Unrealized Unrealized Estimated Fair
1996 Gains Losses Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations $ 180,646 $ 3,336 $ 187 $ 183,795
Government agencies, authorities and
subdivisions 222,867 9,165 3,693 228,339
Public utilities 427,426 12,354 7,270 432,510
Corporate 2,176,977 72,482 20,581 2,228,878
Private placements 199,061 4,923 2,349 201,635
Mortgage-backed securities 1,089,434 16,244 10,142 1,095,536
- --------------------------------------------------------------------------------------------------------------------
4,296,411 118,504 44,222 4,370,693
Preferred stocks 9,719 739 359 10,099
Common stocks 9,705 2,560 11 12,254
- --------------------------------------------------------------------------------------------------------------------
Total $ 4,315,835 $ 121,803 $ 44,592 $ 4,393,046
====================================================================================================================
Held-to-maturity:
U.S. government obligations $ 2,052 $ 14 $ 2 $ 2,064
Government agencies, authorities and
subdivisions 20,970 1,264 208 22,026
Public utilities 9,953 359 1 10,311
Corporate 30,669 1,593 40 32,222
Private placements 527,056 21,799 3,059 545,794
- --------------------------------------------------------------------------------------------------------------------
Total $ 590,700 $ 25,029 $ 3,310 $ 612,417
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
U.S. government obligations $ 310,430 $ 15,105 $ 12 $ 325,523
Government agencies, authorities and
subdivisions 97,474 9,502 87 106,889
Public utilities 245,525 23,935 524 268,936
Corporate 1,515,959 143,525 674 1,658,810
Private placements 150,866 11,439 1,753 160,552
Mortgage-backed securities 667,827 29,203 535 696,495
- --------------------------------------------------------------------------------------------------------------------
2,988,081 232,709 3,585 3,217,205
Preferred stocks 14,217 453 423 14,247
Common stocks 7,428 1,637 37 9,028
- --------------------------------------------------------------------------------------------------------------------
Total $ 3,009,726 $ 234,799 $ 4,045 $ 3,240,480
====================================================================================================================
Held-to-maturity:
Government agencies, authorities and
subdivisions $ 21,708 $ 1,276 $ 6 $ 22,978
Public utilities 9,839 778 - 10,617
Corporate 32,358 3,353 - 35,711
Private placements 413,803 38,629 1,951 450,481
- --------------------------------------------------------------------------------------------------------------------
Total $ 477,708 $ 44,036 $ 1,957 $ 519,787
====================================================================================================================
</TABLE>
F-10
<PAGE> 74
Unrealized gains and losses on available-for-sale debt and equity securities
included as a component of policyowners' equity and changes therein for the
years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Net unrealized (losses) gains on available-for-sale securities $ (153,543) $ 305,859
Net unrealized gains on separate account seed money 1,225 -
Related minority interests 2,474 -
Related deferred policy acquisition costs 61,726 (151,447)
Related present value of future profits on insurance acquired 11,639 -
Related deferred income taxes 28,173 (54,044)
- ---------------------------------------------------------------------------------------------------
Increase (decrease) in net unrealized gains (losses) (48,306) 100,368
Balance, beginning of year 77,173 (23,195)
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 28,867 $ 77,173
===================================================================================================
Balance, end of year includes:
Net unrealized gains on available-for-sale securities $ 77,211 $ 230,754
Net unrealized gains on separate account seed money 1,225 -
Related minority interests 2,474 -
Related deferred policy acquisition costs (50,300) (112,026)
Related present value of future profits on insurance acquired 11,639 -
Related deferred income taxes (13,382) (41,555)
- ---------------------------------------------------------------------------------------------------
Balance, end of year $ 28,867 $ 77,173
===================================================================================================
</TABLE>
In December 1995, securities with an estimated fair value and an amortized cost
of $70.7 million and $67.7 million, respectively were reclassified from
held-to-maturity to available-for-sale consistent with the transition
provisions of the Financial Accounting Standards Board Special Report "A Guide
to Implementation of Statement 115 on Accounting for Certain Debt and Equity
Securities".
The amortized cost and estimated fair values of debt securities by contractual
maturity at December 31, 1996 are shown below (in thousands). Expected
maturities will differ from contractual maturities because borrowers may have
the right to call or prepay obligations with or without call or prepayment
penalties.
<TABLE>
<CAPTION>
Available-for-sale Held-to-maturity
-----------------------------------------------------------------------
Amortized Estimated Fair Amortized Estimated Fair
Cost Value Cost Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Due in one year or less $ 47,136 $ 47,520 $ 9,562 $ 9,727
Due after one year through five years 384,967 396,911 122,675 125,576
Due after five years through ten years 1,607,585 1,616,822 260,462 271,399
Due after ten years 1,163,295 1,209,956 198,001 205,715
Mortgage-backed securities 1,093,428 1,099,484 - -
- --------------------------------------------------------------------------------------------------------------------
Total $ 4,296,411 $ 4,370,693 $ 590,700 $ 612,417
====================================================================================================================
</TABLE>
Information relating to debt security sale transactions for the years ended
December 31 are shown below (in thousands):
<TABLE>
<CAPTION>
Available-for-sale
------------------------------------
1996 1995
- ---------------------------------------------------------------------------------
<S> <C> <C>
Proceeds from sales $ 1,990,175 $ 1,575,695
Gross realized gains $ 46,092 $ 54,877
Gross realized losses $ 42,759 $ 12,216
</TABLE>
There were no sales of held-to-maturity securities in 1996 or 1995.
F-11
<PAGE> 75
National Life periodically lends certain U.S. government or corporate bonds to
approved counterparties to enhance the yield of its bond portfolio. National
Life receives cash collateral slightly higher than the market value of
securities loaned. Collateral adequacy is evaluated daily and periodically
adjusted for changes in the market value of securities loaned. The carrying
values of securities loaned are unaffected by the transaction. Collateral held
(included in cash and cash equivalents) and the corresponding liability for
collateral held (included in other liabilities) were $159.4 million and $127.7
million at December 31, 1996 and 1995, respectively.
National Life also periodically enters into repurchase agreements on U.S.
Treasury securities to enhance the yield of its bond portfolio. These
transactions are accounted for as financings because the securities received at
the end of the repurchase period are identical to the securities transferred.
The repurchase liability is included in other liabilities and was $51.0 million
at December 31, 1995. There were no open transactions at December 31, 1996.
MORTGAGE LOANS AND REAL ESTATE
The distributions of mortgage loans and real estate at December 31 were as
follows:
<TABLE>
<CAPTION>
Mortgage Loans Real Estate
-----------------------------------------------------------
1996 1995 1996 1995
-----------------------------------------------------------
<S> <C> <C> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 5.0% 8.9%
Middle Atlantic 10.1 14.6 - 0.1%
East North Central 9.4 12.0 19.6% 20.5
West North Central 3.9 2.8 0.1 0.1
South Atlantic 28.9 29.2 42.0 48.6
East South Central 4.4 5.1 4.2 -
West South Central 11.5 2.4 29.5 27.0
Mountain 17.6 15.8
Pacific 9.2 9.2 4.6 3.7
-----------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=================================================================================================================
PROPERTY TYPE
-------------
Residential 0.3% -
Apartment 23.4 27.3%
Retail 19.5 27.7 10.5% 10.7%
Office Building 34.9 27.0 11.3 10.2
Industrial 19.9 15.3 71.6 73.4
Hotel/Motel 1.1 1.4
Other Commercial 0.9 1.3 6.6 5.7
-----------------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=================================================================================================================
</TABLE>
F-12
<PAGE> 76
Mortgage loans and related valuation allowances at December 31 were as follows
(in thousands):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------
<S> <C> <C>
Unimpaired loans $ 876,994 $ 615,359
Impaired loans without valuation allowances 6,146 13,667
--------------------------------
Subtotal 883,140 629,026
--------------------------------
Impaired loans with valuation allowances 31,167 29,341
Related valuation allowances (7,283) (8,475)
--------------------------------
Subtotal 23,884 20,866
- -----------------------------------------------------------------------------------
Total $ 907,024 $ 649,892
===================================================================================
Impaired loans:
Average recorded investment $ 40,161 $ 41,483
Interest income recognized $ 5,026 $ 4,856
Interest received $ 5,170 $ 4,900
</TABLE>
Impaired loans are mortgage loans where it is not probable that all amounts due
under the contractual terms of the loan will be received. Impaired loans
without valuation allowances are mortgage loans where the estimated fair value
of the collateral exceeds the recorded investment in the loan. For these
impaired loans, interest income is recognized on an accrual basis, subject to
recoverability from the estimated fair value of the loan collateral. For
impaired loans with valuation allowances, interest income is recognized on a
cash basis.
Activity in the valuation allowances for impaired mortgage loans for the years
ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------------------------------
<S> <C> <C>
Additions for impaired loans charged to realized losses $ 3,944 $ 2,240
Impairment losses charged to valuation allowances (7,559) (6,671)
Changes to previously established valuation allowances 2,423 3,367
-----------------------------------------------------------------------------------------------
Decrease in valuation allowances (1,192) (1,064)
Balance, beginning of year 8,475 9,539
-----------------------------------------------------------------------------------------------
Balance, end of year $ 7,283 $ 8,475
===============================================================================================
</TABLE>
NET INVESTMENT INCOME
Net investment income is presented net of related investment expenses of
$31.4 million and $32.5 million for the years ended December 31, 1996 and
1995, respectively.
NOTE 4 - INSURANCE IN-FORCE AND REINSURANCE
National Life reinsures certain risks assumed in the normal course of business.
For individual life products, National Life generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable term,
coinsurance, and modified coinsurance. National Life has assumed a small amount
of yearly renewable term reinsurance from non-affiliated insurers. Disability
income products are significantly reinsured under coinsurance and modified
coinsurance.
National Life remains liable in the event any reinsurer is unable to meet its
assumed obligations. National Life regularly evaluates the financial condition
of its reinsurers and concentrations of credit risk of reinsurers to minimize
its exposure to significant losses from reinsurer insolvencies.
F-13
<PAGE> 77
The effects of reinsurance for the years ended December 31, were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
----------------------------------------------------------------------------------
<S> <C> <C>
Insurance premiums:
Direct premiums $ 474,998 $ 487,411
Reinsurance assumed 959 672
Reinsurance ceded (69,671) (69,856)
----------------------------------------------------------------------------------
$ 406,286 $ 418,227
==================================================================================
Policy benefits:
Direct policy benefits $ 363,405 $ 351,635
Reinsurance assumed 62 -
Reinsurance ceded (65,903) (73,512)
----------------------------------------------------------------------------------
$ 297,564 $ 278,123
==================================================================================
Policyowners' dividends:
Direct policyowners' dividends $ 112,050 $ 104,845
Reinsurance ceded (6,360) (5,893)
----------------------------------------------------------------------------------
$ 105,690 $ 98,952
==================================================================================
Increase in policy liabilities:
Direct increase in policy liabilities $ 164,233 $ 181,145
Reinsurance assumed (20) -
Reinsurance ceded 2,455 6,288
----------------------------------------------------------------------------------
$ 166,668 $ 187,433
==================================================================================
</TABLE>
NOTE 5 - INCOME TAXES
The components of income taxes and a reconciliation of the expected and actual
income taxes and marginal and effective federal income tax rates for the years
ended December 31 were as follows ($ in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------------------------------------------------
Amount Rate Amount Rate
------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Current $ 45,603 $ 41,136
Deferred (13,646) (9,771)
------------------------------------------------------------------- --------------
Income taxes $ 31,957 $ 31,365
=================================================================== ==============
Expected income taxes $ 17,178 35.0% $ 27,777 35.0%
Differential earnings amount 6,007 12.2 - -
Net change in tax reserves 10,290 21.0 4,233 5.3
Other (1,518) (3.1) (645) (.8)
------------------------------------------------------------------------------------------------------------------
Income taxes $ 31,957 $ 31,365
=================================================================== =============
Effective federal income tax rate 65.1% 39.5%
=================================================== =============== ==============
</TABLE>
F-14
<PAGE> 78
Components of net deferred income tax assets at December 31 were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
-------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Deferred tax assets:
Policy liabilities $ 160,933 $ 122,832
Other liabilities and accrued expenses 47,703 44,960
Other 10,495 10,873
-------------------------------------------------------------------------------------------------------------
Total deferred income tax assets 219,131 178,665
-------------------------------------------------------------------------------------------------------------
Deferred income tax liabilities:
Deferred policy acquisition costs 125,454 120,081
Present value of future profits of insurance acquired 24,262 -
Net unrealized gain on available-for-sale debt and equity securities 13,382 41,555
Debt and equity securities 9,352 4,678
Other 13,167 10,427
-------------------------------------------------------------------------------------------------------------
Total deferred income tax liabilities 185,617 176,741
-------------------------------------------------------------------------------------------------------------
Net deferred income tax assets $ 33,514 $ 1,924
=============================================================================================================
</TABLE>
Management believes it is more likely than not that National Life will realize
the benefit of deferred tax assets.
National Life's federal income tax returns are routinely audited by the IRS.
The IRS has examined tax returns through 1993 and is currently examining the
years 1994 and 1995. In management's opinion adequate tax liabilities have been
established for all open years.
NOTE 6 - BENEFIT PLANS
National Life sponsors a qualified defined benefit pension plan covering
substantially all employees. The plan is administered by National Life's
Benefits Committee and is non-contributory, with benefits based on an
employee's retirement age, years of service and compensation near retirement.
National Life makes annual contributions to the plan of the maximum amount
deductible for income tax purposes. Plan assets are primarily bonds and common
stocks held in a National Life separate account and funds invested in an
annuity contract issued by National Life.
National Life also sponsors other non-qualified pension plans, including a
non-contributory defined benefit plan for general agents that provides benefits
based on years of service and sales levels, a contributory defined benefit plan
for certain employees, agents and general agents and a non-contributory defined
supplemental benefit plan for certain executives. These non-qualified plans are
not funded.
F-15
<PAGE> 79
The status of the defined benefit plans at December 31, were as follows (in
thousands):
<TABLE>
<CAPTION>
1996 1995
--------------------------------------------------------
Funded plan Unfunded Funded plan Unfunded
plans plans
---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Actuarial present value of benefit obligation:
Vested $ 83,362 $ 63,255 $ 76,764 $ 62,981
Non-vested 476 19 444 15
---------------------------------------------------------------------------------------------------------------------
Accumulated benefit obligation $ 83,838 $ 63,274 $ 77,208 $ 62,996
---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation $ 108,564 $ 66,402 $ 102,525 $ 67,473
Plan assets at fair value (97,566) - (90,095) -
---------------------------------------------------------------------------------------------------------------------
Projected benefit obligation in excess of plan assets 10,998 66,402 12,430 67,473
Unrecognized net gain (loss) 512 (1,292) (2,527) (2,538)
---------------------------------------------------------------------------------------------------------------------
Accrued pension cost (included in other liabilities) $ 11,510 $ 65,110 $ 9,903 $ 64,935
=====================================================================================================================
</TABLE>
The components of net periodic pension cost for the years ended December 31,
were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost (benefits earned during the current period) $ 4,384 $ 3,706
Interest cost on projected benefit obligation 11,788 11,331
Actual return on plan assets (10,230) (15,090)
Net amortization and deferrals (99) 5,438
---------------------------------------------------------------------------------------------------------
Net periodic pension cost (included in operating expenses) $ 5,843 $ 5,385
==========================================================================================================
</TABLE>
The actuarial assumptions used in determining pension benefit obligations at
December 31, were as follows:
<TABLE>
<CAPTION>
1996 1995
---------------------------------------------------------------------------------------------------------
<S> <C> <C>
Discount rate 7.00% 7.75%
Rate of increase in future compensation levels 5.00% 5.00%
Expected long term return on plan assets 7.00% 7.75%
---------------------------------------------------------------------------------------------------------
</TABLE>
National Life uses the straight-line method of amortization for prior service
cost and unrecognized gains and losses.
National Life provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the company. National Life also contributes
various amounts of an employee's compensation (up to certain levels) to a
401(k) account. Additional voluntary employee contributions may be made to the
plans subject to certain limits. Company contributions to these plans generally
vest within two years.
National Life also sponsors four defined benefit postretirement plans. The
plans provide medical and dental benefits and life insurance benefits to
employees and agents. Substantially all employees and agents may be eligible
for retiree benefits if they reach normal retirement age and meet certain
minimum service requirements while working for National Life. Most of the plans
are contributory, with retiree contributions adjusted annually, and contain
cost sharing features such as deductibles and coinsurance. The plans are not
funded and National Life pays for plan benefits on a current basis. The cost
of these benefits is recognized as earned.
F-16
<PAGE> 80
The plans' combined status at December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 13,902 $ 14,003
Fully eligible active plan participants 3,365 2,951
Other active plan participants 7,084 6,456
------------------------------------------------------------------------------------------------------------------
Total accumulated postretirement benefit obligation 24,351 23,410
Unrecognized actuarial gain 930 338
Unrecognized prior service cost (1,296) (1,368)
------------------------------------------------------------------------------------------------------------------
Accrued postretirement benefit cost (included in other liabilities) $ 23,985 $ 22,380
==================================================================================================================
</TABLE>
The components of net periodic postretirement benefit cost for the years ended
December 31, were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Service cost (benefits earned during the current period) $ 667 $ 444
Interest cost on accumulated postretirement benefit obligation 1,652 1,518
Amortization of prior service cost over 10 years 72 72
----------------------------------------------------------------------------------------------------------------
Net periodic postretirement benefit cost (included in operating expenses) $ 2,391 $ 2,034
================================================================================================================
</TABLE>
The discount rate used in determining the APBO was 7.0% for 1996 and 1995. The
health care cost trend rates for 1997 are 6.8% and 7.2% for the employee and
agent medical plans, respectively, and grade to 5% in year 2000 and remain
level thereafter. Increasing the assumed health care trend rates by one
percentage point in each year would increase the APBO by about $1.1 million and
the 1996 service and interest cost components of net periodic postretirement
benefit cost by about $0.1 million.
During 1995 plan amendments were enacted which increased some of the medical
plan benefits for active and retired employees. These changes increased the
APBO by approximately $1.4 million, which is amortized over the average
remaining years of service of the plan participants of ten years.
NOTE 7 - DERIVATIVES
National Life purchases option contracts on the Standard & Poor's 500 (S&P 500)
index to hedge obligations relating to equity indexed annuity products. When
the S&P 500 index increases, increases in the intrinsic value of the purchased
options are offset by increases in equity indexed annuities account values.
When the S&P 500 index decreases, National Life's loss is limited to the
premium paid for the options.
National Life purchases options only from highly rated institutions. However,
in the event a counterparty failed to perform, National Life's loss would be
equal to the fair value of the net options held from that counterparty.
The option premium is expensed over the term of the option. The amortization of
the option premium and increases in the intrinsic value of purchased options
are reflected in investment income. Interest credited includes amounts that
would be credited on the next policy anniversary based on the S&P 500 index's
value at the reporting date.
At December 31, 1996, National Life held purchased options with a notional
amount of $61.1 million. These options had a net book value of $6.5 million,
consisting of $3.0 million of net amortized cost and $3.5 million of intrinsic
value.
F-17
<PAGE> 81
NOTE 8 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying values and estimated fair values of financial instruments at
December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
- --------------------------------------------------------------------------------------------------------------------
Estimated Fair Estimated Fair
Carrying Value Value Carrying Value Value
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Cash and cash equivalents $ 268,235 $ 268,235 $ 310,905 $ 310,905
Debt and equity securities:
Available-for-sale 4,393,046 4,393,046 3,240,480 3,240,480
Held-to-maturity 590,700 612,417 477,708 519,787
Mortgage loans 907,024 924,732 649,892 706,309
Policy loans 796,193 715,914 735,852 665,151
Derivatives 6,496 5,123 - -
Investment products 2,341,273 2,336,171 872,551 832,013
Debt 82,682 80,149 69,679 70,771
</TABLE>
For cash and cash equivalents carrying value approximates estimated fair value.
Debt and equity securities estimated fair values are based on quoted values
where available. Where quoted values are not available, estimated fair values
are based on discounted cash flows using current interest rates of similar
securities.
Mortgage loan fair values are estimated as the average of discounted cash flows
under different scenarios of future mortgage interest rates (including
appropriate provisions for default losses and borrower prepayments).
For variable rate policy loans the unpaid balance approximates fair value.
Fixed rate policy loan fair values are estimated based on discounted cash flows
using the current variable policy loan rate (including appropriate provisions
for mortality and repayments).
Derivatives estimated fair values are based on quoted values.
Investment products include flexible premium annuities, single premium deferred
annuities and supplementary contracts not involving life contingencies.
Investment product fair values are estimated as the average of discounted cash
flows under different scenarios of future interest rates of A-rated corporate
bonds and related changes in premium persistency and surrenders.
Debt fair values are estimated values are based on discounted cash flows using
current interest rates of similar securities.
F-18
<PAGE> 82
NOTE 9 - DEBT
Debt consists of the following (in thousands):
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
National Life - 8 1/4% Surplus Notes:
$70 million, maturing March 1, 2024 with interest payable semi-annually on
March 1 and September 1. The notes are unsecured and subordinated to all
present and future indebtedness, policy claims and prior claims. The notes
may be redeemed in whole or in part any time after March 1, 2004 at
predetermined redemption prices. All interest and principal payments require
prior written approval by the State of Vermont Department of Banking,
Insurance, Securities and Health Care Administration.
$ 69,682 $ 69,679
LSW National Holdings, Inc. - 6.1% Term Note:
maturing March 1, 2000 with interest payable semi-annually on
March 1 and September 1. The note is secured by subsidiary stock,
includes certain restrictive covenants and requires annual
payments of principal (see below). 13,000
- ---------------------------------------------------------------------------------------------------------------------
Total debt $ 82,682 $ 69,679
=====================================================================================================================
</TABLE>
The aggregate annual maturities of debt for the next five years are as follows:
<TABLE>
<S> <C>
1997 $ 2,600
1998 4,400
1999 3,000
2000 3,000
2001 -
</TABLE>
NOTE 10 - ACQUISITION
National Financial Services, Inc., a wholly-owned subsidiary of National Life,
acquired a two-thirds interest in Life Insurance Company of the Southwest (LSW)
located in Dallas, Texas on February 8, 1996. LSW is a financial services
company specializing in annuities that is licensed in all states but New York
and has assets of $1.8 billion. LSW's customer focus has been mainly on
teachers and employees of non-profit institutions, with particular
concentration in the west and the southwest.
The acquisition was accomplished by purchasing two-thirds of LSW Holdings
Corporation, the owner of LSW. LSW Holdings Corporation was renamed LSW
National Holdings, Inc. concurrent with the purchase. The purchase price was
about $102 million in cash. The purchase resulted in the recording of an
intangible asset for the present value of future profits of insurance acquired
of $67.2 million.
The minority shareholders have the right to put their shares to National Life
at specified prices in the event of certain contingencies during the first five
years subsequent to closing and generally thereafter. Similarly, National Life
has the right to call the minority shareholders' shares at specified prices.
The specified prices are generally a function of GAAP equity or the original
purchase price.
F-19
<PAGE> 83
These consolidated financial statements include the financial position and
operations of LSW National Holdings since the purchase, along with appropriate
adjustments for minority interests, using the purchase method. Pro forma
results had the acquisition occurred as of January 1, 1996 and 1995 are shown
in the table below. These pro forma results are not necessarily indicative of
the actual results which might have occurred had National Life owned LSW since
that date.
<TABLE>
<CAPTION>
1996 1995
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,026,763 $ 1,060,948
Net income 17,356 45,905
</TABLE>
Noncash investing activities relating to the acquisition that are not reflected
in the consolidated statement of cash flow were as follows (in thousands):
<TABLE>
<S> <C>
Fair value of assets acquired, excluding cash acquired $ 1,144,694
Liabilities assumed (1,063,143)
- ------------------------------------------------------------------------
Cash paid (net of cash acquired) $ 81,551
========================================================================
</TABLE>
NOTE 11 - STATUTORY INFORMATION
National Life prepares statutory basis financial statements for regulatory
filings with insurance regulators in all 50 states and the District of
Columbia. A reconciliation of National Life Insurance Company's statutory
surplus to GAAP retained earnings at December 31 and statutory net income to
GAAP net income for the years ended December 31 were as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
-----------------------------------------------------------------------
Surplus/ Surplus/
Retained Retained
Earnings Net Income Earnings Net Income
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Statutory surplus/net income (loss) $ 305,611 $ 11,684 $ 312,488 $ (3,757)
Asset valuation reserve 57,054 - 55,570 -
Interest maintenance reserve 57,169 1,540 55,629 23,966
Surplus notes (69,681) (3) (69,678) (3)
Non-admitted assets 18,391 - 18,352 -
Investments 18,504 290 5,043 5,191
Deferred policy acquisition costs 443,583 3,970 439,613 2,097
Deferred income taxes 58,737 9,179 42,934 9,341
Policy liabilities (193,798) (9,874) (179,310) (4,335)
Policyowners' dividends 62,528 (1,142) 63,670 2,725
Benefit plans (36,094) 4,403 (38,869) 1,244
Other changes, net (1,963) (2,924) (2,524) 11,529
- --------------------------------------------------------------------------------------------------------------------
GAAP retained earnings/net income $ 720,041 $ 17,123 $ 702,918 $ 47,998
====================================================================================================================
</TABLE>
The New York Insurance Department recognizes only statutory accounting
practices for determining and reporting the financial condition and results of
operations of an insurance company and for determining solvency under the New
York Insurance Law. No consideration is given by the Department to financial
statements prepared in accordance with generally accepted accounting principles
in making such determinations.
F-20
<PAGE> 84
NATIONAL LIFE INSURANCE COMPANY
* * * * *
FINANCIAL STATEMENTS
(STATUTORY BASIS)
* * * * *
DECEMBER 31, 1995 AND 1994
F-21
<PAGE> 85
REPORT OF INDEPENDENT ACCOUNTANTS
February 19, 1996, except for Notes 1, 8, 9, and 11 as to which the date is May
28, 1997
To the Board of Directors and Policyowners
of National Life Insurance Company
We have audited the accompanying statutory balance sheet of National Life
Insurance Company as of December 31, 1995 and 1994, and the related statutory
statements of operations and surplus, and of cash flows for the years then
ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits of these statements 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
As described in Note 1, these financial statements were prepared in conformity
with accounting practices prescribed or permitted by the State of Vermont
Department of Banking, Insurance, Securities and Health Care Administration,
which differ from generally accepted accounting principles. The effects on the
financial statements of the differences between such practices and generally
accepted accounting principles are material and are disclosed in Note 11.
In our report dated February 19, 1996, we expressed an opinion that the 1995
and 1994 financial statements, prepared using accounting practices prescribed
or permitted by the State of Vermont Department of Banking, Insurance,
Securities and Health Care Administration (statutory basis of accounting), were
presented fairly, in all material respects, in conformity with generally
accepted accounting principles. Pursuant to pronouncements of the Financial
Accounting Standards Board, financial statements prepared on the statutory
basis of accounting are no longer considered in conformity with generally
accepted accounting principles. Accordingly, our present report on the
presentation of the 1995 and 1994 financial statements is different from our
previous report.
F-22
<PAGE> 86
In our opinion, because of the effects of the matters referred to in the
preceding paragraphs, the financial statements referred to above do not present
fairly, in conformity with generally accepted accounting principles, the
financial position of National Life Insurance Company at December 31, 1995 and
1994, and the results of its operations and its cash flows for the years then
ended.
Also, in our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of National Life
Insurance Company at December 31, 1995 and 1994, and the results of its
operations and its cash flows for the years then ended, on the basis of
accounting described in Note 1.
F-23
<PAGE> 87
NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEET (STATUTORY BASIS)
DECEMBER 31,
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
(In Thousands) 1995 1994
- --------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS:
Cash and short-term investments $ 330,753 $ 237,032
Bonds 3,391,467 3,201,369
Preferred stocks 14,217 15,677
Common stocks 13,807 9,295
Mortgage loans 656,532 581,910
Policy loans 730,561 758,511
Real estate investments 93,719 100,219
Home office properties 45,438 45,016
Other invested assets 66,221 67,307
- --------------------------------------------------------------------------------------
Total cash and invested assets 5,342,715 5,016,336
Due and deferred premiums 102,370 101,059
Due and accrued investment income 96,712 94,940
Other assets 41,322 40,788
Separate account assets 176,531 159,821
- --------------------------------------------------------------------------------------
Total assets $ 5,759,650 $ 5,412,944
======================================================================================
LIABILITIES:
Policy and other contract reserves $ 4,578,326 $ 4,391,860
Policyowners' deposits 105,400 100,368
Claims in process of settlement 23,254 28,026
Policyowners' dividends 116,051 117,905
Interest maintenance reserve 55,629 31,663
Federal income taxes payable (recoverable) 31,074 (1,293)
Asset valuation reserve 55,570 49,681
Other liabilities 314,696 227,827
Separate account liabilities 167,162 149,973
- --------------------------------------------------------------------------------------
Total liabilities 5,447,162 5,096,010
- --------------------------------------------------------------------------------------
SURPLUS:
Surplus notes 69,678 69,675
Policyowners' contingency reserves 242,810 247,259
- --------------------------------------------------------------------------------------
Total surplus 312,488 316,934
- --------------------------------------------------------------------------------------
Total liabilities and surplus $ 5,759,650 $ 5,412,944
======================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-24
<PAGE> 88
NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF OPERATIONS AND SURPLUS (STATUTORY BASIS)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------
(In Thousands) 1995 1994
- ------------------------------------------------------------------------------------------------
<S> <C> <C>
INCOME:
Insurance income $ 564,969 $ 540,779
Net investment income 392,344 367,458
Other income 20,294 21,277
- ------------------------------------------------------------------------------------------------
Total income 977,607 929,514
- ------------------------------------------------------------------------------------------------
EXPENSES:
Benefits 428,220 399,044
Increase in reserves 221,986 223,196
Commissions and operating expenses 173,797 164,009
- ------------------------------------------------------------------------------------------------
Total expenses 824,003 786,249
- ------------------------------------------------------------------------------------------------
Net gain from operations before dividends and federal income
taxes 153,604 143,265
Dividends to policyowners 112,387 111,535
- ------------------------------------------------------------------------------------------------
Net gain from operations before federal income taxes 41,217 31,730
Federal income tax expense 36,752 16,540
- ------------------------------------------------------------------------------------------------
Net gain from operations 4,465 15,190
Net realized losses (9,081) (1,190)
- ------------------------------------------------------------------------------------------------
NET (LOSS) INCOME (4,616) 14,000
Unrealized gains (losses) 7,442 (9,743)
(Increase) decrease in asset valuation reserve (5,889) 2,049
Surplus notes issued - 69,674
Other adjustments to surplus, net (1,383) (2,417)
- ------------------------------------------------------------------------------------------------
(Decrease) increase in surplus (4,446) 73,563
SURPLUS:
Beginning of year 316,934 243,371
- ------------------------------------------------------------------------------------------------
End of year $ 312,488 $ 316,934
================================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-25
<PAGE> 89
NATIONAL LIFE INSURANCE COMPANY
STATEMENT OF CASH FLOWS (STATUTORY BASIS)
FOR THE YEARS ENDED DECEMBER 31,
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------
(In Thousands) 1995 1994
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Insurance income received $ 565,189 $ 534,306
Net investment and other income received 398,253 366,056
Benefits paid (430,088) (387,809)
Commissions and operating expenses paid (205,439) (164,580)
Net decrease in policy loans 27,950 4,852
Net transfers from separate accounts 10,431 9,314
Federal income taxes paid (18,393) (23,555)
Dividends paid to policyowners (114,136) (111,812)
- ----------------------------------------------------------------------------------------------
Net cash provided by operations 233,767 226,772
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from investments sold, matured or repaid:
Bonds 1,757,542 1,283,224
Stocks 4,421 16,558
Mortgage loans 61,849 78,295
Real estate and other investments 40,596 39,493
Cost of investments acquired:
Bonds (1,901,838) (1,476,151)
Stocks (5,771) (4,000)
Mortgage loans (143,309) (108,307)
Real estate and other investments (44,847) (61,417)
- ----------------------------------------------------------------------------------------------
Net cash used for investing activities (231,357) (232,305)
- ----------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of surplus notes - 69,674
Funds borrowed 51,013 -
OTHER SOURCES AND APPLICATIONS, NET 40,298 70,669
- ----------------------------------------------------------------------------------------------
Net increase in cash
and short-term investments 93,721 134,810
CASH AND SHORT-TERM INVESTMENTS:
Beginning of year 237,032 102,222
- ----------------------------------------------------------------------------------------------
End of year $ 330,753 $ 237,032
==============================================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE> 90
NATIONAL LIFE INSURANCE COMPANY
NOTES TO FINANCIAL STATEMENTS (STATUTORY BASIS)
DECEMBER 31, 1995 and 1994
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying financial statements of National Life Insurance Company (the
Company) have been prepared in conformity with statutory accounting practices
prescribed or permitted by the State of Vermont Department of Banking,
Insurance, Securities and Health Care Administration, which is a comprehensive
basis of accounting other than generally accepted accounting principles.
NATURE OF OPERATIONS AND CUSTOMER CONCENTRATIONS
The Company is primarily engaged in the development and distribution of
traditional and universal individual life insurance and annuity products.
Through affiliates it also provides distribution and investment advisory
services to the Sentinel Group Funds, Inc., a family of twelve mutual funds.
The Company's insurance and annuity products are primarily marketed through a
general agency system. The Company is licensed in all 50 states and the
District of Columbia. Approximately 25% of total collected premiums are from
residents of the states of New York and California.
INVESTMENTS
Bonds and preferred stocks are generally carried at amortized cost and cost,
respectively. Bonds in or near default are carried at the lower of amortized
cost or fair value. Common stocks are carried at market value. Mortgage loans
in good standing are valued at their unpaid principal balance. Mortgage loans
that are delinquent or in process of foreclosure are valued at the lower of
their principal balance or the estimated fair value of the underlying
collateral. The maximum ratio of loan to collateral value at the time a loan
is made is generally 75%. Policy loans are reported at their unpaid balances
and are fully collateralized by policy cash values. Real estate investments
are generally depreciated over 40 years using the straight line method, and are
reflected at the lower of depreciated cost or fair value, net of encumbrances.
Realized gains and losses are determined using the specific identification
method and are reported net of related income taxes.
SHORT-TERM INVESTMENTS
Short-term investments are carried at amortized cost, which approximates fair
value. For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with a remaining maturity of one year or
less to be short-term investments.
ASSET VALUATION RESERVE AND INTEREST MAINTENANCE RESERVE
The Asset Valuation Reserve (AVR) is designed to stabilize policyowners'
contingency reserves from default losses on bonds, preferred stocks, mortgages,
real estate and other invested assets and from fluctuations in the value of
common stocks. The AVR is calculated as prescribed by the National Association
of Insurance Commissioners.
F-27
<PAGE> 91
The Interest Maintenance Reserve (IMR) defers interest rate related after-tax
capital gains and losses on fixed income investments and amortizes them into
income over the remaining lives of the securities sold. IMR amortization is
included in net investment income. The Company uses the seriatim method for
the amortization of IMR.
NON-ADMITTED ASSETS
In accordance with regulatory requirements, certain assets, including amounts
due from agents and furniture and equipment, are excluded from the balance
sheet. The net change in these assets is included in other adjustments to
surplus.
POLICY AND OTHER CONTRACT RESERVES
Policy reserves for life, annuity and disability income contracts are developed
using accepted actuarial methods. Actuarial factors used in determining life
insurance reserves are based primarily upon the 1941, 1958, and 1980
Commissioners' Standard Ordinary (CSO) mortality tables. Methods used to
calculate life reserves consist principally of net level premium,
Commissioners' Reserve Valuation Method, and modified preliminary term, with
valuation interest rates ranging from 2.0% to 6.0%.
Reserves for individual annuities are determined principally using the
Commissioners' Annuity Reserve Valuation Method, based on A-1949, and 1983
annuity tables with valuation interest rates from 2.0% to 9.0%. Active life
disability income reserves are determined primarily using Commissioners'
Disability 1964 with the 1958 CSO mortality table and Disability Termination
Study 1985 and Commissioners' Individual Disability Table A morbidity tables
with the 1980 CSO mortality tables. Valuation interest rates for active life
reserves range from 3.0% to 6.0%. Disabled life reserves are based on expected
experience at 8.0% interest and exceed statutory minimum reserves.
