<PAGE> 1
As filed with the Securities and Exchange Commission on February 25, 1999
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]
Post-Effective Amendment No. 2 [ ]
---
REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940 [X]
Amendment No. 4
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
It is proposed that this filing will become effective:
immediately upon filing pursuant to paragraph (b) of Rule 485
- ------
on May 1, 1988 pursuant to paragraph (b) of Rule 485
- ------
60 days after filing pursuant to paragraph (a) of Rule 485
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X on May 1, 1999 pursuant to paragraph (a) of Rule 485
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---------------------
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<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 Variable Annuity
The Sentinel Advantage Contracts described in this prospectus 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, "we, "our, or "us"). We allocate net Premium
Payments to either the Fixed Account or to the Variable Account. The Variable
Account is divided into 27 Subaccounts. Each Subaccount invests in shares of a
corresponding underlying Fund option (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
Growth 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 Inc.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Growth Fund II Strong Capital Management, Inc.
STRONG OPPORTUNITY FUND II, INC. Strong Capital Management, Inc.
VAN ECK WORLDWIDE INSURANCE TRUST
Worldwide Bond Fund Van Eck Associates Corporation
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
VP Value Portfolio American Century Investment Management, Inc.
VP Income & Growth Portfolio American Century Investment Management, Inc.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
International Equity Goldman Sachs Asset Management International
Global Income Goldman Sachs Asset management International
CORE Small Cap Equity Goldman Sachs Asset Management
Mid Cap Equity Goldman Sachs Asset Management
</TABLE>
1
<PAGE> 8
<TABLE>
<S> <C>
J.P. MORGAN SERIES TRUST II
International Opportunities Portfolio J.P. Morgan Asset Management, Inc.
Small Company Portfolio J.P. Morgan Asset Management, Inc.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Partners Portfolio Neuberger & Berman Management Incorporated
</TABLE>
This Prospectus provides you with the basic information you should know
before investing. You should read it and keep it for future reference. A
Statement of Additional Information dated May 1, 1999 containing further
information about the Contracts and the Variable Account is 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 the address on the previous page.
You may also obtain prospectuses for each of the underlying Fund options
identified above without charge by calling or writing to the same telephone
number or address.
This Prospectus must be accompanied by current prospectuses or profiles
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 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.
The Securities and Exchange Commission has not approved or disapproved
these securities or passed upon the accuracy or adequacy of the Prospectus. Any
representation to the contrary is a criminal offense.
The Statement of Additional Information, dated May 1, 1999, 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 May 1, 1999.
2
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
GLOSSARY....................................................................
SUMMARY.....................................................................
SUMMARY OF CONTRACT EXPENSES................................................
UNDERLYING FUND ANNUAL EXPENSES.............................................
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...........................................
Annuitization - Fixed Account...........................................
Annuity Payment Options.................................................
Death of Owner..........................................................
Death of Annuitant Prior to the Annuitization Date......................
Required Distributions for Qualified Plans and Tax-Sheltered Annuities..
Required Distributions for Individual Retirement Annuities..............
Generation-Skipping Transfers...........................................
Ownership Provisions....................................................
CHARGES AND DEDUCTIONS......................................................
Deductions from the Variable Account....................................
Contingent Deferred Sales Charge........................................
Administration Charge...................................................
Annual Contract Fee.....................................................
Transfer Charge.........................................................
Premium Taxes