PREMIUMS AND RELATED EXPENSES
Annual premiums and related reserve increases on life insurance policies are
recorded at each policy anniversary. Premiums and related reserve increases on
annuity contracts are recorded when premiums are collected. Commissions and
other policy costs are expensed as incurred. First-year policy costs and
required additions to policy reserves generally exceed first-year premiums.
DIVIDENDS TO POLICYOWNERS
The Company issues all of its traditional life insurance and certain annuity
policies on a participating basis. The Company's universal life and disability
income policies are issued on a non-participating basis. Policyowners'
dividends liabilities primarily represent amounts estimated to be paid or
credited in the subsequent year. The amount of dividends to be distributed is
based upon a scale which seeks to reflect the relative contribution of each
group of policies to the Company's overall operating results. The dividend
scale is approved at least annually by the Company's Board of Directors.
SEPARATE ACCOUNTS
Separate account assets represent segregated funds held for the benefit of
certain variable annuity, variable life, pension policyowners, and the
Company's pension plans. Separate account liabilities represent the
policyowners' share of separate account assets. The Company also participates
in certain separate accounts. Separate account investment results are excluded
from operations. Policy values funded by separate accounts reflect the actual
investment performance of the respective accounts and are not
F-28
<PAGE> 92
guaranteed. Investments held in the separate accounts are primarily common
stocks, bonds, mortgage loans, and real estate and are carried at fair value.
FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return that includes all of
its wholly owned subsidiaries. The Company's federal income tax liability is
estimated based on the federal taxable income to be reported in its
consolidated return.
The major differences between pre-tax statutory net income and taxable income
relate to policyowner dividends, investments, differential earnings
adjustments, differences between book and tax policy reserves, and the deferral
of deductions for certain acquisition costs for tax purposes.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, income, and expenses,
and related disclosures in the notes to consolidated financial statements.
Actual results could differ from estimates.
NOTE 2 - INSURANCE INFORCE AND REINSURANCE
For individual life products, the Company generally retains no more than $3.0
million of risk on any person (excluding accidental death benefits and dividend
additions). Reinsurance for life products is ceded under yearly renewable
term, coinsurance, and modified coinsurance agreements. Total individual life
premiums ceded were $20.7 million and $22.8 million for the years ended
December 31, 1995 and 1994, respectively. Total individual life insurance
ceded was $3.7 billion and $3.5 billion of the $33.5 billion and $32.6 billion
in force at December 31, 1995 and 1994, respectively. The Company has assumed
a small amount of yearly renewable term reinsurance from non-affiliated
insurers.
Disability income products are significantly reinsured under coinsurance and
modified coinsurance agreements. Total disability income premiums ceded in
1995 and 1994 were $51.9 million and $52.1 million, respectively. Reserve
transfers and related interest on disability income reserves were $7.1 million
and $7.0 million in 1995 and 1994, respectively, and are included in increase
in reserves. Disability income reinsurance effects included in other income in
1995 and 1994 were $18.6 million and $20.5 million, respectively.
The Company is contingently liable with respect to ceded insurance should any
reinsurer be unable to meet its assumed obligations.
F-29
<PAGE> 93
NOTE 3 - FEDERAL INCOME TAXES
The federal income tax provisions for 1995 and 1994 were $36.8 million and
$16.5 million respectively, including taxes on realized capital gains of $13.7
million and $0.9 million.
The Internal Revenue Service has examined the Company's returns through 1991
and the Company has paid all assessed deficiencies. The Company is currently
litigating the disallowance of certain policyowner dividend deductions taken in
1984 under the 1984 Tax Act.
The Company believes that it has adequately provided for all material pending
tax matters.
NOTE 4 - BENEFIT PLANS
The Company has pension programs covering substantially all employees and
full-time agents. The Company funds the pension cost accrued. The Company's
aggregate expense for pension plans was $7.3 million in 1995 and $7.0 million
in 1994.
The annual contributions to the Company's defined benefit plan covering home
office employees are based on the Aggregate Actuarial Cost Method. The accrued
plan benefits and net assets for this plan at December 31, 1995 and 1994 are
presented below (in thousands):
<TABLE>
<CAPTION>
1995 1994
------------------------------------
<S> <C> <C>
Actuarial present value of accrued plan benefits:
Vested $67,933 $64,287
Non-vested 403 440
------------------------------------
Total $68,336 $64,727
====================================
Net assets available for plan benefits $94,125 $77,514
====================================
</TABLE>
The discount rate used in determining the actuarial present value of accrued
plan benefits at December 31, 1995 and 1994 was 8.0%. Mortality assumptions
are based on the 1983 Group Annuity Mortality Table. Plan assets are invested
in the general account and various separate accounts of the Company.
The Company provides employee savings and 401(k) plans where up to 3% of an
employee's compensation may be invested by the employee in either plan with
matching funds contributed by the Company. The Company also contributes a
foundation of 1.5% of an employee's compensation (up to certain levels) to a
401(k) account. Additional voluntary employee contributions may be made to the
plans subject to certain limits. Company contributions to these plans
generally vest within two years.
The Company also sponsors four defined benefit postretirement plans. The plans
provide medical and dental benefits and life insurance benefits to employees
and agents, respectively. Substantially all Company employees and agents may
become eligible for retiree benefits if they reach normal retirement age and
meet certain minimum service requirements while working for the Company. Most
of the plans are contributory, with retiree contributions adjusted annually,
and contain other cost sharing features such as deductibles and coinsurance.
The plans are not funded and the Company pays for plan benefits on a current
basis. The cost of these benefits is recognized as they are earned by fully
eligible employees.
F-30
<PAGE> 94
The following table shows the plans' combined funded status at December 31,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Accumulated postretirement benefit obligation (APBO):
Retirees $ 15,597 $ 13,676
Fully eligible active plan participants 3,195 3,036
---------------------------
Total APBO 18,792 16,712
Unrecognized actuarial gain 354 480
Unrecognized prior service cost (774) -
Unrecognized transition obligation (13,358) (14,144)
---------------------------
Accrued post retirement benefit liability $ 5,014 $ 3,048
===========================
</TABLE>
The accrued postretirement benefit liability is included in other liabilities.
The net periodic postretirement benefit cost for 1995 and 1994 is included in
operating expenses and consists of the following components (in thousands):
<TABLE>
<CAPTION>
1995 1994
---------------------------
<S> <C> <C>
Estimated eligibility cost $ 667 $ 278
Interest cost on APBO 1,238 1,210
Amortization of prior service cost over 10 years 86 -
Amortization of transition obligation over 20 years 786 786
---------------------------
Net periodic postretirement benefit cost $ 2,777 $ 2,274
===========================
</TABLE>
The health care cost trend rates for 1996 are 7.4% and 7.9% for the employee
and agent medical plans, respectively, and grade to 5% in year 2000 and remain
level thereafter. Increasing the assumed health care cost trend rates by one
percentage point in each year would increase the APBO by about $1.2 million and
the 1995 eligibility and interest cost components of net periodic
postretirement benefit cost by about $0.1 million.
During 1995 plan amendments were enacted which increased some of the medical
plan benefits for active and retired employees. These changes increased the
APBO by approximately $.9 million, which is amortizable over the average
remaining years of service of the plan participants of ten years.
The discount rate used in determining the accumulated postretirement benefit
obligation was 7.0% and 7.5% in 1995 and 1994, respectively.
F-31
<PAGE> 95
NOTE 5 - INVESTMENTS
BONDS
The amortized cost and estimated fair value of the Company's bond investments
at December 31, 1995 and 1994 were as follows (in thousands):
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortized Fair -------------------------------
Cost Value Gains (Losses)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
U.S. government obligations
(including obligations guaranteed by
the U.S. government) $ 450,464 $ 470,832 $ 20,738 $ (370)
Foreign government obligations 21,673 24,171 2,498 -
Special revenue and special
assessment obligations and all
non-guaranteed obligations of
government agencies, authorities and
subdivisions 539,837 567,812 28,246 (271)
Public utilities 329,018 359,564 31,070 (524)
Industrial & miscellaneous 2,050,475 2,237,780 191,685 (4,380)
------------------------------------------------------------------------------------------------------
Total $3,391,467 $3,660,159 $274,237 $(5,545)
======================================================================================================
1994
U.S. government obligations
(including obligations guaranteed by
the U.S. government) $ 428,323 $ 415,052 $ 368 $ (13,639)
Foreign government obligations 21,440 21,567 652 (525)
Special revenue and special
assessment obligations and all
non-guaranteed obligations of
government agencies, authorities and
subdivisions 433,739 414,384 5,267 (24,622)
Public utilities 406,065 395,194 5,013 (15,884)
Industrial & miscellaneous 1,911,802 1,883,098 33,327 (62,031)
------------------------------------------------------------------------------------------------------
Total $3,201,369 $3,129,295 $44,627 $(116,701)
======================================================================================================
</TABLE>
F-32
<PAGE> 96
The amortized cost and estimated fair value of the Company's bond investments
at December 31, 1995 and 1994, by contractual maturity, are shown below (in
thousands). Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
Estimated Gross Unrealized
Amortized Fair -------------------------------
Cost Value Gains (Losses)
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Due - in one year or less $ 65,478 $ 67,978 $ 2,510 $ (10)
Due - one year through five years 553,929 584,596 30,925 (258)
Due - five years through ten years 1,232,894 1,312,884 82,205 (2,215)
Due - after ten years 1,539,166 1,694,701 158,597 (3,062)
------------------------------------------------------------------------------------------------------
Total $3,391,467 $3,660,159 $274,237 $(5,545)
======================================================================================================
1994
Due - in one year or less $ 57,935 $ 58,133 $ 288 $ (90)
Due - one year through five years 473,643 467,554 6,204 (12,293)
Due - five years through ten years 1,137,069 1,103,541 13,391 (46,919)
Due - after ten years 1,532,722 1,500,067 24,744 (57,399)
------------------------------------------------------------------------------------------------------
Total $3,201,369 $3,129,295 $44,627 $(116,701)
======================================================================================================
</TABLE>
Proceeds from bond sales during 1995 and 1994 were $1,757.5 million and
$1,283.2 million, respectively. Gross gains of $54.0 million and $29.6 million
and gross losses of $2.6 million and $35.8 million were realized on these sales
in 1995 and 1994, respectively.
The carrying value of preferred stocks at December 31, 1995 and 1994 was $14.2
million and $15.7 million, and the related fair value of preferred stocks was
$14.9 million and $15.0 million, respectively.
The cost of common stocks at December 31, 1995 and 1994 was $9.2 million and
$4.4 million, respectively. The market value of common stocks at December 31,
1995 and 1994 was $13.8 million and $9.3 million, respectively.
F-33
<PAGE> 97
MORTGAGE LOANS AND REAL ESTATE
At December 31, 1995 and 1994 the Company's mortgage loans and real estate
investments (excluding home office properties) were distributed as follows:
<TABLE>
<CAPTION>
Mortgage Loans Real Estate
---------------------------------- --------------------------------
1995 1994 1995 1994
-------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
GEOGRAPHIC REGION
-----------------
New England 8.9% 9.6% - -
Middle Atlantic 14.6 11.8 0.1% -
East North Central 12.0 12.0 20.5 17.8%
West North Central 2.8 0.4 0.1 0.1
South Atlantic 29.2 30.7 48.6 40.9
East South Central 5.1 5.8 - 5.8
West South Central 2.4 3.9 27.0 32.0
Mountain 15.8 14.9 - -
Pacific 9.2 10.9 3.7 3.4
-------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=======================================================================================================
PROPERTY TYPE
-------------
Residential - 0.1% - -
Apartment 27.3% 23.4 - -
Retail 27.7 30.6 10.7% 16.8%
Office Building 27.0 28.4 10.2 8.8
Industrial 15.3 11.0 73.4 73.5
Hotel/Motel 1.4 1.6 - -
Mixed Use - 2.7 - -
Other Commercial 1.3 2.2 5.7 0.9
-------------------------------------------------------------------------------------------------------
Total 100.0% 100.0% 100.0% 100.0%
=======================================================================================================
</TABLE>
The book value of mortgages, classified by scheduled year of contractual
maturity, as of December 31, 1995 and 1994 are shown below. Expected
maturities will differ because of scheduled principal payments and mortgage
prepayments.
<TABLE>
<CAPTION>
1995 1994
--------------------------------------------------------------
<S> <C> <C>
1 year or less 9.2% 6.6%
Over 1 through 3 years 12.3 15.1
Over 3 through 5 years 21.3 24.2
Over 5 through 10 years 35.6 39.4
Over 10 through 15 years 14.6 11.0
Over 15 through 20 years 6.3 3.7
Over 20 years 0.7 -
--------------------------------------------------------------
Total 100.0% 100.0%
==============================================================
</TABLE>
F-34
<PAGE> 98
The estimated fair value of mortgages at December 31, 1995 and 1994, was $706.3
million and $577.0 million, respectively. The fair value of mortgages was
estimated as the average of the present value of future cash flows under
different scenarios of future mortgage interest rates (including appropriate
provisions for default losses) and related changes in borrower prepayments.
POLICY LOANS
The estimated fair value of policy loans at December 31, 1995 and 1994, was
$665.2 million and $654.2 million, respectively. The book value of variable
rate policy loans approximates fair value. The fair value of fixed rate policy
loans was estimated as the present value of future cash flows using reasonable
assumptions for mortality and repayments, discounted at the current variable
policy loan rate.
NOTE 6 - INVESTMENT INCOME
Investment income is presented net of related investment expenses of $38.3
million and $26.3 million for the years ended December 31, 1995 and 1994,
respectively.
NOTE 7 - INVESTMENT PRODUCTS
The Company issues several different investment products, including flexible
premium annuities, single premium deferred annuities and supplementary
contracts not involving life contingencies. The book value of liabilities for
these investment products was $842.8 million and $820.4 million, respectively,
at December 31, 1995 and 1994. The fair value of liabilities for these
investment products was $805.0 million and $763.0 million at December 31, 1995
and 1994, respectively. The fair value of these liabilities was estimated as
the average of the present value of future cash flows under different scenarios
of future interest rates of A-rated corporate bonds and related changes in
premium persistency and surrenders.
NOTE 8 - SUBSEQUENT EVENT
In February 1996, National Financial Services, Inc. (a wholly owned subsidiary
of the Company) purchased a controlling interest in LSW Holdings Corporation,
parent company of Life Insurance Company of the Southwest (LSW), a Texas
domiciled life insurance company. LSW Holdings Corporation was renamed LSW
National Holdings, Inc. concurrent with the purchase. LSW primarily markets
annuities, with approximately 60% of total 1995 premiums collected from
residents of California, Texas, and Florida. The purchase price was $103
million. LSW's audited statutory assets and surplus were $1.6 billion and
$90.4 million, respectively, at December 31, 1995.
NOTE 9 - CHANGES IN ACCOUNTING POLICY
In April 1993 the Financial Accounting Standards Board (FASB) issued FASB
Interpretation No. 40, "Applicability of Generally Accepted Accounting
Principles to Mutual Life Insurance and Other Enterprises" (Interpretation 40).
The interpretation clarified that beginning in 1995 mutual life insurance and
other enterprises are required to apply all applicable authoritative accounting
pronouncements when issuing financial statements prepared in conformity with
generally accepted accounting principles.
F-35
<PAGE> 99
In January 1995, the FASB issued Statement of Financial Accounting Standards
No. 120, "Accounting and Reporting for Mutual Life Insurance Enterprises and by
Insurance Enterprises for Certain Long-Duration Participating Contracts"
(Statement 120). Statement 120 extends the effective date of Interpretation 40
from 1995 to 1996, and defines accounting principles to be used in accounting
for long duration participating contracts by reference to the American
Institute of Certified Public Accountants' Statement of Position 95-1,
"Accounting for Certain Insurance Activities of Mutual Life Insurance
Enterprises" (Statement of Position 95-1).
The effect of these pronouncements was that financial statements prepared on
the basis of statutory accounting principles could no longer be described as
prepared in conformity with generally accepted accounting principles beginning
in 1996.
The changes required by Interpretation 40, Statement 120 and Statement of
Position 95-1 have resulted in an increase in reported equity.
NOTE 10 - SURPLUS NOTES
On March 1, 1994, the Company issued $70.0 million of 8 1/4% Surplus Notes (the
Notes) scheduled to mature on March 1, 2024, with semiannual interest payments
commencing September 1, 1994. The Notes are unsecured and subordinated to all
present and future indebtedness, policy claims and prior claims of the Company.
The Notes may be redeemed in whole or in part at any time after March 1, 2004
at predetermined redemption prices. All interest and principal payments are
subject to prior written approval by the Commissioner of Banking, Insurance,
and Securities of the State of Vermont (the Commissioner).
Liability for interest payments cannot be recorded in the financial statements
until approval for the payments is received from the Commissioner. Total
interest paid during 1995 and 1994 was $5.8 million and $2.9 million,
respectively. Prorata interest accrued but not recorded at December 31, 1995
and 1994 was $1.9 million.
The Notes were sold at a discount of $.3 million. None of the Notes
outstanding at December 31, 1995 were held by any affiliate of the Company.
F-36
<PAGE> 100
NOTE 11 - GAAP INFORMATION
Subsequent to the original issuance of these financial statements, the Company
prepared fully consolidated generally accepted accounting principles (GAAP)
basis financial statements for general purpose public reporting of its
financial position and financial results for 1995. A reconciliation of the
Company's statutory surplus and net income to GAAP basis retained earnings and
net income at December 31, 1995 and for the year then ended was as follows (in
thousands):
<TABLE>
<CAPTION>
1995
----------------------------------------
Surplus/
Retained
Earnings Net Income
-------------------------------------------------------------------------------
<S> <C> <C>
Statutory surplus/net income (loss) $ 312,488 $ (4,616)
Asset valuation reserve 55,570 -
Interest maintenance reserve 55,629 23,966
Surplus notes (69,678) (3)
Non-admitted assets 18,352 -
Investments 5,043 5,191
Deferred policy acquisition costs 439,613 2,097
Deferred income taxes 42,934 9,341
Policy liabilities (179,310) (4,335)
Policyowners' dividends 63,670 2,725
Benefit plans (38,869) 1,244
Other changes, net (2,524) 12,388
-------------------------------------------------------------------------------
GAAP retained earnings/net income $ 702,918 $ 47,998
===============================================================================
</TABLE>
F-37
<PAGE> 101
PART C
OTHER INFORMATION
<PAGE> 102
PART C - OTHER INFORMATION
Item 24. Financial Statements and Exhibits
(a) Financial Statements:
(1) Financial statements and schedule included in
Prospectus
Condensed Financial Information
(2) Financial statements and schedule included in Part B:
National Life Insurance Company:
Independent Auditor's Report.
Consolidated Balance Sheets (GAAP Basis) as of December
31, 1996 and 1995.
Consolidated Statements of Operations and Policyholder's
Equity (GAAP basis) for the years ended December 31, 1996
and 1995.
Consolidated Statements of Cash Flows (GAAP Basis) for the
years ended December 31, 1996 and 1995.
Notes to Consolidated Financial Statements
Independent Auditor's Report.
Balance Sheets (Statutory Basis) as of December 31,
1995 and 1994
Statement of Operations and Surplus (Statutory
Basis) for the years ended December 31, 1995 and 1994
Statement of Cash Flows (Statutory Basis) for the
years ended December 31, 1995 and 1994
(b) Exhibits
(1) Resolution of the Depositor's Board of
Directors authorizing the establishment of
the Registrant.*
(2) Not Applicable
(3) Distribution Agreement between the Variable
Account/Registrant and Principal
Underwriter
(4) (a) The form of the variable annuity contract
(b) Enhanced Death Benefit Rider
(5) Variable Annuity Application
(6) Articles of Incorporation and By-Laws of
Depositor**.
(7) Not Applicable
C-1
<PAGE> 103
(8) (a) Participation Agreement by and
among Market Street Fund, Inc., National
Life Insurance Company and Equity Services,
Inc. dated January, 30, 1996***.
(b) Participation Agreement by
and among Variable Insurance Products Fund,
Fidelity Distributors Corporation and
Vermont Life Insurance Company, (now
National Life Insurance Company), dated
August 1, 1989****.
1. Form of Amendment No. 1 to
Participation Agreement by and among
Variable Insurance Products Fund, Fidelity
Distributions Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated January 1, 1996
*****.
2. Form of Amendment No. 2 to
Participation Agreement by and among
Variable Insurance Products Fund, Fidelity
Distributors Corporation and Vermont Life
Insurance Company (now National Life
Insurance Company) dated April 28, 1997.
(c) Participation Agreement by
and among The Alger American Fund, National
Life Insurance Company and Fred Alger and
Company, dated January 31, 1995 ***.
1. Form of amended Schedule A to the
Participation Agreement by and among The
Alger American Fund, National Life
Insurance Company and Fred Alger Company,
Dated April 25, 1997.
(d) Form of Participation Agreement by
and among National Life Insurance Company,
National Life Variable Annuity Account II
and Strong Variable Insurance Funds, Inc.,
Strong Special Fund II, Inc., and Strong
Funds Distributors, Inc., dated
May 7, 1997.
(e) Participation Agreement by and
among Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now
National Life Insurance Company) dated
April 1, 1990 ****.
(1) Form of Amendment No. 1 by and
among Variable Insurance Products Fund II,
Fidelity Distributors Corporation and
Vermont Life Insurance Company (now
National Life Insurance Company) dated
April 28, 1997.
(f) Form of Participation Agreement by
and among Van Eck Worldwide Insurance Trust
and National Life Insurance Company dated
_______, 1997.
(9) Opinion and consent of D. Russell Morgan,
Counsel of National Life Insurance Company.
(10) (a) Consent of Sutherland, Asbill &
Brennan, L.L.P.
(b) Consent of Price Waterhouse LLP.
(11) Not Applicable.
(12) Not Applicable.
(13) Performance Advertising Calculation
Schedules.
(14) Powers of Attorney*.
(a) Robert E. Boardman
(b) David R. Coates
(c) Benjamin F. Edwards III
(d) Charles H. Erhart, Jr.
(e) Earle H. Harbison, Jr.
(f) Roger B. Porter
(g) E. Miles Prentice, III
(h) Thomas P. Salmon
(i) A. Gary Shilling
(j) Patricia K. Woolf
* Incorporated herein by reference to Registration Statement (File No.
333-19583) for National Variable Annuity Account II filed on January 10, 1997.
C-2
<PAGE> 104
** Incorporated herein by reference to the Form S-6 Registration Statement
(File No. 33-91938) for National Variable Life Insurance Account filed on
May 5, 1995.
*** Incorporated herin by reference to Post-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 33-91938) for National Variable
Life Insurance Account filed March 12, 1996.
**** Incorporated herein by reference to Post-Effective Amendment No. 3 to the
S-6 Registration Statement (File No. 33-16470) for Vermont Variable Life
Insurance Account filed April 30, 1990.
***** Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement (File No. 33-91938) for National Variable
Life Insurance Account filed December 29, 1995.
Item 25. Directors and Officers of the Depositor
<TABLE>
<CAPTION>
Name and Principal Business Address* Position with Depositor
- ------------------------------------ -----------------------
<S> <C>
Patrick E. Welch Chairman of the Board, Chief Executive
Officer and Director
Thomas H. MacLeay President, Chief Operating Officer and
Director
Robert E. Boardman Director
Hickok & Boardman Financial Network
346 Shelburne Street, P. O. Box 1064
Burlington, VT 05402-1064
David R. Coates Director
KPMG Peat Marwick
One Church Street, P. O. Box 564
Burlington, VT 05402-0564
Benjamin F. Edwards III Director
A. G. Edwards & Sons, Inc.
1 N. Jefferson Avenue
St. Louis, MO 63103
Charles H. Erhart, Jr. Director
149 E. 73rd St.
New York, NY 10021
Earle H. Harbison, Jr. Director
Harbison Corporation
7700 Bonhomme Ave., Suite 750
St. Louis, MO 63105
Roger B. Porter Director
Center for Business & Govt. - 414
Kennedy School of Government
Harvard University
79 John F. Kennedy St.
Cambridge, MA 02138
</TABLE>
C-3
<PAGE> 105
<TABLE>
<S> <C>
E. Miles Prentice III Director
Bryan Cave LLP
245 Park Avenue
New York, NY 10167-0034
Thomas P. Salmon Director
The University of Vermont
349 Waterman Building
85 S. Prospect Street
Burlington, VT 05405-0160
A. Gary Shilling Director
A. Gary Shilling & Co., Inc.
500 Morris Avenue
Springfield, New Jersey 07081-1020
Thomas R. Williams Director
The Wales Group, Inc.
3200 Arden Rd., NW
Atlanta, GA 30305
Patricia K. Woolf Director
506 Quaker Road
Princeton, NJ 08540
Margaret K. Arthur Senior Vice President & General Counsel
Beverly A. Bagalio Senior Vice President - Service Strategies
Rodney A. Buck Senior Vice President & Chief
Investment Officer
John L. LaGue, Jr. Vice President & Controller
Mark J. Levesque Senior Vice President - Information System
Systems & Management Services
Craig A. Smith Senior Vice President - Product
Theodore N. von Wallmenich Senior Vice President & Chief Actuary
</TABLE>
*Unless otherwise indicated, the principal business address is National Life
Drive, Montpelier, Vermont 05604.
C-4
<PAGE> 106
Item 26. Persons Controlled by or Under Common Control with the Depositor or
Registrant.
A list of all persons directly or indirectly controlled by
or under common control with National Life is set forth below.
National Life Insurance Company owns 100% of Administrative Services,
Inc. and National Financial Services, Inc. National Financial
Services, Inc. owns 66.667% of LSW National Holdings, Inc.; LSW
National Holdings Inc. owns 100% of Insurance Investors Life
Insurance Company; Insurance Investors Life Insurance Company owns
100% of Life Insurance Company of the Southwest.
National Life Insurance Company owns 100% of National Life Investment
Management Company, Inc. National Life Investment Management Company,
Inc. owns 100% of Sentinel Advisors, Inc., Equity Services, Inc. and
NL Capital Management, Inc. Equity Services, Inc. owns 100% of
Sentinel Administrative Service Corporation. Sentinel Administrative
Service Corporation is the majority partner of Sentinel Administrative
Service Company and Sentinel Advisors, Inc. is the majority partner of
Sentinel Advisors Company.
National Life Investment Management Company, Inc. is the majority
partner of Sentinel Management Company, and Sentinel Financial
Services Company. Sentinel Management Company owns 100% of American
Guaranty & Trust Company.
Item 27. Number of Contract Owners
No contracts have been issued to date.
Item 28. Indemnification
The By-Laws of Depositor provide, in part in Article VI, as follows:
Article 6.02 Any person who at any time shall serve or shall have
served, at the request of the Corporation, as
director or officer or employee of the Corporation or
any other corporation, including but not limited to
the Corporation's subsidiaries and mutual funds
organized by the Corporation, but an officer,
director or employee of such a fund only if such
person is also a director, officer or employee of the
Corporation or a subsidiary) and the heirs, executors
or administrators of such person shall be indemnified
to the maximum extent permitted by law by the
Corporation against all costs and expenses (including
but not limited to counsel fees, amounts of judgments
paid and amounts paid in settlement, before or after
a suit or proceeding is actually commenced)
reasonably incurred with the defense of any claim,
action, suit or proceeding, whether civil, criminal,
administrative or other, in which such person or
persons may be involved by virtue of such person
being or having been a director, officer or employee.
The lawfulness of such indemnification shall be
determined by the opinion of independent counsel,
which opinion shall be based upon the facts of any
particular claim. The disinterested senior legal
officer of the Corporation shall select independent
counsel in such manner as to ensure the impartiality
of that independent counsel in the matter to be
decided. The foregoing indemnification shall not be
deemed exclusive of any other rights to which those
indemnified may be entitled under any resolution,
agreement, vote of shareholders or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling
persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification
C-5
<PAGE> 107
is against public policy as expressed in the Act and is, therefore,
unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any such action, suit or
proceeding) is asserted by such director, officer, or controlling
person in connection with the securities being registered, the
Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question of whether such indemnification by it is
against public policy as expressed in the Act and will be governed by
the final adjudication of such issue.
Item 29 Principal Underwriter
(a) Equity Services, Inc. (ESI) is the principal underwriter for
National Variable Annuity Account II and National Variable Life
Insurance Account.
(b) The following information is furnished with respect to the officers
and directors of ESI:
<TABLE>
<CAPTION>
Name and Principal Positions and Offices
Business Address* with ESI
- ----------------- --------
<S> <C>
Joseph M. Rob Chairman & Chief Executive Officer & Director
Nancy K. Port President & Chief Operating Officer
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Vice President - Financial Products
Marvin Aber Vice President
Budd A. Shedaker Assistant Vice President - Communications
Greg D. Teese Vice President - Compliance
D. Russell Morgan Counsel
Brian K. Martin Treasurer
Lisa A. Pettrey Secretary
Jean K. Landolt Assistant Secretary
Thomas H. MacLeay Director
Rodney A. Buck Director
</TABLE>
*Unless otherwise indicated, principal business address is One National Life
Drive, Montpelier, Vermont 05604.
Item 30. Location of Accounts and Records
All accounts and records required to be maintained by Section 31(a) of
the Investment Company Act of 1940 and the rules thereunder are maintained by
National Life Insurance Company at One National Life Drive, Montpelier, Vermont
05604.
Item 31. Management Services
C-6
<PAGE> 108
All management contracts are discussed in Part A or Part B.
Item 32 Undertakings
(a) Registrant hereby undertakes to file a post-effective amendment to
this registration statement as frequently as is necessary to ensure that the
audited financial statements in the registration statement are never more than
sixteen (16) months old for so long as payments under the variable annuity
contracts may be accepted;
(b) Registrant hereby undertakes to include either (1) as part of any
application to purchase a contract offered by the Prospectus, a space that an
applicant can check to request a Statement of Additional Information, or (2) a
postcard or similar written communication affixed to or included in the
Prospectus that the applicant can remove to send for a Statement of Additional
Information; and
(c) Registrant hereby undertakes to deliver any Statement of Additional
Information and any financial statement required to be made available under this
form promptly upon written or oral request.
(d) Reliance on No-Action Letter Regarding Section 403(b) Retirement
Plan. National Life Insurance Company and the Registrant/Variable Account rely
on a no-action letter issued by the Division of Investment Management to the
American Council of Life Insurance on November 28, 1988 and represent that the
conditions enumerated therein have been or will be complied with.
(e) National Life Insurance Company hereby represents that the fees and
charges deducted under the Contract, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to be incurred, and the
risks assumed by National Life Insurance Company.
C-7
<PAGE> 109
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the
Investment Company Act of 1940, the Registrant, National Variable Annuity
Account II, has duly caused this Pre-Effective Amendment No. 1 to be signed on
its behalf, in the City of Montpelier and the State of Vermont, on the 27th day
of May, 1997.
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Registrant)
Attest: /s/ Lisa A. Pettrey By: /s/ Thomas H. MacLeay
--------------------------- ---------------------------------
Assistant Secretary Thomas H. MacLeay, President &
Chief Operating Officer
National Life Insurance Company
By: NATIONAL LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ Lisa A. Pettrey By: /s/ Thomas H. MacLeay
--------------------------- --------------------------------
Thomas H. MacLeay
Assistant Secretary President & Chief
Operating Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities indicated on the date(s) set forth below.
Signature Title Date
- --------- ----- ----
/s/ Patrick E. Welch Chairman of the Board and May 27, 1997
- ----------------------------- and Chief Executive Officer,
Patrick E. Welch and Director
C-8
<PAGE> 110
/s/ Thomas H. MacLeay President & Chief Operating May 27, 97
- ----------------------------- Officer, and Director
Thomas H. MacLeay
/s/ John L. LaGue, Jr. Vice President & Controller May 27, 97
- ----------------------------- (Chief Accounting Officer)
John L. LaGue, Jr.
/s/ Robert E. Boardman* Director ____________
- -----------------------------
Robert E. Boardman
/s/ David R. Coates* Director ____________
- -----------------------------
David R. Coates
/s/ Benjamin F. Edwards III* Director ____________
- -----------------------------
Benjamin F. Edwards III
/s/ Charles H. Erhart, Jr.* Director ____________
- -----------------------------
Charles H. Erhart, Jr.
/s/ Earle H. Harbison, Jr.* Director ____________
- -----------------------------
Earle H. Harbison, Jr.
/s/ Roger B. Porter* Director ____________
- -----------------------------
Roger B. Porter
/s/ E. Miles Prentice, III* Director ____________
- -----------------------------
E. Miles Prentice, III
/s/ Thomas P. Salmon* Director ____________
- -----------------------------
Thomas P. Salmon
/s/ A. Gary Shilling* Director ____________
- -----------------------------
A. Gary Shilling
- ----------------------------- Director ____________
Thomas R. Williams
C-9
<PAGE> 111
/s/ Patricia K. Woolf* Director ____________
- -----------------------------
Patricia K. Woolf
*By /s/ Thomas H. MacLeay Date: May 27, 1997
----------------------
Thomas H. MacLeay
Pursuant to Power of Attorney
<PAGE> 1
Exhibit (b)(3)
DISTRIBUTION AGREEMENT
AGREEMENT dated as of May 30, 1997 by and between NATIONAL LIFE
INSURANCE COMPANY ("Insurer"), a Vermont insurance company, on its behalf and
on behalf of each separate account identified in Schedule 1 hereto, and EQUITY
SERVICES, INC. ("Distributor"), a Vermont corporation.
WITNESSETH:
WHEREAS, Distributor is a broker-dealer that engages in the
distribution of variable annuity contracts and other investment products; and
WHEREAS, Insurer desires to issue certain variable annuity contracts
described more fully below to the public through Distributor acting as
principal underwriter;
NOW, THEREFORE, in consideration of their mutual promises, Insurer and
Distributor hereby agree as follows:
1. Definitions
a. Contracts -- The class or classes of variable annuity
contracts set forth on Schedule 1 to this Agreement as in effect at the time
this Agreement is executed, and such other classes of variable annuity
contracts that may be added to Schedule 1 from time to time in accordance with
Section 11.b of this Agreement, and including any riders to such Contracts and
any other policies offered in connection therewith. For this purpose and under
this Agreement generally, a "class of Contracts" shall mean those Contracts
issued by Insurer on the same contract form or forms and covered by the same
Registration Statement.
b. Registration Statement -- At any time that this Agreement is
in effect, each currently effective registration statement filed with the SEC
under the 1933 Act on a prescribed form, or currently effective post-effective
amendment thereto, as the case may be, relating to a class of Contracts,
including financial statements included in, and all exhibits to, such
registration statement or post-effective amendment. For purposes of Section 9
of this Agreement, the term "Registration Statement" means any document which
is or at any time was a Registration Statement within the meaning of this
Section 1.b.
c. Prospectus -- The prospectus included within a Registration
Statement, except that, if the most recently filed version of the prospectus
(including any supplements thereto) filed pursuant to Rule 497 under the 1933
Act subsequent to the date on which a Registration Statement became effective
differs from the prospectus included within such Registration Statement at the
time it became effective, the term "Prospectus" shall refer to the most
recently filed prospectus filed under Rule 497 under the 1933 Act, from and
after the date on which it shall have been filed. For purposes of Section 9 of
this Agreement, the term "any Prospectus" means any document which is or at any
time was a Prospectus within the meaning of this Section 1.c.
d. Fund -- An investment company in which the Variable Account
invests.
- 1 -
<PAGE> 2
e. Variable Account -- A separate account supporting a class or
classes of Contracts and specified on Schedule 1 as in effect at the time this
Agreement is executed, or as it may be amended from time to time in accordance
with Section 11.b of this Agreement.
f. 1933 Act -- The Securities Act of 1933, as amended.
g. 1934 Act -- The Securities Exchange Act of 1934, as amended.
h. 1940 Act -- The Investment Company Act of 1940, as amended.
i. SEC -- The Securities and Exchange Commission.
j. NASD -- The National Association of Securities Dealers, Inc.
k. Regulations -- The rules and regulations promulgated by the
SEC under the 1933 Act, the 1934 Act and the 1940 Act as in effect at the time
this Agreement is executed or thereafter promulgated.
l. Selling Broker-Dealer -- A person or entity registered as a
broker-dealer and licensed as a life insurance agent or affiliated with a
person or entity so licensed, and authorized to distribute the Contracts
pursuant to a sales agreement as provided for in Section 4 of this Agreement.
m. Representative -- When used with reference to Distributor or a
Selling Broker-Dealer, an individual who is an associated person, as that term
is defined in the 1934 Act, thereof.
n. Application -- An application for a Contract.
o. Premium -- A payment made under a Contract by an applicant or
purchaser to purchase benefits under the Contract.
p. Customer Service Center -- The service center identified in
the Prospectus as the location at which Premiums and Applications are accepted.
2. Authorization and Appointment
a. Scope of Authority. Insurer hereby authorizes Distributor on
an exclusive basis, and Distributor accepts such authority, subject to the
registration requirements of the 1933 Act and the 1940 Act and the provisions
of the 1934 Act and conditions herein, to be the distributor and principal
underwriter for the sale of the Contracts to the public in each state and other
jurisdiction in which the Contracts may lawfully be sold during the term of
this Agreement. Insurer hereby authorizes Distributor to grant authority to
Selling Broker-Dealers to solicit Applications and Premiums to the extent
Distributor deems appropriate and consistent with the marketing program for the
Contracts or a class of Contracts, subject to the conditions set forth in
Section 4 of this Agreement. The Contracts shall be offered for sale and
distribution at premium rates set from time to time by Insurer. Distributor
shall market the Contracts actively, directly and/or through Selling
Broker-Dealers in accordance with Section 4 of this Agreement, subject to
compliance with applicable law, including rules of the NASD.
- 2 -
<PAGE> 3
b. Limits on Authority. Distributor shall act as an independent
contractor and nothing herein contained shall constitute Distributor or its
agents, officers or employees as agents, officers or employees of Insurer
solely by virtue of their activities in connection with the sale of the
Contracts hereunder. Distributor and its Representatives shall not have
authority, on behalf of Insurer: to make, alter or discharge any Contract or
other insurance policy or annuity entered into pursuant to a Contract; to waive
any Contract forfeiture provision; to extend the time of paying any Premium; or
to receive any monies or Premiums (except for the sole purpose of forwarding
monies or Premiums to Insurer). Distributor shall not expend, nor contract for
the expenditure of, the funds of Insurer. Distributor shall not possess or
exercise any authority on behalf of Insurer other than that expressly conferred
on Distributor by this Agreement.
3. Solicitation Activities
a. Distributor Representatives. No Distributor Representative
shall solicit the sale of a Contract unless at the time of such solicitation
such individual is duly registered with the NASD and duly licensed with all
applicable state insurance and securities regulatory authorities, and is duly
appointed as an insurance agent of Insurer.
b. Solicitation Activities. All solicitation and sales
activities engaged in by Distributor and the Distributor Representatives with
respect to the Contracts shall be in compliance with all applicable federal and
state securities laws and regulations and NASD rules, as well as all applicable
insurance laws and regulations and the Insurer's rules and procedures (to the
extent not inconsistent with the foregoing). In particular, without limiting
the generality of the foregoing:
(1) Neither Distributor nor any Distributor
Representative shall offer, attempt to offer, or solicit Applications for, the
Contracts in any state or other jurisdiction unless Insurer has notified
Distributor that such Contracts may lawfully be sold or offered for sale in
such state, and has not subsequently revised such notice.
(2) Neither Distributor nor any Distributor
Representative shall give any information or make any representation in regard
to a class of Contracts in connection with the offer or sale of such class of
Contracts that is not in accordance with the Prospectus for such class of
Contracts, or in the then-currently effective prospectus or statement of
additional information for a Fund, or in current advertising materials for such
class of Contracts authorized by Insurer.
(3) All Premiums paid by check or money order that are
collected by Distributor or any of its Representatives shall be remitted
promptly, and in any event not later than noon of the next business day
following receipt of such Premium, in full, together with any Applications,
forms and any other required documentation, to the Insurer. Checks or money
orders in payment of Premiums shall be drawn to the order of the Insurer. If
any Premium is held at any time by Distributor, Distributor shall hold such
Premium in a fiduciary capacity and such Premium shall be remitted promptly,
and in any event not later than noon of the next business day following receipt
of such Premium, to Insurer. Distributor acknowledges that all such Premiums,
whether by check, money order or wire, shall be the property of Insurer.
Distributor acknowledges that Insurer shall have the unconditional right to
reject, in whole or in part, any Application or Premium.
c. Representations and Warranties of Distributor. Distributor
represents and warrants to Insurer that Distributor is and shall remain
registered during the term of this
- 3 -
<PAGE> 4
Agreement as a broker- dealer under the 1934 Act, is a member with the NASD,
and is duly registered under applicable state securities laws, and that
Distributor is and shall remain during the term of this Agreement in compliance
with Section 9(a) of the 1940 Act.
4. Selling Broker-Dealers. Insurer shall ensure that sales of the
Contracts by Selling Broker-Dealers comply with the following conditions.
a. Every Selling Broker-Dealer shall be both registered as a
broker-dealer with the SEC and a member of the NASD and licensed as an
insurance agent with authority to sell variable products or associated with an
insurance agent so licensed. Any individuals to be authorized to act on behalf
of Selling Broker-Dealer shall be duly registered with the NASD as
representatives of Selling Broker-Dealer with authority to sell variable
products, and shall be licensed as insurance agents with authority to sell
variable products. Insurer shall verify that Selling Broker-Dealer and its
Representatives are duly licensed under applicable state insurance law to sell
the Contracts (or, if Broker-Dealer is not so licensed, that it is associated
with a person or entity so licensed).
b. Every Selling Broker-Dealer (or, if applicable, its associated
general insurance agency) and each of its Representatives who proposes to
market the Contracts shall have been appointed by Insurer, provided that
Insurer reserves the right to refuse to appoint any proposed person, or once
appointed, to terminate such appointment.
c. Every Selling Broker-Dealer must enter into a written sales
agreement with Distributor which sales agreement, among other things, will
require such Selling Broker-Dealer to use its best efforts to solicit
applications for Contracts and to comply with applicable laws and regulations,
including the Insurer's rules and regulations as reflected in the Insurer's
rules and procedures or otherwise communicated to agents appointed by Insurer,
and will contain such other provisions as the Distributor deems to be
consistent herewith.
d. In view of Insurer's desire to ensure that Contracts will be
sold to purchasers for whom the Contracts will be suitable, the written Sales
Agreement shall require that Selling Broker-Dealers and their Representatives
not make recommendations to an applicant to purchase a Contract in the absence
of reasonable grounds to believe that the purchase of the Contract is suitable
for the applicant. While not limited to the following, a determination of
suitability shall be based on information supplied by an applicant after a
reasonable inquiry concerning the applicant's other security holdings,
investment objectives, financial situation and needs, and the likelihood that
the applicant will continue to make any premium payments contemplated by the
Contract applied for and will keep the Contract in force for a sufficient
period of time so that Insurer's acquisition costs are amortized over a
reasonable period of time.
5. Marketing Materials
a. Preparation and Filing. Insurer and Distributor will work
jointly on the design and preparation of all promotional, sales and advertising
material relating to the Contracts. Distributor shall be responsible for
filing such material, as required, with the NASD and any state securities
regulatory authorities. Insurer shall be responsible for filing all
promotional, sales or advertising material, as required, with any state
insurance regulatory authorities. Insurer shall be responsible for preparing
the Contract Forms and filing them with applicable state insurance regulatory
authorities and obtaining any required approvals, and for preparing the
Prospectuses and Registration Statements and filing them with the SEC and state
regulatory
- 4 -
<PAGE> 5
authorities, to the extent required. The parties shall notify each other
expeditiously of any comments provided by the SEC, NASD or any securities or
insurance regulatory authority on such material, and will cooperate
expeditiously in resolving and implementing any comments, as applicable.
b. Use in Solicitation Activities. Insurer shall be responsible
for furnishing Distributor with such Applications, Prospectuses and other
materials for use by Distributor and any Selling Broker- Dealers in their
solicitation activities with respect to the Contracts. Insurer shall notify
Distributor of those states or jurisdictions which require delivery of a
statement of additional information with a prospectus to a prospective
purchaser.
6. Compensation and Expenses
a. Insurer shall pay compensation for sales of the Contracts in
accordance with Schedule 2 hereto. Until Distributor requests otherwise,
Insurer shall pay compensation payable to Distributor Representatives and to
Selling Broker-Dealers, on Distributor's behalf, subject to the provisions of
Section 7 of this Agreement and applicable NASD rules.
b. Insurer shall pay all expenses in connection with:
(1) the preparation and filing of each Registration
Statement (including each pre-effective and post-effective amendment thereto)
and the preparation and filing of each Prospectus (including any preliminary
and each definitive Prospectus);
(2) the preparation, issuance and administration of the
Contracts;
(3) any registration, qualification or approval or other
filing of the Contracts or Contract forms required under the securities or
insurance laws of the states in which the Contracts will be offered.
(4) all registration fees for the Contracts payable to
the SEC;
(5) the printing and mailing of definitive Prospectuses
for the Contracts and any supplements thereto for distribution to existing
Contract Owners;
(6) the printing and mailing of all promotional materials
relating to the Contracts;
(7) NASD filing fees (to the extent the Insurer requests
expedited review).
c. Distributor shall pay the following expenses related to its
distribution of the Contracts:
(1) NASD filing fees (to the extent expedited review is
not requested by Insurer); and
(2) any other expenses incurred by Distributor or its
employees for the purpose of carrying out the obligations of Distributor
hereunder.
- 5 -
<PAGE> 6
7. Compliance
a. Maintaining Registration and Approvals. Insurer shall be
responsible for maintaining the registration of the Contracts with the SEC and
any state securities regulatory authority with which such registration is
required, for gaining and maintaining approval of the Contract forms where
required under the insurance laws and regulations of each state or other
jurisdiction in which the Contracts are to be offered, and for ensuring that
the Contracts comply with the provisions of the federal securities laws and
rules thereunder.
b. Sales Load Compliance. Insurer shall be responsible for ensuring
that the sales load assessed on the Contracts and compensation paid for the
sales of the Contracts comply with the 1940 Act and rules, regulations and
interpretations thereunder, and NASD rules.
c. Confirmations and 1934 Act Compliance. Insurer, as agent for
Distributor, shall confirm to each applicant for and purchaser of a Contract in
accordance with Rule 10b-10 under the 1934 Act acceptance of Premiums and such
other transactions as are required by Rule 10b-10 or administrative
interpretations thereunder. Insurer shall maintain and preserve such books and
records with respect to such confirmations and all other required books of
account and related financial records relating to the distribution of the
Contracts in conformity with the requirements of Rules 17a-3 and 17a-4 under
the 1934 Act to the extent such requirements apply. Insurer shall maintain all
such books and records and hold such books and records on behalf of and as
agent for Distributor whose property they are and shall remain, and
acknowledges that such books and records are at all times subject to inspection
by the SEC in accordance with Section 17(a) of the 1934 Act.
d. Issuance and Administration of Contracts. Insurer shall be
responsible for issuing the Contracts and administering the Contracts and the
Variable Account, including all Contract Owner communications, in accordance
with applicable law, provided, however, that Distributor shall have full
responsibility for the securities activities of all persons employed by the
Insurer who are engaged directly or indirectly in the Contract operations, and
for the training, supervision and control of such persons to the extent of such
activities.
8. Investigations, Proceedings and Customer Complaints
a. Investigations and Proceedings. Distributor and Insurer shall
cooperate fully in any securities or insurance regulatory investigation or
proceeding or judicial proceeding arising in connection with the offering, sale
or distribution of the Contracts distributed under this Agreement. Without
limiting the foregoing, Insurer and Distributor shall notify each other
promptly of any notice of any regulatory investigation or proceeding or
judicial proceeding received by either party with respect to the Contracts.
b. Customer Complaints. Distributor and Insurer shall cooperate
fully in responding to any customer complaints. Distributor and Insurer, will
promptly provide to the other a copy of all customer complaints received by
either of them concerning or related to the Contracts. With respect to such
complaint, Distributor and Insurer shall determine which party shall be
responsible for responding to such complaint. Such determination shall take
into account the nature of the complaint, the violation alleged, and relevant
laws and facts. Distributor and Insurer will timely provide information as
needed to enable the other to respond to such complaints.
- 6 -
<PAGE> 7
9. Indemnification
a. By Insurer. Insurer shall indemnify and hold harmless
Distributor and each person who controls or is associated with Distributor
within the meaning of such terms under the federal securities laws, and any
officer, director, employee or agent of the foregoing, against any and all
losses, claims, damages or liabilities, joint or several (including any
investigative, legal and other expenses reasonably incurred in connection with,
and any amounts paid in settlement of, any action, suit or proceeding or any
claim asserted), to which Distributor and/or any such person may become
subject, under any statute or regulation, any NASD rule or interpretation, at
common law or otherwise, insofar as such losses, claims, damages or
liabilities:
(1) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein not misleading, in light of the circumstances in which they
were made, contained in any (i) Registration Statement or in any Prospectus or
(ii) blue-sky application or other document executed by Insurer specifically
for the purpose of qualifying any or all of the Contracts for sale under the
securities laws of any jurisdiction; provided that Insurer shall not be liable
in any such case to the extent that such loss, claim, damage or liability
arises out of, or is based upon, an untrue statement or alleged untrue
statement or omission or alleged omission made in reliance upon information
furnished in writing to Insurer by Distributor specifically for use in the
preparation of any such Registration Statement or any such blue-sky application
or any amendment thereof or supplement thereto;
(2) result from any breach by Insurer of any provision of
this Agreement.
This indemnification agreement shall be in addition to any
liability that Insurer may otherwise have; provided, however, that no person
shall be entitled to indemnification pursuant to this provision if such loss,
claim, damage or liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking indemnification.
b. By Distributor. Distributor shall indemnify and hold harmless
Insurer and each person who controls or is associated with Insurer within the
meaning of such terms under the federal securities laws, and any officer,
director, employee or agent of the foregoing, against any and all losses,
claims, damages or liabilities, joint or several (including any investigative,
legal and other expenses reasonably incurred in connection with, and any
amounts paid in settlement of, any action, suit or proceeding or any claim
asserted), to which Insurer and/or any such person may become subject under any
statute or regulation, any NASD rule or interpretation, at common law or
otherwise, insofar as such losses, claims, damages or liabilities:
(1) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact or omission or alleged omission
to state a material fact required to be stated therein or necessary in order to
make the statements therein not misleading, in light of the circumstances in
which they were made, contained in any (i) Registration Statement or in any
Prospectus, or (ii) blue-sky application or other document executed by Insurer
specifically for the purpose of qualifying any or all of the Contracts for sale
under the securities laws of any jurisdiction; in each case to the extent, but
only to the extent, that such untrue statement or alleged untrue statement or
omission or alleged omission was made in reliance upon information furnished in
writing by Distributor to Insurer specifically for use in the preparation of
any such Registration Statement or any such blue-sky application or any
amendment thereof or supplement thereto;
- 7 -
<PAGE> 8
(2) result because of any use by Distributor or any
Distributor Representative of promotional, sales or advertising material not
authorized by Insurer or any verbal or written misrepresentations by
Distributor or any Distributor Representative inconsistent with materials
forwarded by Insurer or any unlawful sales practices concerning the Contracts
by Distributor or any Distributor Representative under federal securities laws
or NASD regulations; or
(3) result from any breach by Distributor of any
provision of this Agreement.
This indemnification shall be in addition to any liability
that Distributor may otherwise have; provided, however, that no person shall be
entitled to indemnification pursuant to this provision if such loss, claim,
damage or liability is due to the willful misfeasance, bad faith, gross
negligence or reckless disregard of duty by the person seeking indemnification.
c. General. Promptly after receipt by a party entitled to
indemnification ("indemnified person") under this Section 9 of notice of the
commencement of any action as to which a claim will be made against any person
obligated to provide indemnification under this Section 9 ("indemnifying
party"), such indemnified person shall notify the indemnifying party in writing
of the commencement thereof as soon as practicable thereafter, but failure to
so notify the indemnifying party shall not relieve the indemnifying party from
any liability which it may have to the indemnified person otherwise than on
account of this Section 9. The indemnifying party will be entitled to
participate in the defense of the indemnified person but such participation
will not relieve such indemnifying party of the obligation to reimburse the
indemnified person for reasonable legal and other expenses incurred by such
indemnified person in defending himself or itself.
The indemnification provisions contained in this Section 9
shall remain operative in full force and effect, regardless of any termination
of this Agreement. A successor by law of Distributor or Insurer, as the case
may be, shall be entitled to the benefits of the indemnification provisions
contained in this Section 9.
10 Termination. This Agreement shall terminate automatically if it is
assigned by a party without the prior written consent of the other party. This
Agreement may be terminated at any time for any reason or for no reason by
either party upon 60 days' written notice to the other party, without payment
of any penalty. (The term "assigned" shall not include any transaction
exempted from Section 15(b)(2) of the 1940 Act.) This Agreement may be
terminated immediately at the option of either party to this Agreement upon the
other party's material breach of any provision of this Agreement or of any
representation or warranty made in this Agreement, unless such breach has been
cured within 10 days after receipt of notice of breach from the non-breaching
party. Upon termination of this Agreement all authorizations, rights and
obligations shall cease except the obligation to settle accounts hereunder,
including commissions on Premiums subsequently received for Contracts in effect
at the time of termination or issued pursuant to Applications signed prior to
termination.
11. Miscellaneous
a. Binding Effect. This Agreement shall be binding on and shall
inure to the benefit of the respective successors and assigns of the parties
hereto provided that neither party shall assign this Agreement or any rights or
obligations hereunder without the prior written consent of the other party.
- 8 -
<PAGE> 9
b. Schedules. The parties to this Agreement may amend Schedule 1
to this Agreement from time to time to reflect additions of any class of
Contracts and Variable Accounts. The provisions of this Agreement shall be
equally applicable to each such class of Contracts and each Variable Account
that may be added to the Schedule, unless the context otherwise requires.
Insurer may amend Schedule 2 unilaterally, from time to time. Any other change
in the terms or provisions of this Agreement shall be by written agreement
between Insurer and Distributor.
c. Rights, Remedies, etc, are Cumulative. The rights, remedies
and obligations contained in this Agreement are cumulative and are in addition
to any and all rights, remedies and obligations, at law or in equity, which the
parties hereto are entitled to under state and federal laws. Failure of either
party to insist upon strict compliance with any of the conditions of this
Agreement shall not be construed as a waiver of any of the conditions, but the
same shall remain in full force and effect. No waiver of any of the provisions
of this Agreement shall be deemed, or shall constitute, a waiver of any other
provisions, whether or not similar, nor shall any waiver constitute a
continuing waiver.
d. Notices. All notices hereunder are to be made in writing and
shall be given:
if to Insurer, to:
D. Russell Morgan, Esq.
National Life Insurance Company
One National Life Drive
Montpelier, Vermont 05604
if to Distributor, to:
Gregory D. Teese, Vice President - Compliance
Equity Services, Inc.
National Life Drive
Montpelier, Vermont 05604
or such other address as such party may hereafter specify in
writing. Each such notice to a party shall be either hand delivered or
transmitted by registered or certified United States mail with return receipt
requested, or by overnight mail by a nationally recognized courier, and shall
be effective upon delivery. Failure to provide written notice shall not
constitute a defense to any action unless the party who did not receive written
notice was materially prejudiced thereby.
f. Interpretation; Jurisdiction. This Agreement constitutes the
whole agreement between the parties hereto with respect to the subject matter
hereof, and supersedes all prior oral or written understandings, agreements or
negotiations between the parties with respect to such subject matter. No prior
writings by or between the parties with respect to the subject matter hereof
shall be used by either party in connection with the interpretation of any
provision of this Agreement. This Agreement shall be construed and its
provisions interpreted under and in accordance with the internal laws of the
state of Vermont without giving effect to principles of conflict of laws.
g. Severability. This is a severable Agreement. In the event
that any provision of this Agreement would require a party to take action
prohibited by applicable federal or state law
- 9 -
<PAGE> 10
or prohibit a party from taking action required by applicable federal or state
law, then it is the intention of the parties hereto that such provision shall
be enforced to the extent permitted under the law, and, in any event, that all
other provisions of this Agreement shall remain valid and duly enforceable as
if the provision at issue had never been a part hereof.
h. Section and Other Headings. The headings in this Agreement
are included for convenience of reference only and in no way define or
delineate any of the provisions hereof or otherwise affect their construction
or effect.
i. Counterparts. This Agreement may be executed in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
j. Regulation. This Agreement shall be subject to the provisions
of the 1933 Act, 1934 Act and 1940 Act and the Regulations and the rules and
regulations of the NASD, from time to time in effect, including such exemptions
from the 1940 Act as the SEC may grant, and the terms hereof shall be
interpreted and construed in accordance therewith.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly
executed by such authorized officers on the date specified below.
NATIONAL LIFE INSURANCE COMPANY
By:
-----------------------------
Name:
Title:
EQUITY SERVICES, INC.
By:
-----------------------------
Name:
Title:
- 10 -
<PAGE> 11
SCHEDULE 1
<TABLE>
<CAPTION>
REGISTRATION VARIABLE
VARIABLE CONTRACT FORM STATEMENT ACCOUNT
<S> <C> <C> <C> <C>
1. Variable Annuity Form S-6 File No. 333-19583 National Variable
Contract Annuity Account II
</TABLE>
- 11 -
<PAGE> 12
SCHEDULE 2
SCHEDULES OF SALES COMMISSIONS
The commission schedules are as follow:
<TABLE>
<CAPTION>
SCHEDULE 1
Issue Comm. Expense
Age Rate Allowance Total
--- ---- --------- -----
<S> <C> <C> <C>
0-79 3.50% 3.00% 6.50%
80-85 3.50% 0.00% 3.50%
Trail No Trail
<CAPTION>
SCHEDULE 2
Issue Comm. Expense
Age Rate Allowance Total
--- ---- --------- -----
<S> <C> <C> <C>
0-79 3.50% 1.75% 5.25%
80-85 2.75% 0.00% 2.75%
Trail 0.25%
<CAPTION>
SCHEDULE 3
Issue Comm. Expense
Age Rate Allowance Total
--- ---- --------- -----
<S> <C> <C> <C>
0-79 3.50% 0.00% 3.50%
80-85 1.75% 0.00% 1.75%
Trail 0.50%
</TABLE>
During an introductory period, a Schedule 1 commission of 7.0% (3.50%
commission, 3.50% expense allowance) for ages 0.79 and 4.00% (3.50% commission,
0.50% expense allowance) for ages 80-85 will be paid.
- 12 -
<PAGE> 1
EXHIBIT (b)(4)(a)
[NATIONAL LIFE INSURANCE COMPANY LETTERHEAD]
We, NATIONAL LIFE INSURANCE COMPANY, agree to pay the proceeds of this
contract, subject to its terms, to the Payee upon maturity of this contract.
We agree to pay the Death Benefit to the Beneficiary, subject to the terms of
this contract, when we receive at our Home Office due proof that a human Owner,
or the Annuitant if the Owner is not a human being, died prior to the Maturity
Date.
The data and the terms on this and all following pages are part of this
contract.
Signed for NATIONAL LIFE INSURANCE COMPANY at Montpelier, Vermont, as of the
Date of Issue, by
Chairman of the Board
and
Chief Executive Officer
Secretary
Registrar
- --------------------------------------------------------------------------------
A FLEXIBLE PREMIUM VARIABLE DEFERRED ANNUITY. THIS CONTRACT IS PARTICIPATING.
ANNUITY PAYMENTS, DEATH BENEFITS, CASH SURRENDER VALUES, AND OTHER CONTRACT
VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A
VARIABLE ACCOUNT, ARE VARIABLE AND MAY INCREASE OR DECREASE DAILY IN ACCORDANCE
WITH FLUCTUATIONS IN THE INVESTMENT EXPERIENCE OF THAT ACCOUNT, AND SO ARE NOT
GUARANTEED AS TO DOLLAR AMOUNT.
TEN DAY RIGHT TO REVIEW CONTRACT. This contract, at any time within ten days
after its receipt by the Owner, may be returned in person or by mail to us or
to the agent through whom it was bought. Upon such return, the contract will
be deemed void as of its Date of Issue. We will then refund the Contract Value
plus any charges deducted at issue.
<PAGE> 2
INDEX
Page
1 ROLES IN THIS CONTRACT
1 Owner
1 Annuitant
1 Beneficiary
1 Payee
1 Change of Beneficiary or Payee
2 Trust Beneficiary or Payee
2 Unnamed Beneficiary or Payee
2 Simultaneous Deaths
2 Assignments
2 PREMIUMS
2 Payment of Premiums
2 Net Premium
2 Premium Allocation
3 INVESTMENT
3 Fixed Account
3 Interest Rates Credited to the Contract Value in the Fixed Account
3 Variable Account
3 Sub-Accounts
3 Valuation
3 Valuation Date and Valuation Period
4 CONTRACT VALUE
4 Contract Value
4 Contract Value in the Fixed Account
4 Contract Value in the Variable Account
4 Units in a Sub-Account
4 Unit Value
4 Net Investment Factor
4 Dividends
5 CONTRACT BENEFITS
5 Deferral of Maturity Date
5 Payment on Maturity
5 Death Benefit
5 Joint Owners
5 Cash Surrender Value
6 WITHDRAWALS AND TRANSFERS
6 Withdrawal Benefit
6 Systematic Withdrawals
6 Contingent Deferred Sales Charge
7 Waiver of Contingent Deferred Sales Charges on 15% of Contract Value
7 Waiver of Contingent Deferred Sales Charges for Confinement to an
Eligible Nursing Home
7 General Withdrawal Terms
7 Allocation of Withdrawals
8 Allocation of Contingent Deferred Sales Charges
8 Transfers
8 Dollar Cost Averaging
8 Portfolio Rebalancing
9 CHARGES AGAINST THE CONTRACT VALUE
9 Mortality and Expense Risk Charge and Administration Charge
9 Annual Contract Fee
9 Rider Charges
9 Tax Charge
9 Transfer Charge
I
<PAGE> 3
INDEX (continued)
Page
10 PAYMENT OPTIONS
10 Option Effective Date
10 General Payment Option Terms
10 Choice of Option
10 Fixed Payment Option
10 Variable Payment Option
11 Annuity Unit Value
11 Option 1 - Payments for a Stated Time
11 Option 2 - Payments for Life
11 Option 3 - Payments for Life
with Period Certain
12 GENERAL TERMS
12 Consideration
12 Entire Contract
12 Contract Months, Years, and
Anniversaries
12 Payment of Benefits
12 Postponement of Payments
12 Notices
12 Annual Report
12 Attained Age
13 Misstatement of Age or Sex
13 Proof of Age
13 Values
13 Limit on Transfer
13 Spendthrift Provision
13 Arbitration
Any Riders and Endorsements, and a copy of the application, follow page 13.
II
<PAGE> 4
We, National Life Insurance Company, agree to pay the proceeds of this
contract, subject to its terms, to the Payee upon maturity of this contract.
We agree to pay the Death Benefit to the Beneficiary, subject to the terms of
this contract, when we receive at our Home Office due proof that a human Owner,
or the Annuitant if the Owner is not a human being, died prior to the Maturity
Date.
ROLES IN THIS CONTRACT
If used, the term "estate" of any person shall be deemed to be a designation of
the executors or administrators of that person's estate.
OWNER. The Owner holds all rights under this contract. The Owner may take
action without the consent of and against the interest of any revocable
Beneficiary or Payee. If the Owner has waived the right to change either the
Beneficiary or the Payee, or both of them, action may be taken by the Owner
only with the written consent of all irrevocable Beneficiaries and Payees.
If an instrument of trust is identified as the Owner of this contract,
ownership will extend to such trust as amended if the trust is amendable, or to
the successor(s) in said trust or assigns.
A Death Benefit is payable upon the death of the Owner if such death occurs
prior to the Maturity Date.
ANNUITANT. The Annuitant has no rights and receives no benefits under this
contract.
If the Owner is a human being, and the Annuitant dies prior to the Maturity
Date, an Owner may name a new Annuitant during the first 90 days following the
death of the Annuitant. If the Owner does not so name a new Annuitant, we will
pay the Cash Surrender Value to the Beneficiary.
If the Owner is not a human being, and the Annuitant dies prior to the Maturity
Date, we will pay a Death Benefit to the Beneficiary.
BENEFICIARY. The Beneficiary receives the following benefits:
1. The Beneficiary receives the Death Benefit; and
2. If income payments are being made under a Payment Option of this
contract, the Beneficiary succeeds upon the death of the Owner to such
rights in this contract as the Owner held upon his or her death.
Unless otherwise stated, the interest of any Beneficiary who dies will vest:
1. in the Owner, if living; otherwise
2. in the estate of the Beneficiary.
PAYEE. The Payee receives all proceeds payable upon maturity of this contract.
Unless otherwise stated, the interest of any Payee who dies will vest:
1. in the Owner, if living; otherwise
2. in the Beneficiary.
Upon the death of the Payee, the Owner may name a new Payee. The schedule of
payments under any operational Payment Option may not be extended when a new
Payee is named.
CHANGE OF BENEFICIARY OR PAYEE. The Owner has the right to change the
Beneficiary and Payee. If the Owner expressly waives this right, no change can
be made without their written consent. A new Beneficiary or Payee may be named
by filing at our Home Office written notice in such form as we may require.
When notice is received at our Home Office, the change shall take effect as of
the date the notice was signed. We will not be liable for any payment we make
before receipt of the written notice at our Home Office.
1
<PAGE> 5
TRUST BENEFICIARY OR TRUST PAYEE. Unless an authorized officer or registrar of
the Company explicitly agrees in writing, the following provision shall apply
when a trust is named as Beneficiary or as Payee:
In no event is the Company responsible for the application or disposition of
any proceeds it pays to such trust. Payment to such trust is a full discharge
of the liability of the Company. If a designated trust provides for successor
trustees, the designation of this contract includes successor trustees.
Likewise, if the trust allows amendments, the trust, if so amended, remains as
a designated Beneficiary or Payee.
A Trust Beneficiary or Trust Payee is considered to be a Beneficiary or Payee
who did not survive the Owner if:
1. the trust has been terminated; or
2. the specified testamentary trust does not qualify as such; or
3. for any other reason a Trust Beneficiary or Trust Payee is not entitled
to any proceeds.
UNNAMED BENEFICIARY OR PAYEE. We may rely on an affidavit by any person who in
our judgment knows the facts to identify any Beneficiary or Payee not specified
by name. All our liability shall cease when we pay on the basis of such
affidavit.
If used, the term "children" of any person shall include only lawful children
born to or legally adopted by that person.
SIMULTANEOUS DEATHS. If the timing of the deaths of the Owner and the
Annuitant are such that we cannot discern the true order of the deaths, we will
administer this contract as though the Owner predeceased the Annuitant.
If the timing of the deaths of the Owner and the Beneficiary are such that we
cannot discern the true order of the deaths, we will administer this contract
as though the Beneficiary predeceased the Owner.
ASSIGNMENTS. We are not responsible for the validity or effect of any
assignment of this contract. We will not recognize any assignment until it has
been filed at our Home Office.
PREMIUMS
PAYMENT OF PREMIUMS. A Minimum Initial Premium in the amount stated in the
Data Section is due on the Date of Issue. We retain the right to hold the
Minimum Initial Premium for up to five days while we wait for a complete
application.
After the Date of Issue, we will not accept premium in an amount less than the
Minimum Subsequent Premium stated in the Data Section. The sum of all premiums
credited to this contract may not exceed the Premium Limit set forth in the
Data Section, unless approved by us.
The first premium may be paid to us either at our Home Office or through our
duly authorized agent in exchange for a receipt signed by that agent. Any
later premiums must be paid to us at our Home Office. All premiums will be
credited and allocated on the day we receive them.
NET PREMIUM. A Net Premium is any premium paid less any state premium tax
assessed against the premium as required by the state in which the Annuitant
resides.
If a premium tax is required by the state in which the Annuitant resides, and
the tax was not assessed against the premium at the time the premium was paid,
the tax will be assessed against distributions from this contract as necessary.
PREMIUM ALLOCATION. The Owner has the right to designate the allocation of Net
Premiums among the Fixed Account and the Sub-Accounts of the Variable Account.
The initial allocation is shown in the Data Section. The allocation must be
made in percentages. Each percentage must be a whole number. Each allocation
made must be at least five percent.
The Owner may change the allocation of future premiums by notifying us in
writing at our Home Office. We reserve the right to restrict the number of
different Sub-Accounts to which premiums are allocated over the life of this
contract to seventeen.
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<PAGE> 6
INVESTMENT
Investment may be made in the Fixed Account and/or in one or more of the
Sub-Accounts of the National Variable Annuity Account II (herein called the
"Variable Account"). The Contract Value in the Variable Account is based on
the investment experience of the chosen Sub-Account(s) of the Variable Account,
and may increase or decrease daily. It is not guaranteed as to dollar amount.
FIXED ACCOUNT. The Fixed Account is composed of the admitted assets of
National Life Insurance Company other than those in the Variable Account or any
other separate account.
Unless stated otherwise in this contract, all monies transferred and charges
deducted from the Fixed Account are done so on a last-in-first-out basis.
INTEREST RATES CREDITED TO THE CONTRACT VALUE IN THE FIXED ACCOUNT. The rate
of interest credited on any portion of the Contract Value in the Fixed Account
shall never be less than the Minimum Fixed Account Interest Rate shown in the
Data Section. We may credit interest at a higher interest rate. Any higher
interest rate credited on Contract Value in the Fixed Account shall remain in
effect for at least a one-year period.
Allocations to the Fixed Account made at different times may be credited
interest at different rates. Each month we will declare an interest rate to
apply to amounts allocated or transferred to the Fixed Account during that
month. The rate declared on such amounts will remain in effect for twelve
months. At the end of the twelve month period, such amounts and accrued
interest thereon will rollover for interest crediting at a new rate. The
interest credited to such rollover amounts may be at a different rate than that
applicable to new allocations to the Fixed Account on that date.
VARIABLE ACCOUNT. The Variable Account is composed of assets owned by National
Life Insurance Company. These assets are held separate and apart from Fixed
Account assets. The Variable Account is devoted exclusively to the investment
of assets of variable annuity contracts. Income, gains, and losses from assets
allocated to the Variable Account, whether or not realized, are credited to or
charged against such account without regard to our other income, gains or
losses. The portion of the assets of the Variable Account equal to the
reserves and other liabilities for these contracts shall not be chargeable with
liabilities arising out of any other business which we may conduct.
We may transfer assets which exceed the reserves and other liabilities of the
Variable Account to our Fixed Account.
The Variable Account is registered with the Securities and Exchange Commission
as a unit investment trust under the Investment Company Act of 1940 ("the 1940
Act"). It is also governed by applicable state law. We may make certain
changes if, in our sole judgment, they would best serve the interest of the
owners of contracts such as this one or would be appropriate in carrying out
the purposes of such contracts.
Any changes will be made only if permitted by applicable laws and regulations.
Also when required by law, we will obtain the approval of policyowners of the
changes and the approval of any appropriate regulatory authority.
For example, we may:
1. operate the Variable Account as a management company under the 1940
Act; and
2. deregister the Variable Account under the 1940 Act if registration is
no longer required; and
3. combine or substitute separate accounts, including the Variable
Account;
and
4. create new separate accounts; and
5. transfer all or part of the assets of the Variable Account to another
separate account or to the Fixed Account; and
6. add new investment funds or remove existing investment funds; and
7. make any changes necessary to comply with, or obtain and continue any
exemptions from the 1940 Act; and
8. make any other necessary technical changes in this policy to conform
with any action this provision permits us to take.
SUB-ACCOUNTS. The Variable Account has several Sub-Accounts. Each Sub-Account
invests exclusively in shares of an investment fund. Each investment fund
represents a separate investment portfolio.
If, in our judgment, an investment fund no longer suits the investment goals of
this contract, or tax or marketing conditions so warrant, we may substitute
shares of another investment fund or shares of another investment company.
Income and realized and unrealized gains or losses from the assets of each
Sub-Account of the Variable Account are credited to or charged against that
Sub-Account without regard to income, gains, or losses in the other
Sub-Accounts of the Variable Account, the Fixed Account, or any other separate
accounts. We reserve the right to credit or charge a Sub-Account in a
different manner if required, or made appropriate, by reason of a change in the
law. We maintain records of all purchases and redemptions of investment fund
shares by each of the Sub-Accounts.
VALUATION. We will value the assets of each Sub-Account of the Variable
Account on every Valuation Date.
VALUATION DATE AND VALUATION PERIOD. A Valuation Date is each day that the New
York Stock Exchange is customarily open for trading, except for:
1. the day following Thanksgiving in each year; and
2. any day on which trading is restricted by directive of the Securities
and Exchange Commission.
A Valuation Period is the period between two successive Valuation Dates.
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<PAGE> 7
CONTRACT VALUE
CONTRACT VALUE. The Contract Value of this contract is equal to the sum of the
Contract Value in the Fixed Account and the Contract Value in the Variable
Account.
CONTRACT VALUE IN THE FIXED ACCOUNT. Prior to the Date of Issue of the
contract, the Contract Value in the Fixed Account is zero. The Contract Value
in the Fixed Account on any day on or after the Date of Issue is:
1. the Contract Value in the Fixed Account on the prior day; plus
2. one day's interest on the prior day's Contract Value in the Fixed
Account; plus
3. the amount of all Net Premiums credited on that day which are allocated
to the Fixed Account; plus
4. the amount of all Contract Value transferred to the Fixed Account from
a Sub-Account of the Variable Account on that day; less
5. the amount of all Contract Value transferred from the Fixed Account to
a Sub-Account of the Variable Account on that day; less
6. the amount of any Transfer Charge assessed to the Fixed Account on that
day; less
7. the amount of all Contract Value withdrawn from the Fixed Account on
that day; less
8. any rider charges and Administration Charge allocated to the Fixed
Account which is due on that day.
CONTRACT VALUE IN THE VARIABLE ACCOUNT. The Contract Value in the Variable
Account is the sum of the Contract Values in each Sub-Account of the Variable
Account.
On any day which is a Valuation Date, the Contract Value in each Sub-Account is
the number of units in the Sub-Account multiplied by the Unit Value on that
date.
On any date after the Date of Issue other than a Valuation Date, the Contract
Value in a Sub-Account is as determined on the next following Valuation Date.
UNITS IN A SUB-ACCOUNT. Money allocated, transferred, or added to a Sub-Account
purchases units in that Sub-Account. Any money invested in a Sub-Account
increases the number of units of that Sub-Account credited to this contract.
Units are redeemed when amounts are deducted, transferred, or withdrawn.
The number of units credited to a contract equals the dollar amount directed to
each Sub-Account divided by the Unit Value for that Sub-Account for the
Valuation Date as of which the dollar amount is invested in the Sub-Account.
For each Sub-Account, the number of units purchased or redeemed in connection
with a particular transaction is determined by dividing the dollar amount of
the transaction by the Unit Value on the day the transaction is performed.
UNIT VALUE. The Unit Value in a Sub-Account on any Valuation Date is equal to
that Unit Value on the immediately preceding Valuation Date multiplied by the
Net Investment Factor in effect for that Sub-Account.
NET INVESTMENT FACTOR. Each Sub-Account of the Variable Account has its own
Net Investment Factor. The Net Investment Factor measures the performance of
the Sub-Account during individual Valuation Periods. The Net Investment Factor
is calculated as follows:
1. Take the net asset value per share of the corresponding investment fund
on the current Valuation Date.
2. Add the per share capital gain or loss and dividend distribution of the
investment fund during the current Valuation Period.
3. Divide the result of item (2) by the net asset value per share of the
corresponding investment fund on the just prior Valuation Date.
4. Subtract from the result of item (3) any Tax Charge during the current
Valuation Period.
5. Subtract from the result of item (4) the number of days in the
Valuation Period multiplied times the sum of the Mortality and Expense
Risk Charge and the Administration Charge shown in the Data Section.
The result of item (5) is the Net Investment Factor on the current Valuation
Date.
DIVIDENDS. We may credit this contract with shares, called dividends, from our
divisible surplus. However, it is expected that no dividends will be credited
to this contract. Any dividends shall be set by us and shall be credited on
the Contract Anniversary. Any dividends credited shall be paid in cash.
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<PAGE> 8
CONTRACT BENEFITS
This contract will be administered to fully conform with the provisions of
Section 72(s) of the Internal Revenue Code.
DEFERRAL OF MATURITY DATE. If we approve, the Owner may defer the Maturity
Date upon written request received by us at our Home Office.
PAYMENT ON MATURITY. Upon the Maturity Date stated in the Data Section, the
Cash Surrender Value is payable to the Payee in a single sum. In lieu of this
lump sum payment, an income may be payable to the Payee in accordance with a
Payment Option chosen by the Owner. The amount of income shall be determined
by applying the Contract Value less any state premium tax that is assessed on
distributions as of the date this contract matures as proceeds under that
Payment Option.
Upon the Maturity Date, unless we receive at our Home Office written
instructions from the Owner to the contrary, the Owner will be deemed to have
elected an income payment pursuant to Option 3 - Payments for Life with Period
Certain, with monthly payments for 120 months, continuing thereafter during the
life of:
1. the Annuitant; or
2. the Owner, if the Annuitant is not living.
DEATH BENEFIT. A Death Benefit is payable to the Beneficiary when we receive
at our Home Office due proof that any human Owner, or the Annuitant if the
Owner is not a human being, died prior to the Maturity Date and while this
contract was in force.
1. If the deceased died prior to his or her Attained Age 81, this Death
Benefit is the greater of:
a. the Contract Value on the date we receive proof of death;
b. the sum, as of the date we receive proof of death, of all Net
Premiums less cumulative withdrawals made since the Date of
Issue of this contract;
less any state premium tax that is assessed on distribution.
2. If the deceased died on or after his or her Attained Age 81, this
Death Benefit is the Contract Value on the date we receive proof of
death less any state premium tax that is assessed on distribution.
If the Annuitant dies prior to the Maturity Date while the Owner is a human
being, and the Owner does not name a new Annuitant during the first 90 days
following the death of the Annuitant, we will pay a Death Benefit equal to the
Cash Surrender Value to the Beneficiary.
Any Death Benefit is payable in one sum, or the Beneficiary may elect
settlement under one of the Payment Options of this contract. We may restrict
the availability of Payment Options when distributing Death Benefits to Fixed
Payment Options. The Death Benefit will accrue interest from the date we
receive proof of the death to the date of lump sum payment or the Option
Effective Date at a rate of interest not less than the Minimum Interest Paid on
Death Claims rate shown in the Data Section.
Payments must be completed by December 31st of the fifth calendar year
immediately following the year of the death, except that, if the Beneficiary is
a human being and so elects, the payments may be made:
1. over the life of the Beneficiary, or
2. according to a fixed schedule which does not extend beyond the life
expectancy of the Beneficiary,
provided that payments begin within one year from the date of the death.
If there is no named Beneficiary, payment of the Death Benefit will be made in
a lump sum to the estate of the deceased on or prior to December 31st of the
fifth calendar year immediately following the year of the death.
Upon payments of a Death Benefit all rights under this contract shall cease.
JOINT OWNERS. If this contract is jointly owned, the Death Benefit will be
payable on the death of the first human Owner to die.
CASH SURRENDER VALUE. The Cash Surrender Value on any day shall be equal to:
1. the Contract Value on such day; less
2. any state premium tax that is assessed on distribution; less
3. the Contingent Deferred Sales Charge which would apply if the entire
Contract Value were withdrawn on such day.
When no Cash Surrender Value remains, all rights under this contract shall
cease.
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<PAGE> 9
WITHDRAWALS AND TRANSFER
The removal of all Contract Value from this contract is a Cash Surrender. The
removal of less than the full Contract Value may be made on the first Contract
Anniversary and thereafter by withdrawal.
WITHDRAWAL BENEFIT. We will pay a Withdrawal Benefit upon written request by
the Owner received by us at our Home Office. Such request must be made prior
to the Maturity Date. The Withdrawal Benefit shall be equal to any Contract
Value withdrawn less any Contingent Deferred Sales Charge.
SYSTEMATIC WITHDRAWALS. Unless either Portfolio Rebalancing or Dollar Cost
Averaging has been elected for this contract, the Owner may request the payment
of Withdrawal Benefits according to a schedule of Systematic Withdrawals.
According to the chosen schedule, periodic withdrawals of a fixed dollar amount
will automatically be made from the Contract Value. Periodic withdrawals may
be made annually, semi-annually, quarterly,or monthly.
The Contract Value must be at least $15,000 before any schedule of Systematic
Withdrawals may be placed into effect. The dollar amount of each periodic
withdrawal may not be less than $100.
The Owner may change the frequency of withdrawals or the withdrawal schedule at
any time.
Systematic Withdrawals will cease upon the earliest of the following:
1. the death of the Owner; or
2. when a Systematic Withdrawal would result in less than $3,500 of
Contract Value left remaining in the contract on the day of
withdrawal; or
3. the Maturity Date; or
4. written request for cessation by the Owner is received by us at our
Home Office; or
5. 60 days prior written notice provided to the Owner by us.
CONTINGENT DEFERRED SALES CHARGE. For purposes of determining the Contingent
Deferred Sales Charge, the Contract Value will be apportioned into segments of
size equal to the Net Premiums paid into this contract. Such segments will be
considered withdrawn in the order in which the corresponding Net Premiums were
received.
The Contingent Deferred Sales Charge is a percentage of the apportioned
Contract Value withdrawn, and is determined independently for each segment.
The percentage depends upon the number of full 365-day years elapsed between
the date the Net Premium was credited and the date of the withdrawal.
The Contingent Deferred Sales Charge for each segment of the Contract Value
withdrawn is determined by multiplying the amount of the Contract Value in that
segment times the appropriate Contingent Deferred Sales Charge Percentage
shown in the table below:
<TABLE>
<CAPTION>
Contingent Deferred Sales Charge Percentage
Number of Full Years Contingent Deferred
Elapsed Since Sales Charge
Net Premium Payment Percentage
<S> <C>
0 Years 7%
1 Year 6%
2 Years 5%
3 Years 4%
4 Years 3%
5 Years 2%
6 Years 1%
7+ Years 0%
</TABLE>
All surrenders and withdrawals will be made last from available earnings
credited to this contract. No Contingent Deferred Sales Charge will be
assessed upon the surrender or withdrawal of any earnings.
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<PAGE> 10
WAIVER OF CONTINGENT DEFERRED SALES CHARGES ON 15% OF CONTRACT VALUE. After the
first Contract Anniversary, there shall be no Contingent Deferred Sales Charge
on total Contract Value withdrawn during any Contract Year in a amount equal to
up to 15% of the Contract Value at the start of the Contract Year.
This Waiver of Contingent Deferred Sales Charges does not apply upon Cash
Surrender. Any Contingent Deferred Sales Charges waived through operation of
this provision during the 12 months immediately preceding Cash Surrender of
this contract will be assessed against the Cash Surrender Value.
WAIVER OF CONTINGENT DEFERRED SALES CHARGES FOR CONFINEMENT TO AN ELIGIBLE
NURSING HOME. Following the first Contract Anniversary, Contingent Deferred
Sales Charges will be waived if the Owner has been confined to an Eligible
Nursing Home for at least the 90 continuous day ending on the date of the
withdrawal request. Confinement must have begun while this contract was in
force, and the confinement must be expected to be permanent.
An Eligible Nursing Home is an institution or special unit of a hospital which
meets all of the following:
1. It is licensed as a skilled nursing home or as an intermediate care
facility by the state in which it is located; and
2. Its main function is to provide skilled or intermediate nursing care;
and
3. It is engaged in providing continuous room and board accommodations;
and
4. It is under the supervision of:
a. a Registered Nurse (RN); or
b. a Licensed Practical Nurse (LPN); or
c. a Licensed Vocational Nurse (LVN); and
5. It maintains a daily medical record of each patient
An Eligible Nursing Home is not:
1. Any home, facility or part thereof used primarily for rest; or
2. A home or facility used for the aged or for the care of substance
abusers; or
3. A home or facility primarily used for the care and treatment of mental
diseases or disorders, or custodial or educational care.
We must receive written proof satisfactory to us that the Owner has been
confined to an Eligible Nursing Home. A written statement from a licensed
physician, other than the Owner or a member of the Owner's immediate family,
will serve as satisfactory proof.
GENERAL WITHDRAWAL TERMS. The minimum Withdrawal Benefit is $500. The maximum
Withdrawal Benefit allowed is that amount which leaves no less than $3,500 of
Contract Value in the contract on the day of the withdrawal. If the Owner
requests a withdrawal that would leave less than $3,500 of Contract Value
remaining in the contract on the day of withdrawal, the requested withdrawal
will not be processed until further instructions are received from the Owner.
ALLOCATION OF WITHDRAWALS. The amount withdrawn shall be allocated among and
deducted from the Contract Values held in each account according to the
following prioritization:
1. first, from the Contract Value held in specific Sub-Accounts as
specified by the Owner, if the Owner so specifies; and
2. second, from the Contract Value in proportion to the Contract Values
held in the Sub-Accounts of the Variable Account and the Fixed
Account on the day the withdrawal is made.
Within the Fixed Account, withdrawals will be from the Contract Value
attributable to Net Premiums in the order in which they were credited.
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<PAGE> 11
ALLOCATION OF CONTINGENT DEFERRED SALES CHARGES. To the extent possible,
Contingent Deferred Sales Charges will be assessed against the Contract Value
in the Fixed Account and the Sub-Accounts of the Variable Account in
proportions comparable to the Allocation of Withdrawals. If insufficient
Contract Value remains in any of the impacted accounts to complete this
assessment, the unallocated portion of the Contingent Deferred Sales Charge
shall be deducted from the Fixed Account and the Sub-Accounts in proportion to
the respective Contract Values held in those accounts immediately following the
withdrawal.
TRANSFERS. Subject to any applicable Transfer Charges, the Owner may transfer
Contract Value among the Sub-Accounts or to the Fixed Account without
limitation. However, we reserve the right to restrict the amount of Contract
Value transferred from the Variable Account to the Fixed Account in any
Contract Year to 25% of the Contract Value in the Variable Account at the start
of the then current Contract Year.
Once each calendar year a transfer of Contract Value from the Fixed Account to
the Variable Account may be made. Such a transfer may occur only between
January lst and February 15th of the calendar year. We reserve the right to
restrict the amount of Contract Value transferred from the Fixed Account to the
Variable Account in any year to 10% of the Contract Value in the Fixed Account
on the date of transfer. Additionally, we reserve the right to impose a one
year waiting period on transfers of Contract Value back into the Fixed Account
that were previously moved from the Fixed Account to the Variable Account.
While a Payment Option is operational, transfers are only allowed between the
Sub-Accounts of the Variable Account; no transfers will be allowed between the
Fixed and the Variable Accounts.
DOLLAR COST AVERAGING. If this feature is then available, the Owner may elect
in writing to have Contract Value transferred from the Money Market Fund
Sub-Account of the Variable Account into another designated Sub-Account or
Sub-Accounts through an automatic monthly transfer of funds called Dollar Cost
Averaging. These monthly transfers will occur on successive Monthly Contract
Dates beginning on the first Monthly Contract Date following election on which
Contract Value may be transferred from the Money Market Fund Sub-Account.
The amount transferred each month may not be less than $100, except on any
Monthly Contract Date on which the amount of Contract Value in the Money Market
Fund Sub-Account is less than $100.
Dollar Cost Averaging on this policy will be discontinued:
1. when the Contract Value in the Money Market Fund Sub-Account is
depleted; or
2. upon written request by the Owner received at our Home Office; or
3. upon 60 days prior written notice provided to the Owner by us.
The Company may at any time stop offering the Dollar Cost Averaging feature
altogether, upon 60 days prior written notice to all policyholders then
utilizing this feature. The Owner may not elect Dollar Cost Averaging if
Systematic Withdrawals are being made on this contract or if Portfolio
Rebalancing has been elected.
PORTFOLIO REBALANCING. If this feature is then available, the Owner may elect
in writing to have the Contract Value automatically redistributed on a periodic
basis according to the Premium Allocation percentages then in effect on this
contract. Portfolio Rebalancing may be done annually, semi-annually quarterly,
or monthly.
Portfolio Rebalancing on this contract will be discontinued:
1. when the premium allocation percentages are changed; or
2. upon written request by the Owner received at our Home Office; or
3. upon 60 days prior written notice provided to the Owner by us.
The Company may at any time stop offering the Portfolio Rebalancing feature
altogether, upon 60 days prior written notice to all policyholders then
utilizing this feature. The Owner may not elect Portfolio Rebalancing if
Systematic Withdrawals are being made on this contract or if Dollar Cost
Averaging has been elected.
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<PAGE> 12
CHARGES AGAINST THE CONTRACT VALUE
MORTALITY AND EXPENSE RISK CHARGE AND ADMINISTRATION CHARGE. The Mortality and
Expense Risk Charge and the Administration Charge are shown in the Data
Section.
The Mortality and Expense Risk Charge and the Administration Charge, assessed
on each day that the contract is in force, are not deducted from funds held in
the Fixed Account. The Mortality and Expense Risk Charge and the Administration
Charge are assessed both prior to the Maturity Date and during the operation of
any Payment Option elected under this contract.
ANNUAL CONTRACT FEE. The Annual Contract Fee, stated in the Data Section, is
deducted from the Contract Value on the Date of Issue and on each Contract
Anniversary on which the Contract Value is less than $50,000.
RIDER CHARGES. Rider Charges for riders attached to this contract are stated
in the Data Section, and are deducted as described in the riders.
The Annual Contract Fee and Rider Charges shall be allocated among and deducted
from all accounts on a pro rata basis.
TAX CHARGE. We reserve the right to deduct any charge for taxes or amounts set
aside as a reserve for taxes in determining the Net Investment Factor in the
event that such a tax is levied on that Sub-Account in the future.
TRANSFER CHARGE. We may charge a Transfer Charge for the thirteenth and each
subsequent requested transfer of Contract Value between and among the Fixed
Account and the Sub-Accounts occurring during any Contract Year. Transfers to
or from more than one account at the same time shall be treated as one
transfer. The Transfer Charge may not exceed the Maximum Transfer Charge
stated in the Data Section. Transfer Charges shall be allocated among and
deducted from the Fixed Account and the Sub-Accounts in proportion to the
Contract Values to be transferred from such accounts.
No Transfer Charge will be imposed, nor will a debit be made against the twelve
free transfers allowed each Contract Year, for the transfer of Contract Value:
1. from a Sub-Account of the Variable Account to another Sub-Account or
to the Fixed Account, if there has been a material change in the
investment policy of the fund in which the funds of that Sub-Account
are invested; or
2. according to the terms of the Dollar Cost Averaging feature; or
3. according to the terms of the Portfolio Rebalancing feature.
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<PAGE> 13
PAYMENT OPTIONS
The term "proceeds" in this contract refers to any monies available for
distribution from the contract according to its terms.
When proceeds are taken in a lump sum, all other rights and benefits under this
contract shall cease. All or part of the proceeds of this contract may be
applied under a Payment Option. When proceeds are applied under a Payment
Option, all other rights and benefits under this contract shall cease.
While a Payment Option is operational, transfers are only allowed between the
Sub-Accounts of the Variable Account; no transfers will be allowed between the
Fixed and the Variable Accounts.
In addition to the following options, other payment options may be available.
We may issue a document stating the terms of the option.
OPTION EFFECTIVE DATE. The Option Effective Date is the date the proceeds
become payable.
GENERAL PAYMENT OPTION TERMS. If the proceeds to be placed under a Payment
Option are less than $3,500, we may pay them in one sum to the Payee. If any
payments would be less than $100, we may change the frequency to provide
payments of at least $100.
If the proceeds are assigned on the Option Effective Date, we will pay the
assignee's share in one sum and place only the balance under the option. After
the Option Effective Date neither the payments nor the remaining value may be
assigned or encumbered. To the extent the law permits, they are not subject to
any claims against the payee.
We may require proof to our satisfaction that any person upon whose life
payments are predicated is alive on the date any payment is due, and that the
Payee is alive on that date.
The schedule of payments under any operational Payment Option may not be
extended upon the death of the Owner.
CHOICE OF OPTION. Choice of an option may be made by the Owner on or prior to
the Maturity Date.
Equivalent payments for 12-, 6-, 3-, or 1-month intervals may be chosen. The
options are described in terms of monthly payments. We will quote the amount
of the other any payments on request.
FIXED PAYMENT OPTION. Proceeds originating in the Fixed Account are applied to
a Payment Option providing a fixed monthly benefit. The dollar amount of the
annuity payments is determined by applying those proceeds in the Fixed Account
to the applicable annuity table. These annuity payments are fixed and do not
change from month to month.
VARIABLE PAYMENT OPTION. Proceeds originating in the Variable Account are
applied to a Payment Option on a variable basis. The monthly payment will
change from month to month depending on the investment performance of the
Sub-Accounts of the Variable Account.
On the Option Effective Date, the proceeds from each Sub-Account are applied to
the selected Payment Option independently to determine the initial amount of
monthly payment associated with each Sub-Account. The dollar amount of the
first monthly payment made from each Sub-Account is then divided by the Annuity
Unit Value for that Sub-Account on the Option Effective Date to determine the
number of units of each annuity payment associated with that Sub-Account.
Except as may be affected by the transfer of units between Sub-Accounts, the
number of units remains fixed for the entire payment period.
The dollar values of subsequent payments made from individual Sub-Accounts are
determined by multiplying the fixed number of units in each Sub-Account by its
Annuity Unit Value on the date of payment. The total monthly payment made from
a Payment Option on a variable basis is the sum of the monthly payments made
from each Sub-Account.
The Mortality and Expense Risk Charge and the Administration Charge remain
applicable while a Variable Payment Option is operational, as they are
reflected in the determination of the Annuity Unit Value. No Annual Contract
Fee or Rider Charges continue during a Payment Option.
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<PAGE> 14
ANNUITY UNIT VALUE. On any Valuation Date the Annuity Unit Value in a
Sub-Account is equal to that Annuity Unit Value on the immediately preceding
Valuation Date multiplied by the Net Investment Factor for that Sub-Account
divided by the factor 1.035 raised to the power n/365, where n is the number of
days elapsed since the immediately preceding Valuation Date.
Contract Value may be transferred among the Sub-Accounts of the Variable
Account. On the date of the transfer, the number of units to be transferred
from a Sub-Account will be multiplied by the Annuity Unit Value for that
Sub-Account to determine the dollar amount transferred. This dollar amount is
then divided by the Annuity Unit Value of the Sub-Account into which the amount
is transferred to determine the fixed number of units transferred into that
Sub-Account.
OPTION 1 - PAYMENTS FOR A STATED TIME. Monthly payments shall be made for a
stated number of years. The stated number of years must be at least five.
The Owner has the right to change from Option I - Payments for a Stated Time to
another Payment Option. The remaining value under the old option shall become
the proceeds to be placed under the new option. The Owner may also surrender
the contract under Option 1, subject to any applicable Contingent Deferred
Sales Charge.
OPTION 2 - PAYMENTS FOR LIFE. Monthly payments shall be made during the life
of a chosen human being. The amount of each monthly payment depends on the age
and sex of the chosen human being on the Option Effective Date.
OPTION 3 - PAYMENTS FOR LIFE WITH PERIOD CERTAIN. MONTHLY payments shall be
made for 120 or 240 months certain and thereafter during the life of a chosen
human being. The amount of each monthly payment depends on the age and sex of
the chosen human being on the Option Effective Date and on the length of the
chosen period certain.
Options 2 and 3 Table
Monthly Payments for Each $1,000 of Proceeds
(Amounts shown are for the age nearest birthday on the
Effective Date)
---------------------------------------------------------------
Guaranteed Period
--------------------------------------------------------------
<TABLE>
<CAPTION>
Male Female
---------------------- ------------------------------
120 240 120 240
Age None Months Months None Months Months
- -------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
50 $ 3.93 $ 3.90 $ 3.81 $ 3.64 $ 3.63 $ 3.59
51 4.00 3.96 3.86 3.69 3.68 3.63
52 4.06 4.02 3.90 3.74 3.73 3.67
53 4.13 4.09 3.96 3.80 3.78 3.72
54 4.20 4.15 4.01 3.85 3.83 3.77
55 4.28 4.22 4.06 3.91 3.89 3.82
56 4.36 4.30 4.11 3.98 3.95 3.87
57 4.44 4.38 4.17 4.05 4.02 3.92
58 4.54 4.46 4.23 4.12 4.09 3.97
59 4.63 4.55 4.28 4.19 4.16 4.03
60 4.74 4.64 4.34 4.27 4.23 4.09
61 4.85 4.74 4.40 4.36 4.31 4.15
62 4.97 4.84 4.46 4.45 4.40 4.21
63 5.09 4.95 4.51 4.55 4.49 4.27
64 5.23 5.06 4.57 4.65 4.58 4.33
65 5.37 5.18 4.63 4.77 4.68 4.40
66 5.53 5.30 4.68 4.88 4.79 4.46
67 5.69 5.43 4.73 5.01 4.90 4.52
68 5.87 5.56 4.78 5.15 5.02 4.59
69 6.06 5.70 4.83 5.29 5.14 4.65
70 6.26 5.84 4.87 5.45 5.28 4.71
71 6.47 5.99 4.91 5.62 5.41 4.76
72 6.70 6.14 4.95 5.81 5.56 4.82
73 6.94 6.29 4.98 6.01 5.71 4.86
74 7.20 6.44 5.02 6.23 5.87 4.91
75 7.48 6.60 5.04 6.46 6.03 4.95
76 7.78 6.75 5.07 6.71 6.20 4.99
77 8.09 6.91 5.09 6.98 6.37 5.02
78 8.43 7.07 5.11 7.27 6.55 5.05
79 8.80 7.22 5.12 7.59 6.72 5.07
80 9.19 7.37 5.13 7.93 6.90 5.10
81 9.60 7.51 5.14 8.30 7.08 5.11
82 10.04 7.65 5.15 8.70 7.25 5.13
83 10.51 7.78 5.16 9.13 7.41 5.14
84 11.01 7.91 5.16 9.60 7.57 5.15
85+ 11.55 8.02 5.17 10.10 7.72 5.16
</TABLE>
+ Higher ages the same
11
<PAGE> 15
GENERAL TERMS
CONSIDERATION. This contract is issued in consideration of the application and
payment of the minimum premium due on the Date of Issue of this contract.
ENTIRE CONTRACT. The entire contract between the parties is this contract and
a copy of the application and any riders and endorsements which are attached at
issue. Any changes of this contract must be written and may be made only by
one of our authorized officers or registrars.
CONTRACT MONTHS, YEARS, AND ANNIVERSARIES. Policy Months, Years, and
Anniversaries shall be measured from the Date of Issue.
The Date of Issue is the first Monthly Contract Date. The Monthly Contract
Date shown in the Data Section occurs on the same day each month or on the last
day of any month having no such date.
PAYMENT OF BENEFITS. We will make all payments under this contract at our Home
Office.
POSTPONEMENT OF PAYMENTS. We will pay any amounts allocated to the VARIABLE
ACCOUNT which are payable as a result of Cash Surrender, or Withdrawals within
seven days after we receive written request in a form satisfactory to us.
However, determination and payment of any amount payable from the Variable
Account may be postponed whenever:
1. The New York Stock Exchange is closed, or trading on the New York
Stock Exchange is restricted by directive of the Securities and
Exchange Commission; or
2. the Securities and Exchange Commission by order permits postponement
for the protection of policyholders; or
3. an emergency exists, as determined by the Securities and Exchange
Commission, as a result of which it is not reasonably practicable to
dispose of securities or to determine the value of the net assets of
the Variable Account.
Transfers to or from the Sub-Accounts of the Variable Account, though normally
occurring on the same day we receive the request for transfer, may also be
postponed upon any of the above requests.
We may delay payment of any amounts allocated to the FIXED ACCOUNT which are
payable as a result of Cash Surrender, or Withdrawals for up to six months
after we receive written request in a form satisfactory to us.
We will pay the Death Benefit within seven days after we receive due proof
satisfactory to us of the death while this contract is in force. We may
postpone determination and payment of any Death Benefit in excess of the
Contract Value upon any of the events enumerated above.
We have the right to postpone payment which is derived from any amount recently
paid to us by check or draft, until we are satisfied the check or draft has
been paid by the bank or other financial institution on which it is drawn.
If any payment under this contract is deferred for more than 30 days, we will
add to the payment interest of at least 4 1/2% per year from the date we receive
the request to the date of payment.
NOTICES. Unless this contract provides otherwise, any requests, changes, or
notices:
1. from us to the Owner shall be sent to the last address known to us
of the Owner; and
2. from us to an assignee shall be sent to the last address known to us
of such assignee; and
3. from the Owner or an assignee to us must be in writing and received
by us at our Home Office in Montpelier, Vermont.
ANNUAL REPORT. At least once each Contract Year we will send a report to the
Owner. The report will be sent without charge and will show, as of its date:
1. the Contract Value, detailing the distribution of the Contract Value
in the Fixed Account and each Sub-Account of the Variable Account;
and
2. the Cash Surrender Value.
This report will also provide a summary of transactions made during the
previous Contract Year and any information required by law.
ATTAINED AGE. The Attained Age of the Annuitant on any date is the Issue Age
of the Annuitant shown in the Data Section plus the number of full Policy Years
which have passed since the Date of Issue.
The Attained Age of the Owner on any date is the Issue Age of the Owner shown
in the Data Section plus the number of full Policy Years which have passed
since the Date of Issue.
12
<PAGE> 16
MISSTATEMENT OF AGE OR SEX. If an age or sex has been misstated, benefits
provided by this contract shall be those appropriate to the correct age and
sex.
PROOF OF AGE. We may require proof to our satisfaction of the age of any
person upon whose continued life payments are based before we start income
payments.
VALUES. The Cash Surrender Value, Death Benefit, and payments made under any
Payment Option of this contract are not less than the minimum values and
benefits required by the law of the state in which this contract is delivered.
A detailed statement of the method used to compute Cash Surrender Values has
been filed in that state.
The tabled values in Payment Options are based on the 1983 Table "a" for
annuities projected to the year 2000 using Scale G, an expense load of 10%, and
compound interest at a rate of 3 1/2% per year.
LIMIT ON TRANSFER. Unless we receive at our Home Office written request by the
Owner to inactivate this Limit on Transfer provision, the Owner may not:
1. sell or assign the contract, except to us; or
2. use the contract as collateral for a loan; or
3. pledge the contract as security.
This provision shall not apply if the Owner is a trustee of a trust that is
described in Section 401(a) and is exempt from tax under Section 501(a) of
the Internal Revenue Code.
SPENDTHRIFT PROVISION. Unless we receive at our Home Office written request by
the Owner to inactivate this Spendthrift Provision, to the extent allowed by
law and by this contract:
1. only the Owner may transfer, anticipate, commute or encumber the
proceeds of this contract; and
2. only legal process against the Owner may affect the proceeds of this
contract.
Any proceeds payable after this provision is inactivated by the Owner shall not
be affected by this provision.
ARBITRATION. Any controversy arising under, out of, in connection with, or
relating to this contract, or any amendment to or breach of this contract, shall
be determined and settled by arbitration in the state of residence of the
Owner, in accordance with the rules of the American Arbitration Association or
any similar rules to which the parties agree. Any reward rendered through
arbitration shall be final and binding on each and all parties involved, and
judgment may be entered thereon in any court of competent jurisdiction.
13
<PAGE> 17
A FLEXIBLE PREMIUM VARIABLE DEFERRED ANNUITY. THIS CONTRACT IS PARTICIPATING.
ANNUITY PAYMENTS, DEATH BENEFITS, CASH SURRENDER VALUES, AND OTHER CONTRACT
VALUES PROVIDED BY THIS CONTRACT, WHEN BASED ON THE INVESTMENT EXPERIENCE OF A
VARIABLE ACCOUNT, ARE VARIABLE AND MAY INCREASE OR DECREASE DAILY IN ACCORDANCE
WITH FLUCTUATIONS IN THE INVESTMENT EXPERIENCE OF THAT ACCOUNT, AND SO ARE NOT
GUARANTEED AS TO DOLLAR AMOUNT.
The Owner is a member of National Life Insurance Company while this contract is
in force. The annual meetings of the Company are held at its Home Office in
Montpelier, Vermont, on the first Friday in February in each year at 9 o'clock
A.M.
<PAGE> 1
EXHIBIT (b)(4)(b)
ENHANCED DEATH BENEFIT RIDER
If any human Owner, or the Annuitant if the Owner is not a human being, died:
1. prior to the Maturity Date;
2. prior to his or her Attained Age 81; and
3. while this Enhanced Death Benefit Rider was in force;
the Death Benefit provided in the contract is enhanced as described below.
ENHANCED DEATH BENEFIT. If the deceased died according to the terms of this
rider, the Death Benefit is the greater of:
1. the Contract Value on the date of death;
2. the sum of all Net Premiums less cumulative withdrawals made since
the Date of Issue of this contract; and
3. the Maximum Contract Anniversary Value;
less any state premium tax that is assessed on distribution.
All other aspects of the Death Benefit provision of the contract remain
unchanged.
MAXIMUM CONTRACT ANNIVERSARY VALUE. A Contract Anniversary Value is equal to
the Contract Value on any given Contract Anniversary adjusted by the amount of
Net Premiums paid into this contract and withdrawals taken from this contract
since that Contract Anniversary. The Maximum Contract Anniversary Value is the
largest of these Contract Anniversary Values falling prior to the deceased's
Attained Age 81 and while this rider is in force.
CHARGES FOR THIS RIDER. Rider charges will be deducted at issue and on each
Contract Anniversary that this rider remains in force, unless a Contract
Anniversary falls on a non-market day, in which case the deduction will be made
on the first market day following that Contract Anniversary. Rider charges
will be deducted on a pro-rata basis from the Contract Value held in the
Sub-Accounts of the Variable Account and the unloaned portion of the Fixed
Account.
TERMINATION. This rider shall terminate on the earliest of:
1. the Attained Age 81 of the youngest human Owner, or of the Annuitant
if the Owner is non-human; or
2. the date the contract terminates; or
3. any Contract Anniversary requested if before that date we receive at
our Home Office written request for termination.
When this rider terminates:
1. all rights under this rider shall cease; and
2. no further charges will be deducted for this rider; and
3. the contract shall be considered as separate and complete without
this rider.
Signed for National Life Insurance Company at Montpelier, Vermont as of the
date of issue of this rider, by
[SIG]
Chairman of the Board
and
Chief Executive Officer
1
<PAGE> 1
EXHIBIT (b)(5)
[NATIONAL LIFE of VERMONT LOGO]
National Life Insurance Company
Montpelier, Vermont 05604 SENTINEL ADVANTAGE
Tel: 802 229-3333 Variable Annuity Application
<TABLE>
<CAPTION>
====================================================================================================================================
Application No.: Branch No.: Pension Code: Contract No.:
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
A. OWNER 1. Owner Name:
INFORMATION
-----------------------------------------------------------------------------------------------------------------
2. Social Security No. or Tax ID No. 4. Date of Birth or Date of Trust:
-----------------------------------------------------------------------------------------------------------------
3. Address: Street 5. Sex
[ ] Male [ ] Female
-----------------------------------------------------------------------------------------------------------------
City: State: Zip: 6. Area Code & Daytime Telephone:
-----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
B. ANNUITANT 1. Annuitant Name:
INFORMATION
(Complete if -----------------------------------------------------------------------------------------------------------------
different 2. Social Security No.: 4. Date of Birth:
from Owner.)
-----------------------------------------------------------------------------------------------------------------
3. Address: Street 5. Sex
[ ] Male [ ] Female
-----------------------------------------------------------------------------------------------------------------
City: State: Zip: 6. Area Code & Daytime Telephone:
-----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
C. Beneficiary(ies)First: Second:
(If 401(a),
do NOT complete.-----------------------------------------------------------------------------------------------------------------
Beneficiary Date of Birth: Date of Birth:
will be
Owner.) -----------------------------------------------------------------------------------------------------------------
Social Security Number: Social Security Number:
-----------------------------------------------------------------------------------------------------------------
Relationship to Contract Owner or Annuitant: Relationship to Contract Owner or Annuitant:
-----------------------------------------------------------------------------------------------------------------
[ ] As per supplemental request
-----------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
D. TYPE OF PLAN 1. Non-Qualified Plan: 2. Qualified Plan:
[ ] Individually Owned [ ] Pension or Profit-Sharing Plan Section 401(a) or
[ ] 1035 Exchange Section 403(a)
[ ] Other: (Describe.) [ ] Tax-Deferred Annuity Section 403(b)
[ ] Individual IRA [ ] SEP IRA [ ] Simple IRA
[ ] Regular Contribution: Year: $
--------- -----------
[ ] Transfer
[ ] Rollover
- ------------------------------------------------------------------------------------------------------------------------------------
E. FUND SELECTION MARKET STREET FUND: FIDELITY INVESTMENTS: VAN ECK ASSOCIATES:
Allocate Common Stock ____________ % Equity-Income ____________ % Worldwide Bond _______%
percentages to Aggressive Growth ____________ % Overseas ____________ %
the following Managed ____________ % Growth ____________ % NATIONAL LIFE INSURANCE COMPANY:
funds: (Whole Bond ____________ % High Income ____________ % Fixed Account _______%
percentages. Not International ____________ % Index 500 ____________ %
less than 5% per Sentinel Growth ____________ % Contrafund ____________ % OTHER: (As available.)
allocation. Select Money Market ___________________% _______%
no more than 17 Account ____________ % FRED ALGER MANAGEMENT: ___________________% _______%
variable funds. STRONG CAPITAL MGMT: Small Capitalization _______ % ___________________% _______%
Must total 100%) Special Fund II ____________ % Growth Fund _______ % ___________________% _______%
Growth Fund II ____________ % ___________________% _______%
- ------------------------------------------------------------------------------------------------------------------------------------
F. REMINDER 1. Would you like us to send a periodic reminder to fund this contract? [ ] Yes [ ] No
NOTICE
2. Amount: $________________________________ 4. Send Notice to : (Check one.)
[ ] Annuitant's Address [ ] Owner's Address
3. Frequency: [ ] Annual [ ] Monthly (Group) [ ] Other (Give name and address in section K.
[ ] Semi-Annual [ ] EFT Remarks.)
[ ] Quarterly
====================================================================================================================================
7405(0597) Cat. No. 44524
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
====================================================================================================================================
G. REPLACEMENT Has there been or will there be a lapse, surrender, replacement, reissue, or change to reduce amount, premium or
coverage of any existing life or annuity contract if the applied for contract is issued, or will there be any
substantial borrowing on any life insurance policy if the applied for contract is issued? [ ]Yes [ ]No
Company Name(s) and Policy Number(s):
- ------------------------------------------------------------------------------------------------------------------------------------
H. RIDER [ ] Enhanced Death Benefit Rider
- ------------------------------------------------------------------------------------------------------------------------------------
I. INVESTMENT 1. Portfolio Rebalancing:
MANAGEMENT a. Does the Owner request Portfolio Rebalancing, through which the Accumulated Value in the Sub-Accounts
(Select only of the Separate Account will be automatically reallocated according to the fund allocation percentages?
ONE of these [ ] Yes [ ] No
options.)
b. Frequency: [ ] Annual [ ] Semi-Annual [ ] Quarterly
(Complete 2. Dollar Cost Averaging:
Dollar Cost Does the Owner request Dollar Cost Averaging through which the Accumulated Value in the amount designated
Averaging below would be transferred from the MONEY MARKET SUB-ACCOUNT to the other Sub-Accounts as apportioned below,
section only once each month. [ ] Yes [ ] No
if you have
selected Allocation: (Total allocation may not be less than $100.)
Money MARKET STREET FUND: FIDELITY INVESTMENTS: VAN ECK ASSOCIATES:
Market.) Common Stock $____________ Equity-Income $____________ Worldwide Bond $_______
Aggressive Growth $____________ Overseas $____________
Managed $____________ Growth $____________
Bond $____________ High Income $____________
International $____________ Index 500 $____________
Sentinel Growth $____________ Contrafund $____________ OTHER: (As available.)
___________________ $_______
___________________ $_______
STRONG CAPITAL MGMT: FRED ALGER MANAGEMENT: ___________________ $_______
Special Fund II $____________ Small Capitalization $____________ ___________________ $_______
Growth Fund II $____________ Growth Fund $____________ ___________________ $_______
- ------------------------------------------------------------------------------------------------------------------------------------
J. TELEPHONE 1. Does the Owner authorize the Company to accept telephone requests by the Owner to:
TRANSACTION - Change the fund allocation percentages - Add, cancel or change Portfolio Rebalancing,
PRIVILEGE - Transfer funds among Sub-Accounts or Dollar Cost Averaging
[ ] Check here if you wish to authorize the Company to accept telephone requests by the Owner for investment
management and fund selection.
2. [ ] Check here if you wish to authorize your reprsentative/agent to have telephone transaction privileges.
Name of Representative:
------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
K. REMARKS
- ------------------------------------------------------------------------------------------------------------------------------------
L. AUTHORIZATION I hereby represent my answers to the above questions to be true and correct to the best of my knowledge and
belief. I understand that annuity payments or surrender values, when based upon the investment experience of a
separate account, are variable and not guaranteed as to a fixed dollar amount.
[ ] Receipt of Variable Annuity and Fund Prospectuses is hereby acknowledged.
I have paid $ _________________________for Variable Annuity with this application.
Monies remitted via: [ ] Check [ ] Wire [ ] 1035 [ ] Transfer
Signed at (City & State) on this day of : (mm/dd/yyyy)
-------------------------------------------- ----------------
Owner's Signature:
------------------------------------------------------------------------------------------------------------------
Annuitant's Signature: (If different than Owner)
------------------------------------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------------
M. BROKER/DEALER Signature of Registered Representative: Signature of Broker/Dealer:
SALES
-------------------------------------------------------------- -------------------------------------------------
====================================================================================================================================
7405(0597) Cat. No. 44524
</TABLE>
<PAGE> 1
EXHIBIT (b)(8)(b)(2)
AMENDMENT NO. 2 TO PARTICIPATION AGREEMENT
AMONG
VARIABLE INSURANCE PRODUCTS FUND,
FIDELITY DISTRIBUTORS CORPORATION
AND
NATIONAL LIFE INSURANCE COMPANY (AS SUCCESSOR TO VERMONT LIFE INSURANCE
COMPANY)
THIS AMENDMENT NO. 2 to the Participation Agreement by and among Vermont Life
Insurance Company (since merged into National Life Insurance Company), Variable
Insurance Products Fund (the "Fund"), and Fidelity Distributors Corporation
(the "Underwriter"), dated August 1, 1989 as amended by Amendment No. 1 to
Participation Agreement dated January 1, 1996 (the "Participation Agreement"),
is made and entered into this 28th day of April, 1997.
1. Schedule A is hereby further amended to add the following contract forms:
National Life Contract Form 7400 (Flexible Premium Variable
Deferred Annuity)
National Life Contract Form 7401 (Flexible Premium Variable
Deferred Annuity (Unisex Version)
2. Schedule C is hereby further amended to add the following separate account:
National Variable Annuity Account II - November 1, 1996
3. Pursuant to section 1.6 hereof, the Fund and the Distributor hereby
consents to the investment of net amounts available under the variable
contracts listed in paragraph 1 above in the following Funds other than the
Fund: The Market Street Fund, The Alger American Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., Strong Special Fund II, Inc., Strong Variable
Insurance Funds, Inc. and Van Eck Worldwide Insurance Trust.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 2
to the Participation Agreement to be executed in its name and on its behalf by
its duly authorized representative and its seal to be affixed hereto as of the
date specified below.
NATIONAL LIFE INSURANCE COMPANY
by
---------------------------------
Name: Linda Usle Hoitt
Title: Second Vice President - Annuities
VARIABLE INSURANCE PRODUCTS FUND
by
---------------------------------
Name:
Title:
FIDELITY DISTRIBUTORS CORPORATION
by
---------------------------------
Name:
Title:
<PAGE> 1
EXHIBIT (b)(8)(c)(1)
SCHEDULE A
NATIONAL VARIABLE LIFE INSURANCE ACCOUNT
NATIONAL VARIABLE ANNUITY ACCOUNT II
/s/ D. RUSSELL MORGAN
--------------------------
April 25, 1997
PAGE 15
<PAGE> 1
EXHIBIT (b)(8)(d)
PARTICIPATION AGREEMENT
THIS AGREEMENT, is made as of May 7, 1997, by and among National Life
Insurance Company ("Company"), on its own behalf and on behalf of National
Variable Annuity Account II, a segregated asset account of the Company
("Account"), Strong Variable Insurance Funds, Inc. (the "Insurance Funds") and
Strong Special Fund II, Inc. ("Special Fund"), Strong Capital Management, Inc.
(the "Adviser"), the investment adviser and transfer agent for the Insurance
Funds and the Special Fund, and Strong Funds Distributors, Inc.
("Distributors"), the distributor for the Insurance Funds and the Special Fund
(each, a "Party" and collectively, the "Parties").
WHEREAS, beneficial interests in the Strong Variable Insurance Funds,
Inc. are divided into several series of shares, each representing the interest
in a particular managed portfolio of securities and other assets (the
"Portfolios");
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares of the Strong Special Fund
II, Inc. and the Portfolios named in Exhibit A, hereto (said series of the
Insurance Funds, the "Designated Portfolios"; reference herein to a "Fund" or
"Funds" shall be deemed to refer to each Designated Portfolio and to the
Special Fund to the extent the context requries), as such Exhibit may be
amended from time to time, on behalf of the Account to fund the variable
annuity contracts that use the Designated Portfolios as an underlying
investment medium (the "Contracts");
WHEREAS, the Company, Adviser and Distributors desire to facilitate
the purchase and redemption of shares of the Special Fund and the Designated
Portfolios by the Company for the Account through one account in the Special
Fund and in each Designated Portfolio (each an "Omnibus Account") to be
maintained of record by the Company, subject to the terms and conditions of
this Agreement; and
WHEREAS, the Company desires to provide administrative services and
functions (the "Services") for purchasers of Contracts ("Owners") who are
beneficial owners of shares of the Special Fund or Designated Portfolios on the
terms and conditions set forth herein.
NOW, THEREFORE, in consideration of the mutual promises set forth
herein, the Company, Fund, Adviser and Distributors agree as follows:
1. Performance of Services. Company agrees to perform the administrative
functions and services specified in Exhibit B attached hereto with respect to
the shares of the Designated Portfolios beneficially owned by the Owners and
included in the Account.
<PAGE> 2
2. The Omnibus Accounts.
2.1 Each Omnibus Account will be opened based upon the information
contained in Exhibit C hereto. In connection with each Omnibus Account, Company
represents and warrants that it is authorized to act on behalf of each Owner
effecting transactions in the Omnibus Account and that the information
specified on Exhibit C hereto is correct.
2.2 The Fund shall designate each Omnibus Account with an account number.
Account numbers will be the means of identification when the parties are
transacting in the Omnibus Accounts. The assets in the Accounts are segregated
from the Company's own assets. The Adviser agrees to cause the Omnibus
Accounts to be kept open on the Designated Portfolio's or Special Fund's books,
as applicable, regardless of a lack of activity or small position size except
to the extent the Company takes specific action to close an Omnibus Account or
to the extent the Fund's prospectus reserves the right to close accounts which
are inactive or of a small position size. In the latter two cases, the Adviser
will give prior notice to the Company before closing an Omnibus Account.
2.3 The Company agrees to provide Adviser such information as Adviser or
Distributors may reasonably request concerning Owners as may be necessary or
advisable to enable Company and Distributors to comply with applicable laws,
including state "Blue Sky" laws relating to the sales of Fund shares to the
Accounts.
3. Fund Shares Transactions.
3.1 In General. Designated Portfolio and Fund shares shall be sold on
behalf of the Fund by Distributors and purchased by Company for the Account
and, indirectly for the appropriate subaccount thereof at the net asset value
next computed after receipt by Distributors of each order of the Company or its
designee, in accordance with the provisions of this Agreement, the then current
prospectuses of the Designated Portfolio, and the Contracts. Company may
purchase Designated Portfolio and Fund shares for its own account subject to
(a) receipt of prior written approval by Distributors; and (b) such purchases
being in accordance with the then current prospectuses of the Portfolio and the
Contracts. The Board of Directors of each Fund ("Directors") may refuse to sell
shares of Fund to any person, or suspend or terminate the offering of shares of
the Fund if such action is required by law or by regulatory authorities having
jurisdiction. Company agrees to purchase and redeem the shares of the Fund in
accordance with the provisions of this Agreement, of the Contracts and of the
then current prospectuses for the Contracts and Designated Portfolio. Except as
necessary to implement transactions initiated by Owners, or as otherwise
permitted by state and/or federal laws or regulations, Company shall not redeem
Fund shares attributable to the Contracts.
2
<PAGE> 3
3.2 Purchase and Redemption Orders. On each day that the Funds are open
for business (a "Business Day"), the Company shall aggregate and calculate the
net purchase or redemption order it receives for the Account from the Owners
for shares of the Fund that it received prior to the close of trading on the
New York Stock Exchange (the "NYSE") (i.e. 3:00 p.m., Central time, unless the
NYSE closes at an earlier time in which case such earlier time shall apply) and
communicate to Distributors, by telephone or facsimile (or by such other means
as the parties hereto may agree to in writing), the net aggregate purchase or
redemption order (if any) for the Omnibus Account for such Business Day (such
Business Day is sometimes referred to herein as the "Trade Date"). The Company
will communicate such orders to Distributors prior to 8:00 a.m., Central time,
on the next Business Day following the Trade Date. All trades communicated to
Distributors by the foregoing deadline shall be treated by Distributors as if
they were received by Distributors prior to the close of trading on the Trade
Date.
3.3 Settlement of Transactions.
(a) Purchases. Company will wire, or arrange for the wire of, the
purchase price of each purchase order to the custodian for the Fund in
accordance with written instructions provided by Distributors to the
Company so that either (1) such funds are received by the custodian for
the Fund prior to 12:00 (noon), Central time, on the next Business Day
following the Trade Date, or (2) Distributors is provided with a Federal
Funds wire system reference number prior to such 12:00 noon deadline
evidencing the entry of the wire transfer of the purchase price to the
applicable custodian into the Federal Funds wire system prior to such
time. Company agrees that if it fails to provide funds to the Fund's
custodian by the close of business on the next Business Day following the
Trade Date, then, at the option of Distributors, (i) the transaction may
be canceled, or (ii) the transaction may be processed at the
next-determined net asset value for the applicable Fund after purchase
order funds are received. In such event, the Company shall indemnify and
hold harmless Distributors, Adviser and/or the Fund from any liabilities,
costs and damages either may suffer as a result of such failure.
(b) Redemptions. The Adviser will use its best efforts to cause to
be transmitted to such custodial account as Company shall direct in
writing, the proceeds of all redemption orders placed by Company by 8:00
a.m., Central time, on the Business Day immediately following the Trade
Date, by wire transfer on that Business Day. Should Company need to extend
the settlement on a trade, it will contact Adviser to discuss the
extension. For purposes of determining the length of settlement, Adviser
agrees to treat the Account no less favorably than other shareholders of
the Designated Portfolio. Each wire transfer of redemption proceeds shall
indicate, on the Federal Funds wire system, the amount thereof
attributable to each Portfolio; provided, however, that if the number of
entries would be too great to be transmitted through the Federal Funds
wire system, the Adviser shall, on the day the wire is sent, fax such
entries to Company or if
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possible, send via direct or indirect systems access until otherwise
directed by the Company in writing.
(c) Authorized Persons. The following persons are each duly
authorized to act on behalf of the Company under this Agreement. The
Funds, Adviser and Distributors are entitled to conclusively rely on
verbal or written instructions that Adviser or Distributors reasonably
believes were originated by any one of said persons. The Company shall
inform Adviser and Distributors of additions to or subtractions from this
list of authorized persons pursuant to Section 13, hereof:
Margaret Bates
Linda Bizzozero
Douglas White
Eileen Breer
Charlene Compo
3.4 Book Entry Only. Issuance and transfer of Fund shares will be by
book entry only. Stock certificates will not be issued to the Company or the
Account. Shares of the Fund ordered from Distributors will be recorded in the
appropriate book entry title for the Account.
3.5 Distribution Information. The Adviser or Distributors shall provide
the Company with all distribution announcement information as soon as it is
announced by the Fund. The distribution information shall set forth, as
applicable, ex-dates, record date, payable date, distribution rate per share,
record date share balances, cash and reinvested payment amounts and all other
information reasonably requested by the Company. Where possible, the Adviser or
Distributors shall provide the Company with direct or indirect systems access
to the Adviser's systems for obtaining such distribution information.
3.6 Reinvestment. All dividends and capital gains distributions will be
automatically reinvested on the payable date in additional shares of the
Designated Portfolio or Special Fund, as applicable, at net asset value in
accordance with each Designated Portfolio's or the Special Fund's then current
prospectus.
3.7 Pricing Information. Distributors shall use its best efforts to
furnish to the Company prior to 6:00 p.m., Central time, on each Business Day
the Designated Portfolios' and Special Fund's closing net asset value for that
day, and for those Funds for which such information is calculated, the daily
accrual for interest rate factor (mil rate). Such information shall be
communicated via fax, or indirect or direct systems access acceptable to the
Company.
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3.8 Price Errors.
(a) In the event adjustments are required to correct any
error in the computation of the net asset value of Fund shares, Fund or
Adviser shall promptly notify Company after discovering the need for those
adjustments which result in a reimbursement to an Account in accordance
with such Fund's or Designated Portfolio's then current policies on
reimbursement. Notification may be made orally or via direct or indirect
systems access. Any such notification shall be promptly followed by a
letter written on Fund or Adviser letterhead and must state for each day
for which an error occurred the incorrect price, the correct price, and,
to the extent communicated to the Fund's shareholder, the reason for the
price change. Fund and Adviser agree that Company may send this writing,
or derivation thereof (so long as such derivation is approved in advance
by Fund or Adviser, which approval shall not be unreasonably withheld) to
Owners that are affected by the price change.
(b) If the Account received amounts in excess of the amounts
to which it otherwise would have been entitled prior to an adjustment for
an error, Company, when requested by Fund or Adviser, will use its best
efforts to collect such excess amounts from the accounts of the Owners. In
no event, however, shall Company be liable to Fund or Adviser for any such
amounts.
(c) If an adjustment is to be made in accordance with
subsection (a) above to correct an error which has caused the Account to
receive an amount less than that to which it is entitled, Fund and/or
Adviser shall make all necessary adjustments (within the parameters
specified in subsection (a)) to the number of shares owned in the Account
and distribute to the Company the amount of such underpayment for credit
to the accounts of the Owners.
3.9 Agency. Distributors hereby appoints the Company as its agent for
the limited purpose of accepting purchase and redemption instructions from the
Owners for the purchase and redemption of shares of the Fund by the Company on
behalf of Account.
3.10 Quarterly Reports. Adviser agrees to provide Company a statement of
Special Fund and Designated Portfolio assets as soon as practicable and in any
event within 30 days after the end of each calendar quarter, and a statement
certifying the compliance by the Special Fund and the Designated Portfolios
during that fiscal quarter with the diversification requirements and
qualification as a regulated investment company. In the event of a breach of
Section 6.4(a), Adviser will take all reasonable steps (a) to notify Company of
such breach and (b) to adequately diversify the Portfolio so as to achieve
compliance within the grace period afforded by Treasury Regulation 1.817-5.
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<PAGE> 6
4. Proxy Solicitations and Voting. The Company shall, at its expense,
distribute or arrange for the distribution of all proxy materials furnished by
the Fund to the Account and shall: (i) solicit voting instructions from Owners;
(ii) vote the Fund shares in accordance with instructions received from Owners;
and (iii) vote the Fund shares for which no instructions have been received, as
well as shares attributable to it, in the same proportion as Fund shares for
which instructions have been received from Owners, so long as and to the extent
that the Securities and Exchange Commission (the "SEC") continues to interpret
the Investment Company Act of 1940, as amended (the "1940 Act"), to require
pass-through voting privileges for various contract owners. The Company and its
agents will not recommend action in connection with, or oppose or interfere
with, the solicitation of proxies for the Fund shares held for Owners.
5. Customer Communications.
5.1 Prospectuses. The Adviser or Distributors, at its expense,
will provide the Company with as many copies of the current prospectus for the
Special Fund and Designated Portfolios as the Company may reasonably request
for distribution, at the Company's expense, to existing or prospective Owners.
5.2 Shareholder Materials. The Adviser and Distributors shall, as
applicable, provide in bulk to the Company or its authorized representative, at
a single address and at no expense to the Company, the following shareholder
communications materials prepared for circulation to Owners in quantities
requested by the Company which are sufficient to allow mailing thereof by the
Company and, to the extent required by applicable law, to all Owners: proxy or
information statements, annual reports, semi-annual reports, and all initial
and updated prospectuses, supplements and amendments thereof Neither the Funds,
the Adviser nor Distributors shall be responsible for the cost of distributing
such materials to Owners.
6. Representations and Warranties.
6.1 The Company represents and warrants that:
(a) It is an insurance company duly organized and in good standing
under the laws of the State of Vermont and that it has legally and validly
established the Account prior to any issuance or sale thereof as a
segregated asset account and that the Company has and will maintain the
capacity to issue all Contracts that may be sold; and that it is and will
remain duly registered, licensed, qualified and in good standing to sell
the Contracts in all the jurisdictions in which such Contracts are to be
offered or sold;
(b) It is and will remain duly registered and licensed in all
material respects under all applicable federal and state securities and
insurance laws and shall perform its obligations hereunder in compliance
in all material respects with any applicable state and federal laws;
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<PAGE> 7
(c) The Contracts are and will be registered under the Securities
Act of 1933, as amended (the "1933 Act"), and are and will be registered
and qualified for sale in the states where so required; and the Account is
and will be registered as a unit investment trust in accordance with the
1940 Act and shall be a segregated investment account for the Contracts;
(d) The Contracts are currently treated as annuity contracts, under
applicable provisions of the Internal Revenue Code of 1986, as amended
(the "Code"), and the Company will maintain such treatment and will notify
Adviser, Distributors and Fund promptly upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they
might not be so treated in the future;
(e) It is registered as a transfer agent pursuant to Section 17A of
the Securities Exchange Act of 1934, as amended (the "1934 Act"), or is
not required to be registered as such;
(f) The arrangements provided for in this Agreement will be
disclosed to the Owners; and
(g) It is registered as a broker-dealer under the 1934 Act and any
applicable state securities laws, including as a result of entering into
and performing the Services set forth in this Agreement, or is not
required to be registered as such.
6.2 The Funds each represent and warrant that Fund shares sold
pursuant to this Agreement are and will be registered under the 1933 Act
and the Fund is and will be registered as a registered investment company
under the Investment Company Act of 1940, in each case, except to the
extent the Company is so notified in writing;
6.3 Distributors represents and warrants that:
(a) It is and will be a member in good standing of the NASD and is and
will be registered as a broker-dealer with the SEC; and
(b) It will sell and distribute Fund shares in accordance with all
applicable state and federal laws and regulations.
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<PAGE> 8
6.4 Adviser represents and warrants that:
(a) It will cause each Fund to invest money from the Contracts in such a
manner as to ensure that the Contracts will be treated as variable annuity
contracts under the Code and the regulations issued thereunder, and that each
Fund will comply with Section 817(h) of the Code as amended from time to time
and with all applicable regulations promulgated thereunder;
(b) It is and will remain duly registered and licensed in all material
respects under all applicable federal and state securities and insurance laws
and shall perform its obligations hereunder in compliance in all material
respects with any applicable state and federal laws; and
6.5 Each of the parties hereto represents and warrants to the others that:
(a) It has full power and authority under applicable law, and has taken
all action necessary, to enter into and perform this Agreement and the person
executing this Agreement on its behalf is duly authorized and empowered to
execute and deliver this Agreement;
(b) This Agreement constitutes its legal, valid and binding obligation,
enforceable against it in accordance with its terms and it shall comply in all
material respects with all laws, rules and regulations applicable to it by
virtue of entering into this Agreement;
(c) No consent or authorization of, filing with, or other act by or in
respect of any governmental authority, is required in connection with the
execution, delivery, performance, validity or enforceability of this Agreement;
(d) The execution, performance and delivery of this Agreement will not
result in it violating any applicable law or breaching or otherwise impairing
any of its contractual obligations;
(e) Each Party hereto is entitled to rely on any written records or
instructions provided to it by another Party; and
(f) Its directors, officers, employees, and investment advisers, and
other individuals/entities dealing with the money and/or securities of a Fund
are and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
amount required by the applicable rules of the National Association of
Securities Dealers, Inc. ("NASD") and the federal
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<PAGE> 9
securities laws, which bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
7. Sales Material and Information
7.1 NASD Filings. The Company shall promptly inform Distributors as to
the status of all sales literature filings pertaining to the Special Fund or
Designated Portfolios and shall promptly notify Distributors of all approvals
or disapprovals of sales literature filings with the NASD. For purposes of this
Section 7, the phrase "sales literature or other promotional material" shall be
construed in accordance with all applicable securities laws and regulations.
7.2 Company Representations. The Company shall not make any material
representations concerning the Adviser, the Distributors, or a Fund other than
the information or representations contained in: (a) a registration statement
of the Fund or prospectus of a Designated Portfolio or Special Fund, as amended
or supplemented from time to time; (b) published reports or statements of the
Funds which are in the public domain or are approved by Distributors and/or the
Funds; or (c) sales literature or other promotional material of the Funds.
7.3 Adviser, Distributors and Fund Representations. Neither Adviser,
Distributors nor a Fund shall make any material representations concerning the
Company other than the information or representations contained in: (a) a
registration statement or prospectus for the Contracts, as amended or
supplemented from time to time; (b) published reports or statements of the
Contracts or the Account which are in the public domain or are approved by the
Company; or (c) sales literature or other promotional material of the Company.
7.4 Trademarks, etc. Except to the extent required by applicable law, no
Party shall use any other Party's names, logos, trademarks or service marks,
whether registered or unregistered, without the prior consent of such Party.
7.5 Information From Distributors and Adviser. Upon request, Distributors
and/or Adviser will provide to Company at least one complete copy of all
registration statements, prospectuses, Statements of Additional Information,
reports, proxy statements, solicitations for voting instructions, applications
for exemptions, requests for no action letters, and all amendments to any of
the above, that relate to the Designated Portfolios or the Special Fund, in
final form as filed with the SEC, NASD and other regulatory authorities.
7.6 Information From Company. Company will provide to Distributors at
least one complete copy of all registration statements, prospectuses,
Statements of Additional Information, reports, solicitations for voting
instructions, sales literature and other promotional materials, applications
for exemptions, requests for no action letters and all amendments to any of the
above, that relate to a Fund and the Contracts, in final form as filed with the
SEC, NASD and other regulatory authorities.
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<PAGE> 10
7.7 Review of Marketing Materials. If so requested by Company, the
Adviser or Distributors will use its best efforts to review sales literature
and other marketing materials prepared by Company which relate to the Funds,
the Adviser or Distributors for factual accuracy as to such entities, provided
that the Adviser or Distributors is provided at least five (5) Business Days to
review such materials. Neither the Adviser nor Distributors will review such
materials for compliance with applicable laws. Company shall provide the
Adviser with copies of all sales literature and other marketing materials which
refer to the Funds, the Company or Distributors within five (5) Business Days
after their first use, regardless of whether the Adviser or Distributors has
previously reviewed such materials. If so requested by the Adviser or
Distributors, Company shall cease to use any sales literature or marketing
materials which refer to the Funds, the Adviser or Distributors that the
Adviser or Distributors determines to be inaccurate, misleading or otherwise
unacceptable.
8. Fees and Expenses.
8.1 Fund Registration Expenses. Fund or Distributors shall bear the cost
of registration and qualification of Fund shares; preparation and filing of
Fund prospectuses and registration statements, proxy materials and reports;
preparation of all other statements and notices relating to Fund or
Distributors required by any federal or state law; payment of all applicable
fees, including, without limitation, all fees due under Rule 24f-2 of the 1940
Act, relating to Fund; and all taxes on the issuance or transfer of Fund's
shares on the Fund's records.
8.2 Contract Registration Expenses. The Company shall bear the expenses
for the costs of preparation and filing of the Company's prospectus and
registration statement with respect to the Contracts; preparation of all other
statements and notices relating to the Account or the Contracts required by any
federal or state law; expenses for the solicitation and sale of the Contracts
including all costs of printing and distributing all copies of advertisements,
prospectuses, Statements of Additional Information, proxy materials, and
reports to Owners or potential purchasers of the Contracts as required by
applicable state and federal law; payment of all applicable fees relating to
the Contracts; all costs of drafting, filing and obtaining approvals of the
Contracts in the various states under applicable insurance laws; filing of
annual reports on form N-SAR, and all other costs associated with ongoing
compliance with all such laws and its obligations hereunder.
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9. Indemnification.
9.1 Indemnification By Company.
(a) Company agrees to indemnify and hold harmless the Funds, Adviser
and Distributors and each of their directors, officers, employees and
agents, and each person, if any, who controls any of them within the
meaning of Section 15 of the 1933 Act (each, an "Indemnified Party" and
collectively, the "Indemnified Parties" for purposes of this Section 9.1)
from and against any and all losses, claims, damages, liabilities
(including amounts paid in settlement with the written consent of
Company), and expenses (including reasonable legal fees and expenses), to
which the Indemnified Parties may become subject under any statute,
regulation, at common law or otherwise (collectively, hereinafter
"Losses"), insofar as such Losses:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
registration statement, prospectus or sales literature for the
Contracts or contained in the Contracts (or any amendment or
supplement to any of the foregoing), or arise out of or are based
upon the omission or the alleged omission to state therein a material
fact required to be stated therein or necessary to make the
statements therein not misleading, provided that this paragraph
9.1(a) shall not apply as to any Indemnified Party if such statement
or omission or such alleged statement or omission was made in
reliance upon and in conformity with written information furnished to
Company by or on behalf of a Fund, Distributors or Adviser for use in
the registration statement or prospectus for the Contracts or in the
Contracts (or any amendment or supplement) or otherwise for use in
connection with the sale of the Contracts or Fund shares; or
(ii) arise out of, or as a result of, statements or
representations or wrongful conduct of Company or its agents, with
respect to the sale or distribution of the Contracts or Fund shares;
or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature covering a Fund or any amendment
thereof or supplement thereto, or the omission or alleged omission to
state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading, if such a
statement or omission was made in reliance upon written information
furnished to a Fund, Adviser or Distributors by or on behalf of
Company; or
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(iv) arise out of, or as a result of, any failure by Company or
persons under its control to provide the Services and furnish the
materials contemplated under the terms of this Agreement; or
(v) arise out of, or result from, any material breach of any
representation and/or warranty made by Company or persons under its
control in this Agreement or arise out of or result from any other
material breach of this Agreement by Company or persons under its
control; as limited by and in accordance with the provisions of
Sections 9.1(b) and 9.1(c) hereof; or
(vi) arise out of, or as a result of, adherence by Adviser or
Distributors to instructions that it reasonably believes were
originated by persons specified in Section 3.2(c), hereof.
This indemnification provision is in addition to any liability which
the Company may otherwise have.
(b) Company shall not be liable under this indemnification provision
with respect to any Losses to which an Indemnified Party would otherwise
be subject by reason of such Indemnified Party's willful misfeasance, bad
faith, or gross negligence in the performance of such Indemnified Party's
duties or by reason of such Indemnified Party's reckless disregard of
obligations or duties under this Agreement.
(c) Company shall not be liable under this indemnification provision
with respect to any claim made against an Indemnified Party unless such
Indemnified Party shall have notified Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received
notice of such service on any designated agent), but failure to notify
Company of any such claim shall not relieve Company from any liability
which it may have to the Indemnified Party otherwise than on account of
this indemnification provision. In case any such action is brought against
any Indemnified Party, and it notified the indemnifying Party of the
commencement thereof, the indemnifying Party will be entitled to
participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such Indemnified Party.
After notice from the indemnifying Party of its intention to assume the
defense of an action, the Indemnified Party shall bear the expenses of any
additional counsel obtained by it, and the indemnifying Party shall not be
liable to such Indemnified Party under this Section for any legal or other
expenses subsequently incurred by such Indemnified Party in connection
with the defense thereof other than reasonable costs of investigation. The
Indemnified Party may not settle any action without the written consent of
the indemnifying Party. The indemnifying Party may not settle any action
without the written consent of the Indemnified Party unless
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<PAGE> 13
such settlement completely and finally releases the Indemnified Party from
any and all liability. In either event, consent shall not be unreasonably
withheld.
(d) The Indemnified Parties will promptly notify Company of the
commencement of any litigation or proceedings against them in connection
with the issuance or sale of Fund shares or the Contracts or the operation
of Fund.
9.2 Indemnification by Adviser and Distributors.
(a) Adviser and Distributors agrees to indemnify and hold harmless
Company and each of its directors, officers, employees and agents and each
person, if any, who controls Company within the meaning of Section 15 of
the 1933 Act (each, and "Indemnified Party" and collectively, the
"Indemnified Parties" for purposes of this Section 9.2) against any and
all Losses to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such Losses:
(i) arise out of or are based upon any untrue statement or
alleged untrue statement of any material fact contained in the
registration statement or prospectus or sales literature of a Fund
(or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this Section 9.2(a) shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with written information
furnished to a Fund, Adviser or Distributors by or on behalf of
Company for use in the registration statement or prospectus for a
Fund or in sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or
Fund shares; or
(ii) arise out of, or as a result of, statements or
representations or wrongful conduct of Adviser or Distributors or
persons under its control, with respect to the sale or distribution
of Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a registration statement,
prospectus, or sales literature covering the Contracts, or any
amendment thereof or supplement thereto, or the omission or alleged
omission to state therein a material fact required to be stated
therein, or necessary to make the statements therein not misleading,
if such statement or omission was made in reliance upon written
information furnished to Company by or on behalf of Adviser or
Distributors; or
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(iv) arise out of, or as a result of, any failure by Adviser or
Distributors or persons under its control to provide the services and
furnish the materials contemplated under the terms of this Agreement;
or
(v) arise out of or result from any material breach of any
representation and/or warranty made by Adviser or Distributors or
persons under its control in this Agreement or arise out of or result
from any other material breach of this Agreement by Adviser or
Distributors or persons under its control; as limited by and in
accordance with the provisions of Sections 9.2(b) and 9.2(c) hereof.
This indemnification provision is in addition to any liability which
Adviser and Distributors may otherwise have.
(b) Distributors shall not be liable under this indemnification
provision with respect to any Losses to which an Indemnified Party would
otherwise be subject by reason of such Indemnified Party's willful
misfeasance, bad faith, or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's
reckless disregard of obligations and duties under this Agreement or to
Company.
(c) Adviser and Distributors shall not be liable under this
indemnification provision with respect to any claim made against an
Indemnified Party unless such Indemnified Party shall have notified
Adviser and Distributors in writing within a reasonable time after the
summons or other first legal process giving information of the nature of
the claim shall have been served upon such Indemnified Party (or after
such Indemnified Party shall have received notice of such service on any
designated agent), but failure to notify Adviser and Distributors of any
such claim shall not relieve Adviser and Distributors from any liability
which it may have to the Indemnified Party otherwise than on account of
this indemnification provision. In case any such action is brought against
any Indemnified Party, and it notified the indemnifying Party of the
commencement thereof, the indemnifying Party will be entitled to
participate therein and, to the extent that it may wish, assume the
defense thereof, with counsel satisfactory to such Indemnified Party.
After notice from the indemnifying Party of its intention to assume the
defense of an action, the Indemnified Party shall bear the expenses of any
additional counsel obtained by it, and the indemnifying Party shall not
be liable to such Indemnified Party under this Section for any legal or
other expenses subsequently incurred by such Indemnified Party in
connection with the defense thereof other than reasonable costs of
investigation. The Indemnified Party may not settle any action without the
written consent of the indemnifying Party. The indemnifying Party may not
settle any action without the written consent of the Indemnified Party
unless such settlement completely and finally releases the Indemnified
Party from any and all liability. In either event, consent shall not be
unreasonably withheld.
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(d) The Indemnified Parties will promptly notify Adviser and
Distributors of the commencement of any litigation or proceedings against
them in connection with the issuance or sale of the Contracts or the
operation of the Account.
10. Potential Conflicts.
10.1 Monitoring by Directors for Conflicts of Interest. The Directors of
each Fund will monitor the Fund for any potential or existing material
irreconcilable conflict of interest between the interests of the contract
owners of all separate accounts investing in the Fund, including such conflict
of interest with any other separate account of any other insurance company
investing in the Fund. An irreconcilable material conflict may arise for a
variety of reasons, including: (a) an action by any state insurance regulatory
authority; (b) a change in applicable federal or state insurance, tax, or
securities laws or regulations, or a public ruling, private letter ruling,
no-action or interpretive letter, or any similar action by insurance, tax or
securities regulatory authorities; (c) an administrative or judicial decision
in any relevant proceeding; (d) the manner in which the investments of the Fund
are being managed; (e) a difference in voting instructions given by variable
annuity contract owners and variable life insurance contract owners or by
contract owners of different life insurance companies utilizing the Fund; or
(f) a decision by Company to disregard the voting instructions of Owners. The
Directors shall promptly inform the Company, in writing, if they determine that
an irreconcilable material conflict exists and the implications thereof.
10.2 Monitoring by the Company for Conflicts of Interest. The Company will
promptly notify the Directors, in writing, of any potential or existing
material irreconcilable conflicts of interest, as described in Section 10.1
above, of which it is aware. The Company will assist the Directors in carrying
out their responsibilities under any applicable provisions of the federal
securities laws and/or any exemptive orders granted by the SEC ("Exemptive
Order"), by providing the Directors, in a timely manner, with all information
reasonably necessary for the Directors to consider any issues raised. This
includes, but is not limited to, an obligation by the Company to inform the
Directors whenever Owner voting instructions are disregarded.
10.3 Remedies. If it is determined by a majority of the Directors, or a
majority of disinterested Directors, that a material irreconcilable conflict
exists, as described in Section 10.1 above, the Company shall, at its own
expense take whatever steps are necessary to remedy or eliminate the
irreconcilable material conflict, up to and including, but not limited to: (a),
withdrawing the assets allocable to some or all of the separate accounts from
the applicable Fund and reinvesting such assets in a different investment
medium, including (but not limited to) another fund managed by the Adviser, or
submitting the question whether such segregation should be implemented to a
vote of all affected Owners and, as appropriate, segregating the assets of any
particular group that votes in favor of such segregation, or offering to the
affected
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owners the option of making such a change; and (b), establishing a new
registered management investment company or managed separate account.
10.4 Causes of Conflicts of Interest.
(a) State Insurance Regulators. If a material irreconcilable
conflict arises because a particular state insurance regulator's
decision applicable to the Company conflicts with the majority of
other state regulators, then the Company will withdraw the affected
Account's investment in the applicable Fund and terminate this
Agreement with respect to such Account within the period of time
permitted by such decision, but in no event later than six months
after the Directors inform the Company in writing that it has
determined that such decision has created an irreconcilable material
conflict; provided, however, that such withdrawal and termination
shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the
disinterested Directors. Until the end of the foregoing period, the
Distributors and Fund shall continue to accept and implement orders
by the Company for the purchase (and redemption) of shares of the
Fund to the extent such actions do not violate applicable law.
(b) Disregard of Owner Voting. If a material irreconcilable
conflict arises because of Company's decision to disregard Owner
voting instructions and that decision represents a minority position
or would preclude a majority vote, Company may be required, at the
applicable Fund's election, to withdraw the Account's investment in
said Fund. No charge or penalty will be imposed against the Account
as a result of such withdrawal.
10.5 Limitations on Consequences. For purposes of Sections 10.3
through 10.5 of this Agreement, a majority of the disinterested Directors
shall determine whether any proposed action adequately remedies any
irreconcilable material conflict. In no event will a Fund, the Adviser or
the Distributors be required to establish a new funding medium for any of
the Contracts. The Company shall not be required by Section 10.3 to
establish a new funding medium for the Contracts if an offer to do so has
been declined by vote of a majority of Owners affected by the
irreconcilable material conflict. In the event that the Directors
determine that any proposed action does not adequately remedy any
irreconcilable material conflict, then the Company will withdraw the
Account's investment in the applicable Fund and terminate this Agreement
as quickly as may be required to comply with applicable law, but in no
event later than six (6) months after the Directors inform the Company in
writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any
such material irreconcilable conflict.
16
<PAGE> 17
10.6 Changes in Laws. If and to the extent that Rule 6e-2 and Rule
6e-3(T) are amended, or Rule 6e-3 is adopted, to provide exemptive relief
from any provision of the Act or the rules promulgated thereunder with
respect to mixed or shared funding (as defined in the Fund's Exemptive
Order) on terms and conditions materially different from those contained
in the Fund's Exemptive Order, then (a) the Fund and/or the Company, as
appropriate, shall take such steps as may be necessary to comply with
Rules 6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the
extent such rules are applicable; and (b) Sections 10.1, 10.2, 10.3 and
10.4 of this Agreement shall continue in effect only to the extent that
terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
11. Maintenance of Records.
(a) Recordkeeping and other administrative services to Owners
shall be the responsibility of the Company and shall not be the
responsibility of the Fund, Adviser or Distributors. Neither the
Funds, the Adviser nor Distributors shall maintain separate accounts
or records for Owners. Company shall maintain and preserve all
records as required by law to be maintained and preserved in
connection with providing the Services and in making shares of the
Funds available to the Account.
(b) Upon the request of the Adviser or Distributors, the
Company shall provide copies of all the historical records relating
to transactions between the Funds and the Account, written
communications regarding the Funds to or from the Account and other
materials, in each case (1) as are maintained by the Company in the
ordinary course of its business and in compliance with applicable
law, and (2) as may reasonably be requested to enable the Adviser and
Distributors, or its representatives, including without limitation
its auditors or legal counsel, to (A) monitor and review the
Services, (B) comply with any request of a governmental body or
self-regulatory organization or the Owners, (C) verify compliance by
the Company with the terms of this Agreement, (D) make required
regulatory reports, or (E) perform general customer supervision. The
Company agrees that it will permit the Adviser and Distributors or
such representatives of either to have reasonable access to its
personnel and records in order to facilitate the monitoring of the
quality of the Services.
(c) Upon the request of the Company, the Adviser and
Distributors shall provide copies of all the historical records
relating to transactions between the Funds and the Account, written
communications regarding the Funds to or from the Account and other
materials, in each case (1) as are maintained by the Adviser and
Distributors, as the case may be, in the ordinary course of its
business and in compliance with applicable law, and (2) as may
reasonably be requested to enable the Company, or its
representatives, including without limitation its auditors or legal
counsel, to (A) comply with any request of a governmental body or
self-regulatory organization or the Owners, (B) verify
17
<PAGE> 18
compliance by the Adviser and Distributors with the terms of this
Agreement, (C) make required regulatory reports, or (D) perform
general customer supervision.
(d) The Parties agree to cooperate in good faith in providing
records to one another pursuant to this Section II-1.
12. Term and Termination.
12.1 Term and Termination Without Cause. The initial term of this
Agreement shall be for a period of one year from the date hereof. Unless
terminated as to any Fund upon not less than thirty (30) days prior written
notice to the other Parties, this Agreement shall thereafter automatically
renew for the remaining Funds from year to year, subject to termination at the
next applicable renewal date upon not less than 30 days prior written notice.
Any Party may terminate this Agreement as to any Fund following the initial
term upon six (6) months advance written notice to the other Parties.
12.2 Termination by Fund, Distributors or Adviser for Cause. Adviser,
Fund or Distributors may terminate this Agreement by written notice to the
Company, if any of them shall determine, in its sole judgment exercised in good
faith, that (a) the Company has suffered a material adverse change in its
business, operations, financial condition or prospects since the date of this
Agreement or is the subject of material adverse publicity; or (b) any of the
Contracts are not registered, issued or sold in accordance with applicable
state and/or federal law or such law precludes the use of Fund shares as the
underlying investment media of the Contracts issued or to be issued by the
Company.
12.3 Termination by Company for Cause. Company may terminate this
Agreement by written notice to the Funds and the Distributors in the event that
(a) any of the Fund's shares are not registered, issued or sold in accordance
with applicable state and/or federal law or such law precludes the use of such
shares as the underlying investment media of the Contracts issued or to be
issued by the Company; (b) the Funds cease to qualify as a Regulated Investment
Companies under Subchapter M of the Code or under any successor or similar
provision, or if the Company reasonably believes that the Funds may fail to so
qualify; or (c) a Fund fails to meet the diversification requirements specified
in Section 6.4(a).
12.4 Termination by any Party. This Agreement may be terminated as to
any Fund by any Party at any time (A) by giving 30 days' written notice to the
other Parties in the event of a material breach of this Agreement by the other
Party or Parties that is not cured during such 30-day period, and (B) (i) upon
institution of formal proceedings relating to the legality of the terms and
conditions of this Agreement against the Account, Company, Funds, Adviser or
Distributors by the NASD, the SEC or any other regulatory body provided that
the terminating Party has a reasonable belief that the institution of formal
proceedings is not without foundation and will have a material adverse impact
on the terminating Party, (ii) by the non-assigning Party upon the
18
<PAGE> 19
assignment of this Agreement in contravention of the terms hereof, or (iii) as
is required by law, order or instruction by a court of competent jurisdiction
or a regulatory body or self-regulatory organization with jurisdiction over the
terminating Party.
12.5 Limit on Termination. Notwithstanding the termination of this
Agreement with respect to any or all Funds, for so long as any Contracts remain
outstanding and invested in a Designated Portfolio or in the Special Fund each
Party hereto shall continue to perform such of its duties hereunder as are
necessary to ensure the continued tax deferred status thereof and the payment
of benefits thereunder, except to the extent proscribed by law, the SEC or
other regulatory body. Notwithstanding the foregoing, nothing in this Section
12.5 obligates a Fund to continue in existance. In the event that any Fund
elects to terminate its operations, the Company shall, as soon as practicable,
obtain an exemptive order or order of substition from the SEC to remove all
Owners from the applicable Fund.
13. Notices.
All notices hereunder shall be given in writing (and shall be deemed to
have been duly given upon receipt) by delivery in person, by facsimile, by
registered or certified mail or by overnight delivery (postage prepaid, return
receipt requested) to the respective Parties as follows:
If to Insurance Fund:
Strong Variable Insurance Funds, Inc.
100 Heritage Reserve
Milwaukee, Wisconsin 53051
Attention: General Counsel
Facsimile No.: 414/359-3948
If to Special Fund:
Strong Special Fund II, Inc.
100 Heritage Reserve
Milwaukee, Wisconsin 53051
Attention: General Counsel
Facsimile No.: 414/359-3948
19
<PAGE> 20
If to Adviser:
Strong Capital Management, Inc.
100 Heritage Reserve
Milwaukee, Wisconsin 53051
Attention: General Counsel
Facsimile No.: 414/359-3948
If to Distributors:
Strong Funds Distributors, Inc.
100 Heritage Reserve
Milwaukee, Wisconsin 53051
Attention: General Counsel
Facsimile No.: 414/359-3948
If to Company:
National Life Insurance Company
National Life Drive
Montpelier, VT 05604
Attention: General Counsel
Facsimile No.: (802) 229-3743
14. Miscellaneous.
14.1. Captions. The captions in this Agreement are included for
convenience of reference only and in no way affect the construction or effect
of any provisions hereof.
14.2. Enforceability. If any portion of this Agreement shall be held
or made invalid by a court decision, statute, rule or otherwise, the remainder
of the Agreement shall not be affected thereby.
14.3. Counterparts. This Agreement may be executed simultaneously in two
or more counterparts, each of which taken together shall constitute one and the
same instrument.
14.4. Remedies not Exclusive. The rights, remedies and obligations
contained in this Agreement are cumulative and are in addition to any and all
rights, remedies and obligations, at law or in equity, which the Parties hereto
are entitled to under state and federal laws.
20
<PAGE> 21
14.5. Confidentiality. Subject to the requirements of legal process and
regulatory authority, the Fund and Distributors shall treat as confidential the
names and addresses of the owners of the Contracts and all information
reasonably identified as confidential in writing by the Company hereto and,
except as permitted by this Agreement, shall not disclose, disseminate or
utilize such names and addresses and other confidential information without the
express written consent of the Company until such time as it may come into the
public domain.
14.6. Governing Law. This Agreement shall be governed by and interpreted
in accordance with the internal laws of the State of Wisconsin applicable to
agreements fully executed and to be performed therein; exclusive of conflicts
of laws.
14.7. Survivability. Sections 6, 7.2, 7.3, 7.4, 9, 11 and 12.5 hereof
shall survive termination of this Agreement. In addition, all provisions of
this Agreement shall survive termination of this Agreement in the event that
any Contracts are invested in Special Fund or a Designated Portfolio at the
time the termination becomes effective and shall survive for so long as such
Contracts remain so invested.
14.8. Amendment and Waiver. No modification of any provision of this
Agreement will be binding unless in writing and executed by the Party to be
bound thereby. No waiver of any provision of this Agreement will be binding
unless in writing and executed by the Party granting such waiver.
Notwithstanding anything in this Agreement to the contrary, the Company may
unilaterally amend Exhibit A hereto to add additional series of Insurance Funds
("New Funds") as Funds by sending to the Company a written notice of the New
Funds Any valid waiver of a provision set forth herein shall not constitute a
waiver of any other provision of this Agreement. In addition, any such waiver
shall constitute a present waiver of such provision and shall not constitute a
permanent future waiver of such provision.
14.9. Assignment. This Agreement shall be binding upon and shall inure
to the benefit of the Parties and their respective successors and assigns;
provided, however, that neither this Agreement nor any rights, privileges,
duties or obligations of the Parties may be assigned by any Party without the
written consent of the other Parties or as expressly contemplated by this
Agreement.
14.10. Entire Agreement. This Agreement contains the full and complete
understanding between the Parties with respect to the transactions covered and
contemplated hereunder, and supersedes all prior agreements and understandings
between the Parties relating to the subject matter hereof, whether oral or
written, express or implied.
21
<PAGE> 22
14.11. Relationship of Parties, No Joint Venture, Etc. Except for
the limited purpose provided in Section 3.8, it is understood and agreed that
the Company shall be acting as an independent contractor and not as an employee
or agent of the Adviser, Distributors or the Funds, and none of the Parties
shall hold itself out as an agent of any other Party with the authority to bind
such Party. Neither the execution nor performance of this Agreement shall be
deemed to create a partnership or joint venture by and among any of the
Company, Fund, Adviser, or Distributors.
14.12. Expenses. All expenses incident to the performance by each Party
of its respective duties under this Agreement shall be paid by that Party.
14.13. Time of Essence. Time shall be of the essence in this Agreement.
14.14. Non-Exclusivity. Each of the Parties acknowledges and agrees that
this Agreement and the arrangements described herein are intended to be
non-exclusive and that each of the Parties is free to enter into similar
agreements and arrangements with other entities.
14.15. Operations of Fund. In no way shall the provisions of this
Agreement limit the authority of the Funds, the Company or Distributors to take
such action as it may deem appropriate or advisable in connection with all
matters relating to the operation of such Fund and the sale of its shares. In
no way shall the provisions of this Agreement limit the authority of the
Company to take such action as it may deem appropriate or advisable in
connection with all matters relating to the provision of Services or the shares
of funds other than the Funds offered to the Account.
22
<PAGE> 23
IN WITNESS WHEREOF, each of the Parties hereto has caused this Agreement
to be duly executed as of the date first above written.
NATIONAL LIFE INSURANCE COMPANY].
/s/ CRAIG A. SMITH
----------------------------------------------
Craig A. Smith,/Vice President
Senior
STRONG CAPITAL MANAGEMENT, INC.
/s/ ROCHELLE LAMM WALLASH
----------------------------------------------
Rochelle Lamm Wallach
President of Strong Advisory Services, a
division of Strong Capital Management, Inc.
STRONG FUNDS DISTRIBUTORS, INC.
/s/ STEPHEN J. SHENKENBERG
----------------------------------------------
Stephen J. Shenkenberg, Vice President
STRONG VARIABLE INSURANCE FUNDS,
INC.
/s/ STEPHEN J. SHENKENBERG
----------------------------------------------
Stephen J. Shenkenberg, Vice President
STRONG SPECIAL FUND II, INC.
/s/ STEPHEN J. SHENKENBERG
----------------------------------------------
Stephen J. Shenkenberg, Vice President
23
<PAGE> 24
EXHIBIT A
The following is a list of all series of the Insurance Fund which are to be
made available for investment by the Contracts pursuant to this Agreement:
Strong Growth Fund II
24
<PAGE> 25
EXHIBIT B
THE SERVICES
Company shall perform the following services. Such services shall be the
responsibility of the Company and shall not be the responsibility of the Funds,
Adviser or Distributors.
1. Maintain separate records for each Account, which records shall
reflect Fund shares ("Shares") purchased and redeemed, including the date and
price for all transactions, Share balances, and the name and address of each
Owner, including zip codes and tax identification numbers.
2. Credit contributions to individual Owner accounts and invest such
contributions in shares of the Special Fund or Designated Portfolios to the
extent so designated by the Owner.
3. Disburse or credit to the Owners, and maintain records of, all
proceeds of redemptions of Special Fund or Designated Portfolio shares and all
other distributions not reinvested in shares.
4. Prepare and transmit to the Owners, periodic account statements
showing, among other things, the total number of Special Fund or Designated
Portfolio shares owned as of the statement closing date, purchases and
redemptions of shares during the period covered by the statement, the net asset
value of the Special Fund and Designated Portfolios as of a recent date, and
the dividends and other distributions paid during the statement period (whether
paid in cash or reinvested in shares).
5. Transmit to the Owners, as required by applicable law,
prospectuses, proxy materials, shareholder reports, and other information
provided by the Adviser, Distributors or Funds and required to be sent to
shareholders under the Federal securities laws.
6. Transmit to Distributors purchase orders and redemption requests
placed by the Account and arrange for the transmission of funds to and from the
Funds.
7. Transmit to Distributors such periodic reports as Distributors
shall reasonably conclude is necessary to enable the Funds to comply with
applicable Federal securities and state Blue Sky requirements.
8. Transmit to the each Account confirmations of purchase orders and
redemption requests placed by each Account.
25
<PAGE> 26
9. Maintain all account balance information for the Account and daily
and monthly purchase summaries expressed in shares and dollar amounts.
10. Prepare, transmit and file any Federal, state and local government
reports and returns as required by law with respect to each account maintained
on behalf of the Account.
11. Respond to Owners' inquiries regarding, among other things, share
prices, account balances, dividend options, dividend amounts, and dividend
payment dates.
26
<PAGE> 27
EXHIBIT C
ACCOUNT INFORMATION
1. Entity in whose name each Account will be opened:
Mailing address:
National Variable Annuity Account II
-------------------------------------
One National Life Drive
-------------------------------------
Montpelier, Vermont 05604
-------------------------------------
-------------------------------------
2. Employer ID number (For internal usage only):
03-0144090
-------------------------------------
3. Authorized contact persons: The following persons are authorized on behalf
of the Company to effect transactions in each Account:
Name: Margaret Bates Name: Linda Bizzozero
------------------------ ----------------------
Phone: (802) 229-7219 Phone: (802) 229-7022
------------------------ ----------------------
4. Will the Accounts have telephone exchange? x Yes No
------- ------
(This option lets Company redeem shares by telephone and apply the proceeds
for purchase in another identically registered Strong Funds account.)
5. Will the Accounts have telephone redemption? x Yes No
------- ------
(This option lets Company sell shares by telephone. The proceeds will be
wired to the bank account specified below.)
6. All dividends and capital gains will be reinvested automatically.
7. Instructions for all outgoing wire transfers:
Chase Manhattan Bank
-------------------------------------
One Chase Manhattan Plaza
-------------------------------------
New York City, New York
-------------------------------------
ABA Routing #021-000-021
-------------------------------------
For Credit to: National Life
-------------------------------------
Insurance Company, Chase Account
-------------------------------------
#910-4-017752
-------------------------------------
Ref:
-------------------------------------
8. If this Account Information Form contains changed information, the
undersigned authorized officer has executed this amended Account Information
Form as of the date set forth below and acknowledges the agreements and
representations set forth in the Participation Agreement between the Company,
the Funds, Adviser and Distributors:
/s/ CRAIG A. SMITH May 9, 1997
- -------------------------------------- --------------------
(Signature of Authorized Officer) (Date)
Craig A. Smith, Senior Vice President
27
<PAGE> 28
9. Company represents under penalty of perjury that:
(i) The employer ID number on this form is correct; and
(ii) Company is not subject to backup withholding because (a) Company is
exempt from backup withholding, (b) Company has not been notified by the IRS
that it is subject to backup withholding as a result of failure to report all
interest or dividends, or (c) the IRS has notified the Company that it is no
longer subject to backup withholding. (Cross out (ii) if Company has been
notified by the IRS that it is subject to backup withholding because of
underreporting interest or dividends on its tax return.)
Please Note: Distributors employs reasonable procedures to confirm that
instructions communicated by telephone are genuine and may not be liable for
losses due to unauthorized or fraudulent instructions. Please see the
prospectus for the Special Fund or applicable Designated Portfolio for more
information on the telephone exchange and redemption privileges.
For Strong Internal Use: This Account Information Form may be a copy. The
original Account Information Form is attached to the Participation Agreement
with the Adviser and retained in the legal department.
28
<PAGE> 29
Re: Fee Letter Relating to the National Life Insurance Company
Participation Agreement.
Dear Sir or Madame:
Pursuant to the Participation Agreement by and among Strong Capital
Management, Inc. ("Strong"), National Life Insurance Company (the "Company"),
Strong Variable Insurance Funds, Inc., Strong Special Fund II, Inc. and Strong
Funds Distributors, Inc. ("Distributors") dated May 7, 1997 (the "Participation
Agreement"), the Company will provide certain administrative services on behalf
of the registered investment companies or series thereof specified in Exhibit A
(each a "Fund" and collectively the "Funds").
In recognition of the reduction in administrative expenses that derives
from the performance of said administrative services, Strong agrees to pay the
Company the fee specified below for each Fund specified in Exhibit A hereto.
(a) For average aggregate amounts (as calculated in paragraph
(b), below) invested through variable insurance products issued by the
Company with the Funds, the monthly fee shall equal the percentage
(calculated in paragraph (b), below) of of the applicable annual fee for
each Fund specified in Exhibit A.
(b) For purposes of computing the fee contemplated in paragraph
(a) above, Strong shall calculate and pay to the Company an amount with
respect to each Fund equal to the product of: (a) the product of (i) the
number of calendar days in the applicable month divided by the number of
calendar days in that year (365 or 366 as applicable) and (ii) the
applicable percentage specified in Exhibit A, hereto, multiplied by (b)
the average daily market value of the investments held in such Fund
pursuant to the Participation Agreement computed by totaling the
aggregate investment (share net asset value multiplied by the total
number of shares held) on each day during the calendar month and dividing
by the total number of days during such month.
(c) Strong shall calculate the amount of the payment to be made
pursuant to this Letter Agreement at the end of each calendar month and
will make such payment to the Company within 30 days after receiving the
report referenced in paragraph (e), below. Fees will be paid, at Strong's
election, by wire transfer or by check. All payments hereunder shall be
considered final unless disputed by the Company in writing within 60 days
of receipt.
(d) The parties agree that the fees contemplated herein are
solely for shareholder servicing and other administrative services
provided by the Company and do not constitute payment in any manner for
investment advisory, distribution, trustee, or custodial services.
29
<PAGE> 30
(e) The Company agrees to provide Strong by the 15th day of each
month with a report which indicates the number of Owners that hold
through a Contract interests in each Account as of the last day of the
prior month.
(f) If requested in writing by Strong, and at Strong's expense,
the Company shall provide to Strong, by February 14th of each year, a
"Special Report" from a nationally recognized accounting firm reasonably
acceptable to Strong which substantiates for each month of the prior
calendar year: (a) the number of Owners that hold, through an Account,
interests in each Account maintained by the Company on the last day of
each month which held shares for which the fee provided for in this
Letter Agreement was received by the Company, (b) that any fees billed to
Strong for such month were accurately determined in accordance with this
Letter Agreement, and (c) such other information in connection with this
Agreement and the Participation Agreement as may be reasonably requested
by Strong.
(g) The parties hereto agree that Strong may unilaterally amend
Schedule A hereto to add additional investment companies or series
thereof ("New Funds") as Funds subject to the provisions of this Letter
Agreement by sending to the Company a written notice of the New Funds and
indicating therein the fees to be paid to the Company with respect to the
administrative services provided pursuant to the Participation Agreement
in connection with such New Funds.
(h) This Letter Agreement shall terminate upon termination of the
Participation Agreement. Accordingly, all payments pursuant to this
Letter Agreement shall cease upon termination of the Participation
Agreement.
(i) Capitalized terms not otherwise defined herein shall have the
meaning assigned to them in the Participation Agreement.
If you are in agreement with the foregoing, please sign and date
below where indicated and return one copy of this signed letter agreement to
me.
Very truly yours,
/s/ ROCHELLE LAMM WALLACH
Rochelle Lamm Wallach
President of Strong Advisory Services, a
division of Strong Capital Management, Inc.
Accepted and agreed to this 9th day of
May, 1997 by
National Life Insurance Companv
/s/ CRAIG A. SMITH
- ------------------------------------------
Craig A. Smith, President
Senior
30
<PAGE> 31
EXHIBIT A
The Funds subject to this Agreement and applicable annual fees are as follows:
Fund Annual Fee
Strong Special Fund II, Inc. .20%
Strong Variable Insurance Funds, Inc.
Strong Growth Fund II .20%
31
<PAGE> 1
EXHIBIT (b)(8)(e)(1)
AMENDMENT NO. 1 TO PARTICIPATION AGREEMENT
AMONG
VARIABLE INSURANCE PRODUCTS FUND II,
FIDELITY DISTRIBUTORS CORPORATION
AND
NATIONAL LIFE INSURANCE COMPANY (AS SUCCESSOR TO VERMONT LIFE INSURANCE
COMPANY)
THIS AMENDMENT NO. 1 to the Participation Agreement by and among Vermont Life
Insurance Company (since merged into National Life Insurance Company), Variable
Insurance Products Fund II (the "Fund"), and Fidelity Distributors Corporation
(the "Underwriter"), dated April 1, 1990 (the "Participation Agreement"), and
is made and entered into this 28th day of April, 1997.
1. Schedule A is hereby further amended to add the following contract forms:
National Life Contract Form 7206 (Flexible Premium Adjustable Benefit
Variable Life Insurance)
National Life Contract Form 7207 (Flexible Premium Adjustable Benefit
Variable Life Insurance (Unisex Version)
National Life Contract Form 7400 (Flexible Premium Variable
Deferred Annuity)
National Life Contract Form 7401 (Flexible Premium Variable
Deferred Annuity (Unisex Version))
2. Schedule C is hereby further amended to add the following separate account:
National Variable Life Insurance Account - February 5, 1985
National Variable Annuity Account II - November 1, 1996
3. Pursuant to section 1.6 hereof, the Fund and the Distributor hereby
consents to the investment of net amounts available under the variable
contracts listed in paragraph 1 above in the following Funds other than the
Fund: The Market Street Fund, The Alger American Fund, The Dreyfus Socially
Responsible Growth Fund, Inc., Strong Special Fund II, Inc., Strong Variable
Insurance Funds, Inc. and Van Eck Worldwide Insurance Trust.
IN WITNESS WHEREOF, each of the parties hereto has caused this Amendment No. 1
to the Participation Agreement to be executed in its name and on its behalf by
its duly authorized representative and its seal to be affixed hereto as of the
date specified below.
NATIONAL LIFE INSURANCE COMPANY
by
---------------------------------
Name: Linda Usle Hoitt
Title: Second Vice President - Annuities
VARIABLE INSURANCE PRODUCTS FUND II
by
---------------------------------
Name:
Title:
FIDELITY DISTRIBUTORS CORPORATION
by
---------------------------------
Name:
Title:
<PAGE> 1
Exhibit (b)(8)(f)
PARTICIPATION AGREEMENT
Among
VAN ECK WORLDWIDE INSURANCE TRUST,
VAN ECK SECURITIES CORPORATION,
VAN ECK ASSOCIATES CORPORATION
and
NATIONAL LIFE INSURANCE COMPANY
==================================
THIS AGREEMENT, made and entered into to be effective on __________
______, by and among National Life Insurance Company, (hereinafter the
"Company"), a Vermont corporation, on its own behalf and on behalf of each
segregated asset account of the Company set forth on Schedule A hereto and
incorporated herein by this reference, as such Schedule A may from time to
time be amended by mutual written agreement of the parties hereto (each such
account hereinafter referred to as the "Account"), and VAN ECK WORLDWIDE
INSURANCE TRUST, an unincorporated business trust organized under the laws of
the Commonwealth of Massachusetts (hereinafter the "Fund"), VAN ECK SECURITIES
CORPORATION (hereinafter the "Underwriter"), a Delaware corporation and VAN ECK
ASSOCIATES CORPORATION (hereinafter the "Adviser"), a Delaware corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (hereafter referred to collectively as the "Variable
Insurance Products") to be offered by insurance companies which have entered
into participation agreements with the Fund and the Underwriter (hereinafter
the "Participating Insurance Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each representing the interest in a particular managed
portfolio of securities and other assets (each such series hereinafter referred
to as a "Portfolio"); and
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission (hereinafter the "SEC") (File No. 811-5083), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of Sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b)(15) and 6e-3 (T)(b)(15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Order"); and
Page 1
<PAGE> 2
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, the Company has registered or will register certain variable
life insurance and variable annuity contracts under the 1933 Act, unless such
contracts are exempt from registration thereunder; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company, on the date shown for such Account on Schedule A hereto, to set aside
and invest assets attributable to the aforesaid variable life insurance and
variable annuity contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act, unless such Account is exempt from
registration thereunder; and
WHEREAS, the Underwriter is registered as a broker-dealer with the SEC
under the Securities Exchange Act of 1934, as amended (hereinafter the "1934
Act"), and is a member in good standing of the National Association of
Securities Dealers, Inc. (hereinafter the "NASD"); and
WHEREAS, the Adviser is duly registered as an investment adviser under
the Investment Advisers Act of 1940 and any applicable state securities law;
and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life and variable
annuity contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund, the Underwriter and the Adviser agree as follows:
ARTICLE I
Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares
of the Portfolios (which are listed on Schedule B attached hereto and
incorporated herein by this reference, as such Schedule B may from time to time
be amended by mutual written agreement of the parties hereto) which each
Account orders, executing such orders on a daily basis at the net asset value
per share next computed after receipt by the Fund or its designee of the order
for the shares of the Portfolios subject to the terms and conditions of this
Agreement. For purposes of this Section 1.1, the Company shall be the designee
of the Fund for receipt of such orders from each Account and receipt by such
designee shall constitute receipt by the Fund provided that the Fund receives;
notice of such order by 9:00 a.m. Eastern time on the next following Business
Day. "Business
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<PAGE> 3
Day" shall mean any day on which the New York Stock Exchange is open for
business and on which the Fund calculates the Portfolios' net asset values
pursuant to the rules of the SEC.
1.2. The Fund agrees to make Portfolio shares available for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates net asset values pursuant
to the rules of the SEC and the Fund shall use reasonable efforts to calculate
such net asset values on each day on which the New York Stock Exchange is open
for trading. Notwithstanding the foregoing, the Board of Trustees of the Fund
(hereinafter the "Board") may refuse to sell shares of any Portfolio to any
person, or suspend or terminate the offering of shares of any Portfolio, if
such action is required by law or by regulatory authorities having
jurisdiction, or if it is, in the sole discretion of the Board, desirable or
advisable, and in the best interests of the shareholders of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund
will be sold only to Participating Insurance Companies and their separate
accounts or other accounts (e.g., qualified retirement plans) as may be
permitted so that the Variable Insurance Products continue to qualify as a
"life insurance, annuity or variable contract" under Section 817(h) of the
Internal Revenue Code of 1986, as amended (hereinafter the "Code"). No shares
of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to
any insurance company, separate account or other account unless an agreement
containing provisions substantially the same as Article I, Section 2.5 of
Article II, Sections 3.4 and 3.5 of Article III, Article V and Article VII of
this Agreement is in effect to govern such sales.
1.5. Subject to its rights under Section 18(f) of the 1940 Act,
the Fund agrees to redeem for cash, on the Company's request, any full or
fractional shares of a Portfolio held by the Company, executing such requests
on a daily basis at the net asset value per share next computed after receipt
by the Fund or its designee of the request for redemption. For purposes of
this Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption by 9:00 a.m., Eastern Time, on the next following
Business Day. Payment of redemption proceeds for any whole or fractional shares
shall be made within seven days of actual receipt of the redemption request by
the Fund, or within such greater or lesser period as may be permitted by law or
rule, regulation, interpretive position or order of the SEC.
1.6. The Company agrees that purchases and redemptions of
Portfolio shares offered by the then-current prospectus of the Fund shall be
made in accordance with the provisions of such prospectus. The Company agrees
that all net amounts available in the Accounts which are listed in Schedule A
attached hereto and incorporated herein by this reference, as such Schedule A
may from time to time be amended by mutual written agreement of the parties
hereto (the "Contracts"), shall be invested in the Portfolios and in such other
funds advised by the Adviser as are listed in Schedule B, or in the Company's
general account; provided that such amounts may also be invested in an
investment company other than the Fund if (a) such other investment
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company, or series thereof, has investment objectives or policies that are
substantially different from the investment objectives and policies of all the
Portfolios of the Fund; or (b) the Company gives the Fund and the Underwriter
45 days' written notice of its intention to make such other investment company
available as a funding vehicle for the Contracts; or (c) such other investment
company was available as a funding vehicle for the Contracts prior to the date
of this Agreement and the Company so informs the Fund and Underwriter prior to
their signing this Agreement (a list of such funds appearing on Schedule C to
this Agreement); or (d) the Fund or Underwriter consents in writing to the use
of such other investment company.
1.7. The Company shall pay for Portfolio shares on the next
Business Day after an order to purchase such shares is made in accordance with
the provisions of this Article I. Payment shall be in federal funds transmitted
by wire. For purposes of Sections 2.10 and 2.11, upon receipt by the Fund of
the federal funds so wired, such funds shall cease to be the responsibility of
the Company and shall become the responsibility of the Fund.
1.8. Issuance and transfer of the Fund's shares will be by book
entry only. Stock certificates will not be issued to the Company or any
Account. Shares ordered from the Fund will be recorded in an appropriate title
for each Account or the appropriate subaccount of each Account.
1.9. The Fund shall furnish same day notice (by wire or
telephone, followed by written confirmation) to the Company of any income
dividends or capital gain distributions payable on the Portfolios' shares. The
Company hereby elects to receive all such income dividends and capital gain
distributions as are payable on the Portfolio shares in additional shares of
that Portfolio. The Company reserves the right to revoke this election and to
receive all such income dividends and capital gain distributions in cash. The
Fund shall notify the Company of the number of shares so issued as payment of
such dividends and distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated (normally by 6:30
p.m., Eastern Time) and shall use its best efforts to make such net asset value
per share available by 7:00 p.m., Eastern Time.
ARTICLE II
Representations and Warranties
2.1. The Company represents and warrants that the Contracts are
or will be registered under the 1933 Act or exempt therefrom; that the
Contracts will be issued and sold in compliance in all material respects with
all applicable federal and state laws and that the sale of the Contracts shall
comply in all material respects with state insurance suitability requirements.
The Company further represents and warrants that it is an insurance company
duly organized and in good standing under applicable law and that it has
legally and validly established each Account prior to any issuance or sale
thereof as a segregated asset account under the Insurance Code and Regulations
of the State of Vermont, and has registered or, prior to any issuance
or sale of the Contracts, will, unless exempt from registration, register each
Account as a unit
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investment trust in accordance with the provisions of the 1940 Act to serve as
a segregated investment account for the Contracts.
2.2. The Company represents that the Contracts will be eligible
for treatment as life insurance or annuity contracts under applicable
provisions of the Code and that it will make every effort to maintain such
treatment and that it will notify the Fund and the Underwriter promptly upon
having determined that the Contracts may have ceased to be so treated or that
they might not be so treated in the future.
2.3. The Company represents and warrants that all of its
directors/trustees, employees, investment advisers and other
individuals/entities dealing with money and/or securities of the Fund are and
shall continue to be at all times covered by a blanket fidelity bond or similar
coverage for the benefit of the Fund, in an amount not less than $5 million.
The aforesaid bond shall include coverage for larceny and embezzlement and
shall be issued by a reputable bonding company. The Company shall notify the
Fund, the Underwriter and the Adviser in the event that such coverage no longer
applies.
2.4. The Fund represents and warrants that Fund shares sold
pursuant to this Agreement are registered under the 1933 Act, duly authorized
for issuance and sale in compliance in all material respects with the terms of
this Agreement and all applicable federal and state securities laws, and that,
while shares of the Portfolios are being offered for sale, the Fund is and
shall remain registered under the 1940 Act. The Fund shall amend its
Registration Statement under the 1933 Act and the 1940 Act from time to time as
required in order to effect the continuous offering of Portfolio shares. The
Fund shall register or otherwise qualify the shares for sale in accordance with
the laws of the various states only if and to the extent deemed advisable by
the Fund or the Underwriter.
2.5. The Fund represents that each Portfolio is qualified as a
Regulated Investment Company under Subchapter M of the Code and that it will
make every effort to maintain such qualification (under Subchapter M or any
successor or similar provision) and that it will notify the Company promptly
upon having determined that any Portfolio may have ceased to so qualify or that
it might not so qualify in the future.
2.6. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-1 under the 1940 Act or
otherwise, although it may make such payments in the future. To the extent
that it decides to finance distribution expenses pursuant to Rule 12b-1, the
Fund undertakes to have a board of trustees, a majority of whom are not
interested persons of the Fund, formulate and approve any plan under Rule 12b-1
to finance distribution expenses.
2.7. The Fund makes no representation as to whether any aspect of
its operations (including, but not limited to, fees, expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund has disclosed or made available,
in writing, all information requested by Company and represents and warrants
that such written information is true and accurate in all material respects as
of the
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effective date of this Agreement. Without prior written notice to the Company,
the Fund will not make any changes in fundamental investment policies or
advisory fees, and shall at all times remain in compliance with federal
securities law as it applies to insurance products. The Company will use its
best efforts to provide the Fund with copies of amendments to provisions of
state insurance laws and regulations related to separate accounts and variable
products, which may affect Fund operations.
2.8. The Fund represents that it is lawfully organized and
validly existing under the laws of the Commonwealth of Massachusetts and that
it does and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that it is a member
in good standing of the NASD and is registered as a broker-dealer with the SEC.
The Underwriter further represents that it will sell and distribute Portfolio
shares to the Company in accordance with all applicable state and federal
securities laws, including, without limitation, the 1933 Act, the 1934 Act and
the 1940 Act.
2.10. The Adviser represents and warrants that it is and shall
remain duly registered in all material respects under all applicable federal
and state securities laws and that it shall perform its obligations for the
Fund in compliance in all material respects with any applicable state and
federal securities laws.
2.11. The Fund, the Underwriter and the Adviser represent and
warrant that all of their directors/trustees, officers, employees, investment
advisers and other individuals/entities dealing with money and/or securities of
the Fund are and shall continue to be at all times covered by a blanket
fidelity bond or similar coverage for the benefit of the Fund, in an amount not
less than the minimum coverage as required by Rule 17g-1 of the 1940 Act or
related provisions as may from time to time be promulgated. The aforesaid bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company. The Fund shall notify the Company in the event such
coverage no longer applies.
ARTICLE III
Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company (at the
Underwriter's expense) with as many copies of the Fund's current prospectus as
the Company may reasonably request. If requested by the Company in lieu
thereof, the Fund shall provide such documentation (including a final copy of
the new prospectus as set in type at the Fund's expense) and other assistance
as is reasonably necessary in order for the Company once each year (or more
frequently if the prospectus for the Fund is amended) to have the prospectus
(or private offering memorandum, if a Contract and its associated Account are
exempt from registration) for the Contracts and the Fund's prospectus printed
together in one document (such printing to be at the Company's expense).
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3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in
the Fund's discretion, from the Fund), and the Underwriter (or the Fund), at
its expense, shall provide such Statement of Additional Information free of
charge to the Company and to any owner of a Contract or prospective owner who
requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy statements, reports to shareholders, and other
communications to shareholders in such quantity as the Company shall reasonably
require for distributing to Contract owners.
3.4. If and to the extent required by law, the Company shall:
(i) solicit voting instructions from Contract owners;
(ii) vote Portfolio shares in accordance with
instructions received from Contract owners; and
(iii) vote Portfolio shares for which no instructions
have been received in the same proportion as shares
of such Portfolio for which instructions have been
received,
so long as and to the extent that the SEC continues to interpret the 1940 Act
to require pass-through voting privileges for variable contract owners. The
Company reserves the right to vote Fund shares held in any segregated asset
account in its own right, to the extent permitted by law. The Company shall be
responsible for assuring that each of its separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth in the Shared Funding Order and rules and regulations of the SEC,
which standards will also be provided to other Participating Insurance
Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular, the Fund will either
provide for annual meetings or comply with Section 16(c) of the 1940 Act
(although the Fund is not one of the trusts described in Section 16(c) of that
Act) as well as with Sections 16(a) and, if and when applicable, 16(b).
Further, the Fund will act in accordance with the SEC's interpretation of the
requirements of Section 16(a) with respect to periodic elections of trustees
and with whatever rules the SEC may promulgate with respect thereto.
ARTICLE IV
Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund, the Underwriter or the Adviser is named, at least
fifteen Business Days prior to its use. No such material shall be used unless
approved in writing by the Fund or the Underwriter. The Fund and the
Underwriter will use reasonable best efforts to provide the Company with
written response
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within ten Business Days of receipt of such materials. Any piece which merely
names the Fund, the Underwriter or the Adviser as participating in the
Variable Insurance Products may be used after ten Business Days of receipt by
the Fund and the Underwriter if the Company has not received a written response
from the Fund or the Underwriter.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund, as such registration statement and prospectus may from time to time be
amended or supplemented, or in reports or proxy statements for the Fund, or in
sales literature or other promotional material provided to the Company by the
Fund or its designee or by the Underwriter, except with the written permission
of the Fund or the Underwriter, pursuant to Section 4.1 hereof.
4.3. The Fund, the Underwriter or their designee shall furnish,
or shall cause to be furnished, to the Company or its designee, each piece of
sales literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used unless approved in writing by the Company or its
designee. The Company will use reasonable best efforts to provide the Fund
with written response within ten Business Days of receipt of such materials.
Any piece which merely states that the Fund, the Underwriter or the Adviser are
participating in the Variable Insurance Products may be used after ten Business
Days after receipt by the Company if the Fund or the Underwriter have not
received a written response from the Company.
4.4. The Fund and the Underwriter shall not give any information
or make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may from time to time be amended or
supplemented, or in published reports which are in the public domain or
approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to any of the Portfolios or their
shares, promptly following the filing of such document with the SEC or other
regulatory authorities.
4.6. The Company will provide to the Fund at least one complete
copy of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for
no-action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, promptly following the filing of such document with
the SEC or
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other regulatory authorities; and, if a Contract and its associated Account are
exempt from registration, the equivalents to the above.
4.7. For purposes of this Agreement, the phrase "sales literature
or other promotional material" includes, but is not limited to, any of the
following that refer to the Fund or any affiliate of the Fund: advertisements
(such as material published or designed for use in a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape or
electronic display, signs or billboards, motion pictures, or other public
media), sales literature (i.e., any written communication distributed or made
generally available to customers or the public, including brochures, circulars,
research reports, market letters, form letters, seminar texts, reprints or
excerpts of any other advertisement, sales literature or published article),
educational or training materials or other communications distributed or made
generally available to some or all agents or employees.
ARTICLE V
Fees and Expenses
5.1. The Fund and the Underwriter shall pay no fee or other
compensation to the Company under this Agreement, except that if the Fund or
any Portfolio adopts and implements a plan pursuant to Rule 12b-1 to finance
distribution expenses, then the Underwriter may make payments to the Company or
to the underwriter for the Contracts if and in amounts agreed to by the
Underwriter in writing and such payments will be made out of existing fees
otherwise payable to the Underwriter, past profits of the Underwriter or other
resources available to the Underwriter. No such payments shall be made
directly by the Fund. Currently, no such payments are contemplated.
5.2. Except as otherwise expressly provided in the Agreement, all
expenses incident to performance by the Fund under this Agreement shall be paid
by the Fund. The Fund shall see to it that all Portfolio shares are registered
and authorized for issuance in accordance with applicable federal law and, if
and to the extent deemed advisable by the Fund, in accordance with applicable
state laws prior to their sale. The Fund shall bear the expenses for the cost
of registration and qualification of the Portfolios' shares, preparation and
filing of the Fund's prospectus and registration statement, proxy materials and
reports, setting the prospectus in type, setting in type and printing the proxy
materials and reports to shareholders (including the costs of printing a
prospectus that constitutes an annual report), the preparation of all
statements and notices required by any federal or state law and all taxes on
the issuance or transfer of the Portfolios' shares.
5.3. The Company shall bear the expenses of printing and
distributing the Fund's prospectus to owners of Contracts issued by the Company
and of distributing the Fund's proxy materials and reports to such Contract
owners.
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ARTICLE VI
Diversification
6.1. The Fund will at all times invest money from the Contracts
in such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without
limiting the scope of the foregoing, the Fund will at all times comply with
Section 817(h) of the Code and Treasury Regulation 1.817-5, relating to the
diversification requirements for variable annuity, endowment or life insurance
contracts and any amendments or other modifications to such Section or
Regulation. In the event of a breach of this Article VI by the Fund, it will
take all reasonable steps (a) to notify Company of such breach and (b) to
adequately diversify the Fund so as to achieve compliance with the grace period
afforded by Regulation 1.817-5.
ARTICLE VII
Potential Conflicts
7.1. The Board will monitor the Fund for the existence of any
material irreconcilable conflict between the interests of the contract owners
of all separate accounts investing in the Fund. A material irreconcilable
conflict may arise for a variety of reasons, including: (a) an action by any
state insurance regulatory authority; (b) a change in applicable federal or
state insurance, tax or securities laws or regulations, or a public ruling,
private letter ruling, no-action or interpretive letter or any similar action
by insurance, tax, or securities regulatory authorities; (c) an administrative
or judicial decision in any relevant proceeding; (d) the manner in which the
investments of a Portfolio are being managed; (e) a difference in voting
instructions given by variable annuity contract and variable life insurance
contract owners; or (f) a decision by a Participating Insurance Company to
disregard the voting instructions of contract owners. The Board shall promptly
inform the Company if it determines that a material irreconcilable conflict
exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts
to the Board. The Company will assist the Board in carrying out its
responsibilities under the Shared Funding Order, by providing the Board with
all information reasonably necessary for the Board to consider any issues
raised. This includes, but is not limited to, an obligation by the Company to
inform the Board whenever any of the events in Section 7.1, as they pertain to
the Company, occur (e.g., a decision to disregard contract owner voting
instructions).
7.3. If it is determined by a majority of the Board, or a
majority of its disinterested trustees, that a material irreconcilable conflict
exists, the Company and other Participating Insurance Companies shall, at their
expense and to the extent reasonably practicable (as determined by a majority
of the disinterested trustees), take whatever steps are necessary to remedy or
eliminate the material irreconcilable conflict, up to and including: (1)
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected Contract owners and, as appropriate, segregating the
assets
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of any appropriate group (i.e., annuity contract owners, life insurance
contract owners or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to
the affected contract owners the option of making such a change, and (2)
establishing a new registered management investment company or managed separate
account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and
that decision represents a minority position or would preclude a majority vote,
the Company may be required, at the Fund's election, to withdraw the affected
Account's investment in the Fund and terminate this Agreement with respect to
such Account; provided, however, that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable
conflict as determined by a majority of the disinterested trustees of the
Board. Any such withdrawal and termination must take place within six months
after the Fund gives written notice that this provision is being implemented,
and until the end of that six month period the Fund and the Underwriter shall
continue to accept and implement orders by the Company for the purchase (and
redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with that of other state regulators, then the Company will withdraw
the affected Account's investment in the Fund and terminate this Agreement with
respect to such Account within six months after the Board informs the Company
in writing that it has determined that such decision has created a material
irreconcilable conflict; provided, however, that such withdrawal and
termination shall be limited to the extent required by the foregoing material
irreconcilable conflict as determined by a majority of the disinterested
trustees of the Board. Until the end of that six month period, the Fund and
the Underwriter shall continue to accept and implement orders by the Company
for the purchase (and redemption) of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement,
a majority of the disinterested trustees of the Board shall determine whether
any proposed action adequately remedies a material irreconcilable conflict, but
in no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the material
irreconcilable conflict. In the event that the Board determines that any
proposed action does not adequately remedy a material irreconcilable conflict,
then the Company will withdraw the Account's investment in the Fund and
terminate this Agreement within six months after the Board informs the Company
in writing of the foregoing determination; provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested trustees of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any
provision of the 1940 Act or the rules promulgated thereunder with respect to
mixed or shared funding (as defined in the Shared Funding Order) on terms and
conditions materially different from those contained in the Shared Funding
Order, then
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(a) the Fund and/or the Participating Insurance Companies, as appropriate,
shall take such steps as may be necessary to comply with Rules 6e-2 and
6e-3(T), as amended, and Rule 6e-3 as adopted, to the extent such rules are
applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4 and 7.5 of this
Agreement shall continue in effect only to the extent that terms and conditions
substantially identical to such Sections are contained in such Rule(s) as so
amended or adopted.
ARTICLE VIII
Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund,
the Underwriter and the Adviser and each trustee/director and officer thereof
and each person, if any, who controls the Fund, the Underwriter, or the Adviser
within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company), expenses or litigation (including legal
and other expenses) (hereinafter referred to collectively as a "Loss"), to
which the Indemnified Parties may become subject under any statute or
regulation, at common law or otherwise, insofar as a Loss is related to the
sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact
contained in the registration statement, prospectus
or private offering memorandum for the Contracts or
contained in the Contracts or sales literature or
other promotional materials for the Contracts (or
any amendment or supplement to any of the
foregoing), or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statement therein not
misleading, provided that this agreement to
indemnify shall not apply as to any Indemnified
Party if such statement or omission or such alleged
statement or omission was made in reliance upon and
in conformity with written information furnished to
the Company by or on behalf of the Indemnified
Party for use in the registration statement or
prospectus for the Contracts or in the Contracts or
in sales literature or any other promotional
materials (or any amendment or supplement to any of
the foregoing); or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus or sales literature or other
promotional materials of the Fund not supplied by
the Company, or persons under its control) or
wrongful conduct of the Company or persons under
its control, with respect to the sale or
distribution of the Contracts or Fund shares; or
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(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
registration statement, prospectus or sales
literature or other promotional materials of the
Fund (or any amendment or supplement to any of the
foregoing) or arise out of or are based upon the
omission or the alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statements therein not
misleading if such statement or omission was made
in reliance upon or in conformity with written
information furnished to the Fund, the Underwriter
or the Adviser by or on behalf of the Company; or
(iv) arise as a result of any failure by the Company to
provide the services and furnish the materials
under the terms of this Agreement; or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the
Company in this Agreement or arise out of or result
from any other material breach of this Agreement by
the Company, as limited by and in accordance with
the provisions of Sections 8.1 (b) and 8.1(c)
hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any Loss incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful misfeasance, bad
faith or gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of obligations or
duties under this Agreement or to the Fund, the Underwriter or the Adviser,
whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Company of
any such claim shall not relieve the Company from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Company shall be entitled to
participate, at its own expense, in the defense thereof. The Company also shall
be entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Company to such Party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such Party under this Agreement for any legal or
other expenses subsequently incurred by such Party independently in connection
with the defense thereof other than reasonable costs of investigation.
Page 13
<PAGE> 14
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with this Agreement, the issuance or sale of Portfolio shares or the Contracts
or the operation of the Fund.
8.2. Indemnification By The Fund
8.2(a). The Fund agrees to indemnify and hold harmless the Company,
and each of its directors/trustees and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any Loss to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as a Loss is related
to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to
provide the services and furnish the materials
under the terms of this Agreement (including a
failure to comply with the diversification
requirements specified in Article VI of this
Agreement);or
(ii) arise out of or result from any material breach of
any representation and/or warranty made by the Fund
in this Agreement or arise out of or result from
any other material breach of this Agreement by the
Fund, as limited by and in accordance with the
provisions of Sections 8.2(b) and 8.2(c) hereof.
8.2(b). The Fund shall not be liable under this indemnification
provision with respect to any Loss incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful misfeasance, bad
faith or gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to the Company, an Account, the Fund, the
Underwriter or the Adviser, whichever is applicable.
8.2(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund shall be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such Party under this Agreement for any legal or other expenses
subsequently incurred by such Party independently in connection with the
defense thereof other than reasonable costs of investigation.
Page 14
<PAGE> 15
8.2(d). The Company will promptly notify the Fund of the commencement
of any litigation or proceedings against the Indemnified Parties in connection
with this Agreement, the issuance or sale of Portfolio shares or the Contracts,
the operation of each Account or the acquisition of shares of the Fund.
8.3. Indemnification By The Underwriter
8.3(a) The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors/trustees and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.3)
against any Loss to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as a Loss is related
to the sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or are based upon any untrue statement
or alleged untrue statement of any material fact
contained in the registration statement or
prospectus or sales literature or other promotional
materials of the Fund (or any amendment or
supplement to any of the foregoing), or arise out
of or are based upon the omission or the alleged
omission to state therein a material fact required
to be stated therein or necessary to make the
statements therein not misleading, provided that
this agreement to indemnify shall not apply as to
any Indemnified Party if such statement or omission
or such alleged statement or omission was made in
reliance upon and in conformity with written
information furnished to the Fund, the Underwriter
or the Adviser by or on behalf of the Indemnified
Party for use in the registration statement or
prospectus of the Fund or in sales literature or
other promotional materials (or any amendment or
supplement to any of the foregoing); or
(ii) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus or sales literature or other
promotional materials for the Contracts not
supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund or
Underwriter or persons under their control, with
respect to the sale or distribution of the
Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
registration statement, prospectus or private
offering memorandum for the Contracts or contained
in the Contracts or sales literature or other
promotional materials for the Contracts (or any
amendment or supplement to any of the foregoing) or
arise out of or are based upon the omission or
alleged omission to state therein a material fact
required to be stated therein or necessary to make
the statement or statements therein not misleading,
if such statement or omission was made
Page 15
<PAGE> 16
in reliance upon or in conformity with written
information furnished to the Company by or on
behalf of the Fund or the Underwriter; or
(iv) arise as a result of any failure by the Underwriter
to provide the services and furnish the materials
under the terms of this Agreement (including a
failure, whether unintentional or in good faith or
otherwise, to comply with the diversification
requirements specified in Article VI of this
Agreement); or
(v) arise out of or result from any material breach of
any representation and/or warranty made by the
Underwriter in this Agreement or arise out of or
result from any other material breach of this
Agreement by the Underwriter, as limited by and in
accordance with the provisions of Sections 8.3(b)
and 8.3(c) hereof.
8.3(b). The Underwriter shall not be liable under this
indemnification provision with respect to any Loss incurred or assessed against
an Indemnified Party as such may arise from such Indemnified Party's willful
misfeasance, bad faith or gross negligence in the performance of such
Indemnified Party's duties or by reason of such Indemnified Party's reckless
disregard of obligations and duties under this Agreement or to the Company or
an Account, whichever is applicable.
8.3(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have notified the Underwriter in
writing within a reasonable time after the summons or other first legal process
giving information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Underwriter
of any such claim shall not relieve the Underwriter from any liability which it
may have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Underwriter shall be entitled to
participate, at its own expense, in the defense thereof The Underwriter also
shall be entitled to assume the defense thereof, with counsel satisfactory to
the Party named in the action. After notice from the Underwriter to such Party
of the Underwriter's election to assume the defense thereof, the Indemnified
Party shall bear the fees and expenses of any additional counsel retained by
it, and the Underwriter will not be liable to such Party under this Agreement
for any legal or other expenses subsequently incurred by such Party
independently in connection with the defense thereof other than reasonable
costs of investigation.
8.3(d). The Company will promptly notify the Underwriter of the
commencement of any litigation or proceedings against the Indemnified Parties
in connection with this Agreement, the issuance or sale of Portfolio shares or
the Contracts or the operation of each Account.
Page 16
<PAGE> 17
8.4. Indemnification By The Adviser
8.4(a) The Adviser agrees to indemnify and hold harmless the
Company and each of its directors/trustees and officers and each person, if
any, who controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.4)
against any Loss to which the Indemnified Parties may become subject under any
statute or regulation, at common law or otherwise, insofar as a Loss is related
to the sale or acquisition of the Fund's shares or the Contracts and:
(i) arise out of or as a result of statements or
representations (other than statements or
representations contained in the registration
statement, prospectus or sales literature or other
promotional materials for the Contracts not
supplied by the Adviser, or persons under its
control) or wrongful conduct of the Adviser or
persons under its control, with respect to the sale
or distribution of the Contracts or Fund shares; or
(ii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a
registration statement, prospectus or private
offering memorandum for the Contracts or contained
in the Contracts or sales literature or other
promotional materials for the Contracts (or any
amendment or supplement to any of the foregoing) or
the omission or alleged omission to state therein a
material fact required to be stated therein or
necessary to make the statement or statements
therein not misleading, if such statement or
omission was made in reliance upon or in conformity
with written information furnished to the Company
by or on behalf of the Adviser; or
(iii) arise as a result of any failure by the Adviser to
provide the services and furnish the materials
under the terms of this Agreement (including a
failure by the Fund, whether unintentional or in
good faith or otherwise, to comply with the
diversification requirements specified in Article
VI of this Agreement); or
(iv) arise out of or result from any material breach of
any representation and/or warranty made by the
Adviser in this Agreement or arise out of or result
from any other material breach of this Agreement by
the Adviser, as limited by and in accordance with
the provisions of Sections 8.4(b) and 8.4(c) hereof.
8.4(b). The Adviser shall not be liable under this indemnification
provision with respect to any Loss incurred or assessed against an Indemnified
Party as such may arise from such Indemnified Party's willful misfeasance, bad
faith or gross negligence in the performance of such Indemnified Party's duties
or by reason of such Indemnified Party's reckless disregard of obligations and
duties under this Agreement or to the Company or an Account, whichever is
applicable.
Page 17
<PAGE> 18
8.4(c). The Adviser shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Adviser in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice
of such service on any designated agent), but failure to notify the Adviser of
any such claim shall not relieve the Adviser from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise
than on account of this indemnification provision. In case any such action is
brought against the Indemnified Parties, the Adviser shall be entitled to
participate, at its own expense, in the defense thereof. The Adviser also shall
be entitled to assume the defense thereof, with counsel satisfactory to the
party named in the action. After notice from the Adviser to such party of the
Adviser's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Adviser will not be liable to such Party under this Agreement for any legal or
other expenses subsequently incurred by such Party independently in connection
with the defense thereof other than reasonable costs of investigation.
8.4(d). The Company will promptly notify the Adviser of the
commencement of any litigation or proceedings against the Indemnified Parties
in connection with this Agreement, the issuance or sale of Portfolio shares or
the Contracts or the operation of each Account.
8.5. Except as otherwise expressly provided in the Agreement, no
party shall be liable to any other party for special, consequential, punitive
or exemplary damages, or damages of a like kind or nature; and, without
limiting the foregoing, with respect to Section 1.10 of Article I and Sections
8.2, 8.3 and 8.4 of Article VIII as such Sections relate to errors in
calculation or untimely reporting of net asset value per share or dividend or
capital gain rate, the liability of a party to any other party shall be limited
to the amount required to correct the value of the Account as if there had been
no incorrect calculation or reporting or untimely reporting of the net asset
value per share or dividend or capital gain rate.
ARTICLE IX
Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the State of New York.
9.2. This Agreement shall be subject to the provisions of the
1933 Act, the 1934 Act and the 1940 Act and the rules and regulations and
rulings thereunder, including such exemptions from those statutes, rules and
regulations as the SEC may grant (including, but not limited to, the Shared
Funding Order) and the terms of this Agreement shall be interpreted and
construed in accordance therewith.
Page 18
<PAGE> 19
ARTICLE X
Termination
10.1. This Agreement shall continue in full force and effect
until the first to occur of:
(a) termination by any party for any reason by sixty
(60) days' advance written notice delivered to the
other parties; or
(b) termination by the Company by written notice to the
Fund and the Underwriter with respect to any
Portfolio based upon the Company's determination
that shares of such Portfolio are not reasonably
available to meet the requirements of the
Contracts; or
(c) termination by the Company by written notice to the
Fund and the Underwriter with respect to any
Portfolio in the event any of the Portfolio's
shares are not registered, issued or sold in
accordance with applicable state and/or federal law
or such law precludes the use of such shares as the
underlying investment media of the Contracts issued
or to be issued by the Company; or
(d) termination by the Company by written notice to the
Fund, the Underwriter and the Adviser with respect
to any Portfolio in the event that such Portfolio
ceases to qualify as a "regulated investment
company" under Subchapter M of the Code or under
any successor or similar provision, or if the
Company reasonably believes that the Fund will fail
to so qualify; or
(e) termination by the Company by written notice to the
Fund, the Underwriter and the Adviser with respect
to any Portfolio in the event that such Portfolio
fails to meet the diversification requirements
specified in Article VI hereof; or
(f) termination by either the Fund or the Underwriter
by written notice to the Company, if either one or
both of the Fund or the Underwriter shall
determine, in their sole judgment exercised in good
faith, that the Company and/or its affiliated
companies has suffered a material adverse change in
its business, operations, financial condition or
prospects since the date of this Agreement or is
the subject of material adverse publicity; or
(g) termination by the Company by written notice to the
Fund and the Underwriter, if the Company shall
determine, in its sole judgment exercised in good
faith, that either the Fund or the Underwriter has
suffered a material adverse change in its business,
operations, financial condition or prospects since
the date of this Agreement or is the subject of
material adverse publicity; or
Page 19
<PAGE> 20
(h) termination by the Fund or the Underwriter by written
notice to the Company, if the Company gives the Fund
and the Underwriter the written notice specified in
Section 1.6(b) hereof and at the time such notice was
given there was no notice of termination outstanding
under any other provision of this Agreement; provided,
however, that any termination under this Section
10.1(h) shall be effective forty-five days after the
notice specified in Section 1.6(b) was given.
10.2. Effect of Termination. Notwithstanding termination of this
Agreement, the Fund and the Underwriter shall, if the Company and the
Underwriter mutually agree, continue to make available additional shares of the
Fund pursuant to the terms and conditions of this Agreement, for all Contracts
in effect on the effective date of termination of this Agreement (hereinafter
referred to as "Existing Contracts"). Specifically, without limitation, the
owners of the Existing Contracts shall be permitted to retain investments in
the Fund, reinvest dividends and redeem investments in the Fund. The parties
agree that this Section 10.2 shall not apply to any terminations under Section
1.2 of Article I or under Article VII, and the effect of such Article VII
terminations shall be governed by Article VII of this Agreement.
10.3 The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in the Account) except (i) as necessary to implement Contract Owner initiated
or approved transactions; or (ii) as required by state and/or federal laws or
regulations or judicial or other legal precedent of general application
(hereinafter referred to as a "Legally Required Redemption"); or (iii) as a
result of action by the Fund's Board, acting in good faith, upon sixty (60)
days' advance written notice to the Company and Contract Owners. Upon request,
the Company will promptly furnish to the Fund and the Underwriter the opinion
of counsel for the Company (which counsel shall be reasonably satisfactory to
the Fund and the Underwriter) to the effect that any redemption pursuant to
clause (ii) above is a Legally Required Redemption, or is as permitted by an
order of the SEC pursuant to Section 26(b) of the 1940 Act. In the event that
the Company is to redeem shares pursuant to clause (iii) above, the Fund will
promptly furnish to the Company the opinion of counsel for the Fund (which
counsel shall be reasonably satisfactory to the Company) to the effect that any
such redemption is not in violation of the 1940 Act or any rule or regulation
thereunder, or is as permitted by an order of the SEC. Furthermore, except in
cases where permitted under the terms of the Contracts, the Company shall not
prevent Contract Owners from allocating payments to a Portfolio that was
otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days' advance written notice of its intention to do so.
ARTICLE XI
Notices
Any notice shall be sufficiently given when sent by registered or
certified mail or next-day delivery to the other parties at the address of such
parties set forth below or at such other address as any party may from time to
time specify in writing to the other parties.
Page 20
<PAGE> 21
If to the Company:
One National Life Drive
------------------------------------------------
Montpelier, VT 05604
------------------------------------------------
Attention: D. Russell Morgan, Counsel
--------------------------------------
If to the Fund:
99 Park Avenue
New York, New York 10016
Attention: President, with a copy to the General Counsel
If to the Underwriter:
99 Park Avenue
New York, New York 10016
Attention: President, with a copy to the General Counsel
If to the Adviser:
99 Park Avenue
New York, New York 10016
Attention: President, with a copy to the General Counsel
ARTICLE XII
Miscellaneous
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Board, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
12.2. Subject to the requirements of legal process and regulatory
authority, each party hereto shall treat as confidential the names and
addresses of the owners of the Contracts and all information reasonably
identified as confidential in writing by any other party hereto and, except as
permitted by this Agreement, shall not disclose, disseminate or utilize such
names and addresses and other confidential information without the express
written consent of the affected party, until such time as it may come into the
public domain.
12.3. The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions
hereof or otherwise affect their construction or effect.
12.4. This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5. If any provision of this Agreement shall be held or made
invalid by a court decision, statute, rule or otherwise, the remainder of the
Agreement shall not be affected thereby.
Page 21
<PAGE> 22
12.6. Each party hereto shall cooperate with each other party and
all appropriate governmental authorities (including, without limitation, the
SEC, the NASD and state insurance regulators) and shall permit such authorities
reasonable access to its books and records in connection with any investigation
or inquiry relating to this Agreement or the transactions contemplated hereby.
12.7. The rights, remedies and obligations contained in this
Agreement are cumulative and are in addition to any and all rights, remedies
and obligations, at law or in equity, which the parties hereto are entitled to
under state and federal laws.
12.8. This Agreement or any of the rights and obligations
hereunder may not be assigned by any party without the prior written consent of
all parties hereunder; provided, however, that the Underwriter may assign this
Agreement or any rights or obligations hereunder to any affiliate of or company
under common control with the Underwriter, if such assignee is duly licensed
and registered to perform the obligations of the Underwriter under this
Agreement.
12.9. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, copies of the following reports:
(a) the Company's annual statement (prepared under statutory
accounting principles) and annual report (prepared under
generally accepted accounting principles ("GAAP"), if any),
as soon as practical and in any event within 120 days after
the end of each fiscal year;
(b) the Company's semi-annual statements (statutory) (and GAAP,
if any), as soon as practical and in any event within 60
days after the end of each period:
(c) any financial statement, proxy statement, notice or report
of the Company sent to stockholders and/or policyholders, as
soon as practical after the delivery thereof to
stockholders;
(d) any registration statement (without exhibits) and financial
reports of the Company filed with the SEC or any state
insurance regulator, as soon as practical after the filing
thereof;
(e) any other report submitted to the Company by independent
accountants in connection with any annual, interim or
special audit made by them of the books of the Company, as
soon as practical after the receipt thereof.
Page 22
<PAGE> 23
IN WITNESS WHEREOF, each of the parties hereto has caused this
Agreement to be executed in its name and on its behalf by its duly authorized
representative and its seal to be hereunder affixed hereto as of the date
specified below.
<TABLE>
<S> <C>
National Life Insurance Company Attest:
------------------------------------
By: By:
--------------------------------- ---------------------------------
Name: Name:
------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
VAN ECK WORLDWIDE INSURANCE TRUST Attest:
By: By:
--------------------------------- ---------------------------------
Name: Name:
------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
VAN ECK SECURITIES CORPORATION Attest:
By: By:
--------------------------------- ---------------------------------
Name: Name:
------------------------------- -------------------------------
Title: Title:
------------------------------ ------------------------------
VAN ECK ASSOCIATES CORPORATION Attest:
By: By:
--------------------------------- --------------------------------
Name: Name:
------------------------------- ------------------------------
Title: Title:
------------------------------ -----------------------------
</TABLE>
Page 23
<PAGE> 24
SCHEDULE A
ACCOUNTS
Date Established by the Company's
Name of Account Board of Directors
--------------- ---------------------------------
National Variable Annuity Account II Nov. 1, 1996
Page 24
<PAGE> 25
SCHEDULE B
PORTFOLIOS AND OTHER FUNDS
ADVISED BY ADVISER
I. Portfolios
Van Eck Worldwide Bond Fund
II. Other Funds Advised by the Adviser
Page 25
<PAGE> 26
SCHEDULE C
OTHER INVESTMENT COMPANIES AVAILABLE
AS FUNDING VEHICLE FOR THE CONTRACTS
(If none, so state)
Alger American Fund
Alger American Small Capitalization Portfolio
Alger American Growth Portfolio
Variable Insurance Products Fund
Equity-Income Portfolio
Growth Portfolio
High Income Portfolio
Overseas Portfolio
Variable Insurance Products Fund II
Index 500 Portfolio
Contrafund Portfolio
The Market Street Fund
Common Stock Portfolio
Sentinel Growth Portfolio
Aggressive Growth Portfolio
Bond Portfolio
Managed Portfolio
Money Market Portfolio
International Portfolio
Strong Variable Insurance Funds, Inc.
Strong Growth Fund II
Strong Special Fund II, Inc.
Van Eck Worldwide Insurance Trust
Worldwide Bond Fund
Page 26
<PAGE> 1
Exhibit (b)(9)
May 23, 1997
The Board of Directors
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
RE: Variable Annuity Registration Statement
Ladies and Gentlemen:
With reference to the Registration Statement on Form N-4 as amended,
filed by National Life Insurance Company and National Variable Annuity Account
II with the Securities and Exchange Commission covering individual variable
annuity contracts, I have examined such documents and such laws as I considered
necessary and appropriate and on the basis of such examination, it is my
opinion that:
1. National Life Insurance Company is duly organized and validly
existing under the laws of the state of Vermont, and has been duly authorized
to issue individual variable annuity contracts by the Department of Insurance
of the State of Vermont.
2. National Variable Annuity Account II is a duly authorized and
existing separate account established pursuant to the provisions of Title 8,
Vermont Statutes Annotated, sections 3855 to 3859.
3. The individual variable annuity contracts, when issued as
contemplated by said Form N-4 Registration Statement, will constitute legal,
validly issued and binding obligations of National Life Insurance Company.
I hereby consent to the filing of this opinion as an Exhibit to said
Form N-4 Registration Statement and to the use of my name under the caption
"Legal Matters" in the Registration Statement.
Sincerely,
D. Russell Morgan
Counsel
<PAGE> 1
EXHIBIT (b)(10)(a)
[TRANSMITTED ON SUTHERLAND, ASBILL & BRENNAN, L.L.P. LETTERHEAD]
May 9, 1997
VIA EDGARLINK
Board of Directors
National Life Insurance Company
National Life Drive
Montpelier, Vermont 05604
Ladies and Gentlemen:
We hereby consent to the reference to our name under the caption "Legal
Matters" in the Statement of Additional Information filed as part of
Pre-Effective Amendment No. 1 to the registration statement on Form N-4 for the
National Variable Annuity Account II (File No. 333-19583). In giving this
consent, we do not admit that we are in the category of persons whose consent
is required under Section 7 of the Securities Act of 1933.
Very truly yours,
SUTHERLAND, ASBILL & BRENNAN, L.L.P.
By: /s/ Stephen E. Roth
----------------------------------
Stephen E. Roth
<PAGE> 1
EXHIBIT (b)(10)(b)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Statement of Additional Information
constituting part of this Pre-Effective Amendment No. 1 to the registration
statement on Form N-4 (the "Registration Statement") of our report dated April
15, 1997, related to the consolidated financial statements of National Life
Insurance Company for the 1996 and 1995 financial statements prepared in
accordance with generally accepted accounting principals and of our report
dated February 19, 1996, except for Notes 1, 8, 9 and 11, as to which the date
is May 28, 1997 for the 1995 and 1994 financial statements prepared in
accordance with practices prescribed or permitted by the State of Vermont
Department of Banking, Insurance, Securities and Health Care Administration
(statutory basis accounting), which appear in such Statement of Additional
Information. We also consent to the reference to us under the heading "Experts"
in such Statement of Additional Information.
Price Waterhouse LLP
Montpelier, Vermont
May 28, 1997
<PAGE> 1
EXHIBIT (b)(13)
<TABLE>
<S> <C>
----------------------------------------------------------------
1
RETURN FOR 1 YEAR ENDED 12/31/96 ----
WITH ENHANCED DEATH BENEFIT RIDER ERV with Surrender Term
Advisor FIDELITY Average Annual Total Return = ------------------ -1
Fund EQUITY INCOME Premium
----------------------------------------------------------------
M&E, Admin, Fee and Rider (.0125 + .0015 + .0006 + .002)/12 = 0.001383
Premium: $1,000
</TABLE>
<TABLE>
<CAPTION>
------------------------------------------------------------------
STANDARDIZED RETURN CALCULATION
Premium = $1,000, Surrender, Rider
(a) (b) (b) ------------------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.13833% 0.982246 $1,124.27 $70.00 $1,054.27 1 5.43%
11/30/96 6.69% 1.065483 $1,144.59
10/31/96 1.62% 1.014844 $1,074.24
9/30/96 4.28% 1.041451 $1,058.53
8/31/96 2.05% 1.019124 $1,016.40
7/31/96 -4.88% 0.949849 $997.33
6/30/96 -0.92% 0.989461 $1,049.98
5/31/96 1.08% 1.009414 $1,061.17
4/30/96 1.30% 1.011638 $1,051.27
3/31/96 1.05% 1.009117 $1,039.18
2/29/96 0.34% 1.002017 $1,029.79
1/31/96 2.91% 1.027717 $1,027.72
$1,000.00
------------------------------------------------------------------
<CAPTION>
- ----------------------------------------------
1
----
ERV Term
Total Return = ----------- -1
Premium
- ----------------------------------------------
Premium: $10,000
- ------------------------------------------------
NON STANDARDIZED RETURN CALCULATION
Premium = $10,000, No Surrender, Rider
- ------------------------------------------------
ERV Term Total Return
- ------------------------------------------------
<S> <C> <C>
$11,242.66 1 12.43%
$11,445.86
$10,742.42
$10,585.29
$10,163.98
$9,973.25
$10,499.84
$10,611.67
$10,512.71
$10,391.77
$10,297.89
$10,277.17
$10,000.00
- ------------------------------------------------
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 2
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
RETURN FOR 5 YEARS ENDED 12/31/96 1
WITH ENHANCED DEATH BENEFIT RIDER ERV with Surrender ------
Average Annual Total Return = ---------------------- Term -1
Advisor FIDELITY Premium
Fund EQUITY INCOME -----------------------------------------------------------------------
M&E, Admin, Fee and Rider (.0125 + .0015 + .0006 + .002)/12 = 0.001383
Premium: $1,000
--------------------------------------------------------------
STANDARDIZED RETURN CALCULATION
Premium = $1,000, Surrender, Rider
(a) (b) (b) --------------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.13833% 0.982246 $2,105.58 $30.00 $2,075.58 5 15.73%
11/30/96 6.69% 1.065483 $2,143.64
10/31/96 1.62% 1.014844 $2,011.90
9/30/96 4.28% 1.041451 $1,982.47
8/31/96 2.05% 1.019124 $1,903.56
7/31/96 -4.88% 0.949849 $1,867.84
6/30/96 -0.92% 0.989461 $1,966.46
5/31/96 1.08% 1.009414 $1,987.41
4/30/96 1.30% 1.011638 $1,968.87
3/31/96 1.05% 1.009117 $1,946.23
2/29/96 0.34% 1.002017 $1,928.64
1/31/96 2.91% 1.027717 $1,924.76
12/31/95 2.93% 1.027917 $1,872.85
11/30/95 4.32% 1.041817 $1,821.99
10/31/95 -1.15% 0.987117 $1,748.86
9/30/95 3.32% 1.031817 $1,771.68
8/31/95 1.25% 1.011117 $1,717.05
7/31/95 3.85% 1.037117 $1,698.17
6/30/95 1.44% 1.013017 $1,637.40
5/31/95 3.01% 1.028717 $1,616.36
4/30/95 2.78% 1.026417 $1,571.24
3/31/95 3.45% 1.033117 $1,530.80
2/28/95 3.81% 1.036717 $1,481.73
1/31/95 1.56% 1.014217 $1,429.25
12/31/94 0.33% 1.001917 $1,409.22
11/30/94 -3.27% 0.965917 $1,406.52
10/31/94 2.05% 1.019117 $1,456.15
9/30/94 -1.64% 0.982217 $1,428.84
8/31/94 5.15% 1.050117 $1,454.71
7/31/94 3.34% 1.032017 $1,385.28
6/30/94 -0.62% 0.992417 $1,342.31
<CAPTION>
------------------------------------------------
1
ERV ------
Total Return = ------------- Term -1
Premium
------------------------------------------------
Premium: $10,000
----------------------------------------------------
NON STANDARDIZED RETURN CALCULATION
Premium = $10,000, No Surrender, Rider
----------------------------------------------------
ERV Term Total Return
----------------------------------------------------
<S> <C> <C>
$21,055.83 5 16.06%
$21,436.40
$20,118.95
$19,824.68
$19,035.63
$18,678.43
$19,664.63
$19,874.09
$19,688.74
$19,462.25
$19,286.42
$19,247.61
$18,728.52
$18,219.88
$17,488.56
$17,716.82
$17,170.51
$16,981.73
$16,373.98
$16,163.58
$15,712.38
$15,307.99
$14,817.29
$14,292.52
$14,092.17
$14,065.22
$14,561.52
$14,288.37
$14,547.07
$13,852.81
$13,423.05
National Life Insurance Company
Sentinel Advantage
</TABLE>
<PAGE> 3
<TABLE>
<S> <C> <C> <C> <C>
5/31/94 0.95% 1.008117 $1,352.56 $13,525.62
4/30/94 3.45% 1.033117 $1,341.67 $13,416.72
3/31/94 -4.18% 0.956817 $1,298.66 $12,986.65
2/28/94 -2.58% 0.972817 $1,357.28 $13,572.76
1/31/94 4.40% 1.042617 $1,395.20 $13,952.03
12/31/93 2.31% 1.021717 $1,338.17 $13,381.74
11/30/93 -1.75% 0.981117 $1,309.73 $13,097.31
10/31/93 0.91% 1.007717 $1,334.94 $13,349.39
9/30/93 -0.38% 0.994817 $1,324.72 $13,247.17
8/31/93 3.83% 1.036917 $1,331.62 $13,316.19
7/31/93 1.36% 1.012217 $1,284.21 $12,842.10
6/30/93 1.18% 1.010417 $1,268.71 $12,687.11
5/31/93 1.81% 1.016717 $1,255.63 $12,556.31
4/30/93 -0.42% 0.994417 $1,234.99 $12,349.87
3/31/93 2.98% 1.028417 $1,241.92 $12,419.21
2/28/93 2.25% 1.021117 $1,207.60 $12,076.05
1/31/93 2.99% 1.028517 $1,182.63 $11,826.31
12/31/92 2.75% 1.026117 $1,149.84 $11,498.42
11/30/92 3.63% 1.034917 $1,120.58 $11,205.76
10/31/92 1.20% 1.010617 $1,082.77 $10,827.69
9/30/92 1.04% 1.009017 $1,071.39 $10,713.95
8/31/92 -2.19% 0.976717 $1,061.82 $10,618.21
7/31/92 3.06% 1.029217 $1,087.13 $10,871.33
6/30/92 -0.88% 0.989817 $1,056.27 $10,562.72
5/31/92 0.80% 1.006617 $1,067.14 $10,671.39
4/30/92 3.13% 1.029917 $1,060.12 $10,601.24
3/31/92 -1.23% 0.986317 $1,029.33 $10,293.30
2/29/92 3.25% 1.031117 $1,043.61 $10,436.10
1/31/92 1.35% 1.012117 $1,012.12 $10,121.17
1/1/92 $1,000.00 $10,000.00
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 4
<TABLE>
<S> <C>
----------------------------------------------------------------
1
----
RETURN FOR 10 YEARS ENDED 12/31/96 ERV with Surrender Term
WITH ENHANCED DEATH BENEFIT RIDER Average Annual Total Return = ------------------ -1
Advisor FIDELITY Premium
Fund EQUITY INCOME ----------------------------------------------------------------
M&E, Admin, Fee and Rider (.0125 + .0015 + .0006 + .002)/12 = 0.001383
Premium: $1,000
</TABLE>
<TABLE>
<CAPTION>
----------------------------------------------------------
STANDARDIZED RETURN CALCULATION
(a) (b) (b) Premium = $1,000, Surrender, Rider
----------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
----------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.13833% 0.982246 $3,073.63 $0.00 $3,073.63 10 11.88%
11/30/96 6.69% 1.065483 $3,129.19
10/31/96 1.62% 1.014844 $2,936.87
9/30/96 4.28% 1.041451 $2,893.92
8/31/96 2.05% 1.019124 $2,778.73
7/31/96 -4.88% 0.949849 $2,726.59
6/30/96 -0.92% 0.989461 $2,870.55
5/31/96 1.08% 1.009414 $2,901.13
4/30/96 1.30% 1.011638 $2,874.07
3/31/96 1.05% 1.009117 $2,841.01
2/29/96 0.34% 1.002017 $2,815.34
1/31/96 2.91% 1.027717 $2,809.68
12/31/95 2.93% 1.027917 $2,733.90
11/30/95 4.32% 1.041817 $2,659.65
10/31/95 -1.15% 0.987117 $2,552.90
9/30/95 3.32% 1.031817 $2,586.22
8/31/95 1.25% 1.011117 $2,506.47
7/31/95 3.85% 1.037117 $2,478.92
6/30/95 1.44% 1.013017 $2,390.20
5/31/95 3.01% 1.028717 $2,359.49
4/30/95 2.78% 1.026417 $2,293.62
3/31/95 3.45% 1.033117 $2,234.59
2/28/95 3.81% 1.036717 $2,162.96
1/31/95 1.56% 1.014217 $2,086.36
12/31/94 0.33% 1.001917 $2,057.11
11/30/94 -3.27% 0.965917 $2,053.18
10/31/94 2.05% 1.019117 $2,125.62
9/30/94 -1.64% 0.982217 $2,085.75
8/31/94 5.15% 1.050117 $2,123.52
7/31/94 3.34% 1.032017 $2,022.17
6/30/94 -0.62% 0.992417 $1,959.44
5/31/94 0.95% 1.008117 $1,974.41
4/30/94 3.45% 1.033117 $1,958.51
3/31/94 -4.18% 0.956817 $1,895.73
2/28/94 -2.58% 0.972817 $1,981.29
1/31/94 4.40% 1.042617 $2,036.65
<CAPTION>
- ------------------------------------------------
1
-----
Total Return = ERV Term
-------- -1
Premium
- ------------------------------------------------
- ------------------------------------------
NON STANDARDIZED RETURN CALCULATION
Premium = $10,000, No Surrender, Rider
- ------------------------------------------
ERV Term Total Return
<S> <C> <C>
$30,736.34 10 11.88%
$31,291.89
$29,368.73
$28,939.17
$27,787.35
$27,265.92
$28,705.54
$29,011.29
$28,740.73
$28,410.11
$28,153.44
$28,096.78
$27,339.04
$26,596.55
$25,529.01
$25,862.20
$25,064.73
$24,789.15
$23,901.99
$23,594.86
$22,936.21
$22,345.91
$21,629.61
$20,863.57
$20,571.11
$20,531.76
$21,256.25
$20,857.52
$21,235.15
$20,221.71
$19,594.36
$19,744.09
$19,585.12
$18,957.32
$19,812.90
$20,366.54
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 5
<TABLE>
<S> <C> <C> <C> <C>
12/31/93 2.31% 1.021717 $1,953.41 $19,534.06
11/30/93 -1.75% 0.981117 $1,911.89 $19,118.86
10/31/93 0.91% 1.007717 $1,948.68 $19,486.84
9/30/93 -0.38% 0.994817 $1,933.76 $19,337.62
8/31/93 3.83% 1.036917 $1,943.84 $19,438.37
7/31/93 1.36% 1.012217 $1,874.63 $18,746.32
6/30/93 1.18% 1.010417 $1,852.01 $18,520.07
5/31/93 1.81% 1.016717 $1,832.91 $18,329.14
4/30/93 -0.42% 0.994417 $1,802.78 $18,027.77
3/31/93 2.98% 1.028417 $1,812.90 $18,128.99
2/28/93 2.25% 1.021117 $1,762.81 $17,628.06
1/31/93 2.99% 1.028517 $1,726.35 $17,263.51
12/31/92 2.75% 1.026117 $1,678.49 $16,784.87
11/30/92 3.63% 1.034917 $1,635.77 $16,357.66
10/31/92 1.20% 1.010617 $1,580.58 $15,805.77
9/30/92 1.04% 1.009017 $1,563.97 $15,639.73
8/31/92 -2.19% 0.976717 $1,550.00 $15,499.97
7/31/92 3.06% 1.029217 $1,586.95 $15,869.47
6/30/92 -0.88% 0.989817 $1,541.90 $15,418.98
5/31/92 0.80% 1.006617 $1,557.76 $15,577.61
4/30/92 3.13% 1.029917 $1,547.52 $15,475.21
3/31/92 -1.23% 0.986317 $1,502.57 $15,025.70
2/29/92 3.25% 1.031117 $1,523.41 $15,234.15
1/31/92 1.35% 1.012117 $1,477.44 $14,774.42
12/31/91 7.90% 1.077617 $1,459.75 $14,597.55
11/30/91 -4.31% 0.955517 $1,354.61 $13,546.14
10/31/91 1.67% 1.015317 $1,417.68 $14,176.77
9/30/91 -0.69% 0.991717 $1,396.29 $13,962.90
8/31/91 2.11% 1.019717 $1,407.95 $14,079.53
7/31/91 5.67% 1.055317 $1,380.73 $13,807.30
6/30/91 -4.09% 0.957717 $1,308.36 $13,083.56
5/31/91 5.49% 1.053517 $1,366.12 $13,661.20
4/30/91 0.47% 1.003317 $1,296.72 $12,967.23
3/31/91 2.07% 1.019317 $1,292.44 $12,924.37
2/28/91 6.89% 1.067517 $1,267.94 $12,679.44
1/31/91 5.36% 1.052217 $1,187.75 $11,877.51
12/31/90 2.33% 1.021917 $1,128.81 $11,288.09
11/30/90 7.17% 1.070317 $1,104.60 $11,046.00
10/31/90 -2.55% 0.973117 $1,032.03 $10,320.31
9/30/90 -7.76% 0.921017 $1,060.54 $10,605.42
8/31/90 -7.99% 0.918717 $1,151.49 $11,514.90
7/31/90 -2.45% 0.974117 $1,253.37 $12,533.68
6/30/90 -1.00% 0.988617 $1,286.67 $12,866.71
5/31/90 6.62% 1.064817 $1,301.49 $13,014.87
4/30/90 -3.47% 0.963917 $1,222.26 $12,222.64
3/31/90 0.16% 1.000217 $1,268.02 $12,680.18
2/28/90 0.59% 1.004517 $1,267.74 $12,677.43
1/31/90 -6.75% 0.931117 $1,262.04 $12,620.43
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 6
<TABLE>
<S> <C> <C> <C> <C>
12/31/89 0.83% 1.006917 $1,355.41 $13,554.08
11/30/89 0.57% 1.004317 $1,346.10 $13,460.97
10/31/89 -5.77% 0.940917 $1,340.31 $13,403.12
9/30/89 -1.12% 0.987417 $1,424.47 $14,244.75
8/31/89 1.61% 1.014717 $1,442.63 $14,426.28
7/31/89 5.83% 1.056917 $1,421.70 $14,217.05
6/30/89 0.07% 0.999317 $1,345.14 $13,451.44
5/31/89 2.97% 1.028317 $1,346.06 $13,460.64
4/30/89 3.86% 1.037217 $1,309.00 $13,089.97
3/31/89 2.17% 1.020317 $1,262.03 $12,620.29
2/28/89 -0.51% 0.993517 $1,236.90 $12,368.99
1/31/89 6.18% 1.060417 $1,244.97 $12,449.70
12/31/88 0.91% 1.007717 $1,174.04 $11,740.39
11/30/88 -1.61% 0.982517 $1,165.05 $11,650.49
10/31/88 1.73% 1.015917 $1,185.78 $11,857.80
9/30/88 2.97% 1.028317 $1,167.20 $11,672.02
8/31/88 -1.72% 0.981417 $1,135.06 $11,350.61
7/31/88 -0.18% 0.996817 $1,156.55 $11,565.54
6/30/88 5.69% 1.055517 $1,160.25 $11,602.47
5/31/88 1.34% 1.012017 $1,099.22 $10,992.22
4/30/88 1.66% 1.015217 $1,086.17 $10,861.70
3/31/88 -1.74% 0.981217 $1,069.89 $10,698.90
2/29/88 4.96% 1.048217 $1,090.37 $10,903.70
1/31/88 7.11% 1.069717 $1,040.21 $10,402.15
12/31/87 5.11% 1.049717 $972.42 $9,724.21
11/30/87 -4.47% 0.953917 $926.36 $9,263.65
10/31/87 -19.51% 0.803517 $971.12 $9,711.17
9/30/87 -2.10% 0.977617 $1,208.58 $12,085.84
8/31/87 2.75% 1.026117 $1,236.26 $12,362.55
7/31/87 3.81% 1.036717 $1,204.79 $12,047.90
6/30/87 2.08% 1.019417 $1,162.12 $11,621.21
5/31/87 0.62% 1.004817 $1,139.99 $11,399.86
4/30/87 -2.49% 0.973717 $1,134.52 $11,345.22
3/31/87 2.54% 1.024017 $1,165.15 $11,651.46
2/28/87 2.33% 1.021917 $1,137.82 $11,378.19
1/31/87 11.48% 1.113417 $1,113.42 $11,134.17
1/1/86 $1,000.00 $10,000.00
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 7
<TABLE>
<S> <C>
----------------------------------------------------------------
1
RETURN FOR 1 YEAR ENDED 12/31/96 ----
ERV with Surrender Term
Advisor FIDELITY Average Annual Total Return = ------------------ -1
Fund EQUITY INCOME Premium
----------------------------------------------------------------
M&E, Admin and Contract Fee (.0125 + .0015 + .0006)/12 = 0.001217
Premium: $1,000
</TABLE>
<TABLE>
<CAPTION>
-------------------------------------------------------------
STANDARDIZED RETURN CALCULATION
Premium = $1,000, Surrender
(a) (b) (b) -------------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
-------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.12167% 0.982413 $1,126.50 $70.00 $1,056.50 1 5.65%
11/30/96 6.69% 1.065650 $1,146.66
10/31/96 1.62% 1.015011 $1,076.02
9/30/96 4.28% 1.041618 $1,060.11
8/31/96 2.05% 1.019291 $1,017.75
7/31/96 -4.88% 0.950015 $998.49
6/30/96 -0.92% 0.989628 $1,051.03
5/31/96 1.08% 1.009580 $1,062.04
4/30/96 1.30% 1.011804 $1,051.96
3/31/96 1.05% 1.009283 $1,039.69
2/29/96 0.34% 1.002183 $1,030.13
1/31/96 2.91% 1.027883 $1,027.88
$1,000.00
-------------------------------------------------------------
<CAPTION>
----------------------------------------------
1
----
ERV Term
Total Return = ----------- -1
Premium
----------------------------------------------
Premium: $10,000
- ---------------------------------------------------------
NON STANDARDIZED RETURN CALCULATION
Premium = $10,000, No Surrender
- ---------------------------------------------------------
Average
ERV Term Total Return
- ---------------------------------------------------------
<S> <C> <C>
$11,264.95 1 12.65%
$11,466.62
$10,760.21
$10,601.08
$10,177.52
$9,984.90
$10,510.25
$10,620.41
$10,519.63
$10,396.91
$10,301.28
$10,278.83
$10,000.00
- ---------------------------------------------------------
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 8
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
RETURN FOR 5 YEARS ENDED 12/31/96 1
ERV with Surrender ------
Advisor FIDELITY Average Annual Total Return = ---------------------- Term -1
Fund EQUITY INCOME Premium
-----------------------------------------------------------------------
M&E, Admin and Contract Fee (.0125 + .0015 + .0006)/12 = 0.001217
Premium: $1,000
----------------------------------------------------------------
STANDARDIZED RETURN CALCULATION
Premium = $1,000 with Surrender
(a) (b) (b) ----------------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.12167% 0.982413 $2,126.49 $30.00 $2,096.49 5 15.96%
11/30/96 6.69% 1.065650 $2,164.55
10/31/96 1.62% 1.015011 $2,031.21
9/30/96 4.28% 1.041618 $2,001.17
8/31/96 2.05% 1.019291 $1,921.21
7/31/96 -4.88% 0.950015 $1,884.85
6/30/96 -0.92% 0.989628 $1,984.02
5/31/96 1.08% 1.009580 $2,004.82
4/30/96 1.30% 1.011804 $1,985.79
3/31/96 1.05% 1.009283 $1,962.62
2/29/96 0.34% 1.002183 $1,944.57
1/31/96 2.91% 1.027883 $1,940.34
12/31/95 2.93% 1.028083 $1,887.70
11/30/95 4.32% 1.041983 $1,836.14
10/31/95 -1.15% 0.987283 $1,762.15
9/30/95 3.32% 1.031983 $1,784.85
8/31/95 1.25% 1.011283 $1,729.54
7/31/95 3.85% 1.037283 $1,710.24
6/30/95 1.44% 1.013183 $1,648.77
5/31/95 3.01% 1.028883 $1,627.31
4/30/95 2.78% 1.026583 $1,581.63
3/31/95 3.45% 1.033283 $1,540.67
2/28/95 3.81% 1.036883 $1,491.05
1/31/95 1.56% 1.014383 $1,438.01
12/31/94 0.33% 1.002083 $1,417.62
11/30/94 -3.27% 0.966083 $1,414.67
10/31/94 2.05% 1.019283 $1,464.34
9/30/94 -1.64% 0.982383 $1,436.63
8/31/94 5.15% 1.050283 $1,462.40
7/31/94 3.34% 1.032183 $1,392.38
6/30/94 -0.62% 0.992583 $1,348.97
5/31/94 0.95% 1.008283 $1,359.05
4/30/94 3.45% 1.033283 $1,347.88
3/31/94 -4.18% 0.956983 $1,304.47
2/28/94 -2.58% 0.972983 $1,363.10
1/31/94 4.40% 1.042783 $1,400.95
<CAPTION>
------------------------------------------------
1
ERV ------
Total Return = ------------- Term -1
Premium
------------------------------------------------
Premium: $10,000
--------------------------------------------------------
NON STANDARDIZED RETURN CALCULATION
Premium = $10,000, No Surrender
--------------------------------------------------------
ERV Term Total Return
--------------------------------------------------------
<S> <C> <C>
$21,264.86 5 16.29%
$21,645.54
$20,312.06
$20,011.67
$19,212.11
$18,848.51
$19,840.21
$20,048.16
$19,857.92
$19,626.25
$19,445.72
$19,403.36
$18,877.01
$18,361.36
$17,621.55
$17,848.52
$17,295.36
$17,102.39
$16,487.67
$16,273.14
$15,816.31
$15,406.75
$14,910.48
$14,380.09
$14,176.19
$14,146.72
$14,643.37
$14,366.34
$14,623.97
$13,923.83
$13,489.69
$13,590.48
$13,478.83
$13,044.66
$13,631.02
$14,009.51
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 9
<TABLE>
<S> <C> <C> <C> <C>
12/31/93 2.31% 1.021883 $1,343.47 $13,434.73
11/30/93 -1.75% 0.981283 $1,314.70 $13,147.03
10/31/93 0.91% 1.007883 $1,339.78 $13,397.79
9/30/93 -0.38% 0.994983 $1,329.30 $13,293.00
8/31/93 3.83% 1.037083 $1,336.00 $13,360.02
7/31/93 1.36% 1.012383 $1,288.23 $12,882.30
6/30/93 1.18% 1.010583 $1,272.47 $12,724.73
5/31/93 1.81% 1.016883 $1,259.15 $12,591.47
4/30/93 -0.42% 0.994583 $1,238.24 $12,382.41
3/31/93 2.98% 1.028583 $1,244.98 $12,449.85
2/28/93 2.25% 1.021283 $1,210.39 $12,103.88
1/31/93 2.99% 1.028683 $1,185.16 $11,851.64
12/31/92 2.75% 1.026283 $1,152.12 $11,521.17
11/30/92 3.63% 1.035083 $1,122.61 $11,226.11
10/31/92 1.20% 1.010783 $1,084.56 $10,845.61
9/30/92 1.04% 1.009183 $1,072.99 $10,729.91
8/31/92 -2.19% 0.976883 $1,063.23 $10,632.27
7/31/92 3.06% 1.029383 $1,088.39 $10,883.87
6/30/92 -0.88% 0.989983 $1,057.32 $10,573.19
5/31/92 0.80% 1.006783 $1,068.02 $10,680.17
4/30/92 3.13% 1.030083 $1,060.82 $10,608.21
3/31/92 -1.23% 0.986483 $1,029.84 $10,298.40
2/29/92 3.25% 1.031283 $1,043.95 $10,439.51
1/31/92 1.35% 1.012283 $1,012.28 $10,122.83
1/1/92 $1,000.00 $10,000.00
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 10
<TABLE>
<CAPTION>
-----------------------------------------------------------------------
RETURN FOR 10 YEARS ENDED 12/31/96 1
ERV with Surrender ------
Advisor FIDELITY Average Annual Total Return = ---------------------- Term -1
Fund EQUITY INCOME Premium
-----------------------------------------------------------------------
M&E, Admin and Contract Fee (.0125 + .0015 + .0006)/12 = 0.001217
Premium: $1,000
---------------------------------------------------------------
STANDARDIZED RETURN CALCULATION
Premium = $1,000 with Surrender
(a) (b) (b) ---------------------------------------------------------------
Month Monthly M&E and Factor Surrender ERV with Average Annual
Ending Return Contract Fee 1+[(a)-(b)] ERV Charge Surrender Term Total Return
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
12/31/96 -1.64% 0.12167% 0.982413 $3,135.18 $0.00 $3,135.18 10 12.11%
11/30/96 6.69% 1.065650 $3,191.31
10/31/96 1.62% 1.015011 $2,994.71
9/30/96 4.28% 1.041618 $2,950.42
8/31/96 2.05% 1.019291 $2,832.54
7/31/96 -4.88% 0.950015 $2,778.93
6/30/96 -0.92% 0.989628 $2,925.14
5/31/96 1.08% 1.009580 $2,955.80
4/30/96 1.30% 1.011804 $2,927.75
3/31/96 1.05% 1.009283 $2,893.59
2/29/96 0.34% 1.002183 $2,866.98
1/31/96 2.91% 1.027883 $2,860.73
12/31/95 2.93% 1.028083 $2,783.13
11/30/95 4.32% 1.041983 $2,707.11
10/31/95 -1.15% 0.987283 $2,598.03
9/30/95 3.32% 1.031983 $2,631.50
8/31/95 1.25% 1.011283 $2,549.94
7/31/95 3.85% 1.037283 $2,521.49
6/30/95 1.44% 1.013183 $2,430.86
5/31/95 3.01% 1.028883 $2,399.23
4/30/95 2.78% 1.026583 $2,331.88
3/31/95 3.45% 1.033283 $2,271.49
2/28/95 3.81% 1.036883 $2,198.33
1/31/95 1.56% 1.014383 $2,120.13
12/31/94 0.33% 1.002083 $2,090.07
11/30/94 -3.27% 0.966083 $2,085.72
10/31/94 2.05% 1.019283 $2,158.94
9/30/94 -1.64% 0.982383 $2,118.10
8/31/94 5.15% 1.050283 $2,156.08
7/31/94 3.34% 1.032183 $2,052.86
6/30/94 -0.62% 0.992583 $1,988.85
5/31/94 0.95% 1.008283 $2,003.71
4/30/94 3.45% 1.033283 $1,987.25
3/31/94 -4.18% 0.956983 $1,923.24
2/28/94 -2.58% 0.972983 $2,009.69
1/31/94 4.40% 1.042783 $2,065.49
<CAPTION>
------------------------------------------------
1
ERV ------
Total Return = ------------- Term -1
Premium
------------------------------------------------
Premium: $10,000
-------------------------------------------------------------
NON STANDARDIZED RETURN CALCULATION
-------------------------------------------------------------
Premium = $10,000, No Surrender
-------------------------------------------------------------
ERV Term Total Return
-------------------------------------------------------------
<S> <C> <C>
$31,351.83 10 12.11%
$31,913.09
$29,947.08
$29,504.21
$28,325.37
$27,789.29
$29,251.41
$29,558.00
$29,277.51
$28,935.95
$28,669.80
$28,607.34
$27,831.31
$27,071.06
$25,980.32
$26,314.96
$25,499.40
$25,214.90
$24,308.59
$23,992.29
$23,318.77
$22,714.93
$21,983.25
$21,201.28
$20,900.66
$20,857.21
$21,589.45
$21,181.01
$21,560.84
$20,528.59
$19,888.51
$20,037.12
$19,872.51
$19,232.39
$20,096.90
$20,654.92
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 11
<TABLE>
<S> <C> <C> <C> <C>
12/31/93 2.31% 1.021883 $1,980.75 $19,807.49
11/30/93 -1.75% 0.981283 $1,938.33 $19,383.32
10/31/93 0.91% 1.007883 $1,975.30 $19,753.03
9/30/93 -0.38% 0.994983 $1,959.85 $19,598.53
8/31/93 3.83% 1.037083 $1,969.73 $19,697.34
7/31/93 1.36% 1.012383 $1,899.30 $18,993.02
6/30/93 1.18% 1.010583 $1,876.07 $18,760.70
5/31/93 1.81% 1.016883 $1,856.42 $18,564.23
4/30/93 -0.42% 0.994583 $1,825.60 $18,256.01
3/31/93 2.98% 1.028583 $1,835.54 $18,355.43
2/28/93 2.25% 1.021283 $1,784.54 $17,845.35
1/31/93 2.99% 1.028683 $1,747.35 $17,473.46
12/31/92 2.75% 1.026283 $1,698.62 $16,986.24
11/30/92 3.63% 1.035083 $1,655.12 $16,551.22
10/31/92 1.20% 1.010783 $1,599.02 $15,990.23
9/30/92 1.04% 1.009183 $1,581.96 $15,819.64
8/31/92 -2.19% 0.976883 $1,567.57 $15,675.68
7/31/92 3.06% 1.029383 $1,604.66 $16,046.63
6/30/92 -0.88% 0.989983 $1,558.86 $15,588.58
5/31/92 0.80% 1.006783 $1,574.63 $15,746.31
4/30/92 3.13% 1.030083 $1,564.02 $15,640.21
3/31/92 -1.23% 0.986483 $1,518.34 $15,183.45
2/29/92 3.25% 1.031283 $1,539.15 $15,391.49
1/31/92 1.35% 1.012283 $1,492.46 $14,924.60
12/31/91 7.90% 1.077783 $1,474.35 $14,743.50
11/30/91 -4.31% 0.955683 $1,367.95 $13,679.46
10/31/91 1.67% 1.015483 $1,431.38 $14,313.80
9/30/91 -0.69% 0.991883 $1,409.56 $14,095.56
8/31/91 2.11% 1.019883 $1,421.09 $14,210.90
7/31/91 5.67% 1.055483 $1,393.39 $13,933.85
6/30/91 -4.09% 0.957883 $1,320.14 $13,201.39
5/31/91 5.49% 1.053683 $1,378.18 $13,781.84
4/30/91 0.47% 1.003483 $1,307.97 $13,079.68
3/31/91 2.07% 1.019483 $1,303.43 $13,034.27
2/28/91 6.89% 1.067683 $1,278.52 $12,785.18
1/31/91 5.36% 1.052383 $1,197.47 $11,974.69
12/31/90 2.33% 1.022083 $1,137.86 $11,378.64
11/30/90 7.17% 1.070483 $1,113.28 $11,132.79
10/31/90 -2.55% 0.973283 $1,039.98 $10,399.78
9/30/90 -7.76% 0.921183 $1,068.53 $10,685.25
8/31/90 -7.99% 0.918883 $1,159.95 $11,599.49
7/31/90 -2.45% 0.974283 $1,262.35 $12,623.46
6/30/90 -1.00% 0.988783 $1,295.67 $12,956.66
5/31/90 6.62% 1.064983 $1,310.36 $13,103.64
4/30/90 -3.47% 0.964083 $1,230.41 $12,304.08
3/31/90 0.16% 1.000383 $1,276.25 $12,762.47
2/28/90 0.59% 1.004683 $1,275.76 $12,757.57
1/31/90 -6.75% 0.931283 $1,269.81 $12,698.11
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 12
<TABLE>
<S> <C> <C> <C> <C>
12/31/89 0.83% 1.007083 $1,363.51 $13,635.06
11/30/89 0.57% 1.004483 $1,353.92 $13,539.16
10/31/89 -5.77% 0.941083 $1,347.87 $13,478.73
9/30/89 -1.12% 0.987583 $1,432.26 $14,322.57
8/31/89 1.61% 1.014883 $1,450.26 $14,502.64
7/31/89 5.83% 1.057083 $1,429.00 $14,289.96
6/30/89 0.07% 0.999483 $1,351.83 $13,518.29
5/31/89 2.97% 1.028483 $1,352.53 $13,525.28
4/30/89 3.86% 1.037383 $1,315.07 $13,150.70
3/31/89 2.17% 1.020483 $1,267.68 $12,676.80
2/28/89 -0.51% 0.993683 $1,242.24 $12,422.35
1/31/89 6.18% 1.060583 $1,250.13 $12,501.32
12/31/88 0.91% 1.007883 $1,178.72 $11,787.21
11/30/88 -1.61% 0.982683 $1,169.50 $11,695.01
10/31/88 1.73% 1.016083 $1,190.11 $11,901.10
9/30/88 2.97% 1.028483 $1,171.27 $11,712.72
8/31/88 -1.72% 0.981583 $1,138.83 $11,388.34
7/31/88 -0.18% 0.996983 $1,160.20 $11,602.01
6/30/88 5.69% 1.055683 $1,163.71 $11,637.12
5/31/88 1.34% 1.012183 $1,102.33 $11,023.30
4/30/88 1.66% 1.015383 $1,089.06 $10,890.62
3/31/88 -1.74% 0.981383 $1,072.56 $10,725.62
2/29/88 4.96% 1.048383 $1,092.91 $10,929.09
1/31/88 7.11% 1.069883 $1,042.47 $10,424.71
12/31/87 5.11% 1.049883 $974.38 $9,743.78
11/30/87 -4.47% 0.954083 $928.08 $9,280.82
10/31/87 -19.51% 0.803683 $972.75 $9,727.47
9/30/87 -2.10% 0.977783 $1,210.36 $12,103.61
8/31/87 2.75% 1.026283 $1,237.86 $12,378.63
7/31/87 3.81% 1.036883 $1,206.16 $12,061.61
6/30/87 2.08% 1.019583 $1,163.26 $11,632.56
5/31/87 0.62% 1.004983 $1,140.91 $11,409.13
4/30/87 -2.49% 0.973883 $1,135.26 $11,352.56
3/31/87 2.54% 1.024183 $1,165.70 $11,657.00
2/28/87 2.33% 1.022083 $1,138.17 $11,381.75
1/31/87 11.48% 1.113583 $1,113.58 $11,135.83
1/1/86 $1,000.00 $10,000.00
</TABLE>
National Life Insurance Company
Sentinel Advantage
<PAGE> 13
SHEET 1
<TABLE>
<CAPTION>
7-DAY YIELD AS OF 12/31/96
<S> <C>
------------------------------------------------------------------
7 365
Advisor: MARKET STREET 7 - Day Yield = ((Pi (1 + Dividend - ES))-1) x ---
Fund: MONEY MARKET t=1 t 7
7 365
7 - Day Effective Yield = ((Pi (1 + Dividend - ES))-1) x --- -1
t=1 t 7
------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
M&E, Admin and Contract Fee (.0125+.0015+.0006)/365 0.00004
------------------------
7-Day
7-Day Effective
Day Dividend ES 1+Divend-ES Product Yield Yield
------------------------
<S> <C> <C> <C> <C> <C> <C>
12/31/96 0.000141020 0.00004 1.000141020 1.000701103 3.66% 3.72%
12/30/96 0.000140512 0.00004 1.000140512
12/29/96 0.000140442 0.00004 1.000140442
12/28/96 0.000140442 0.00004 1.000140442
12/27/96 0.000140442 0.00004 1.000140442
12/26/96 0.000136298 0.00004 1.000136298
12/25/96 0.000141736 0.00004 1.000141736
</TABLE>
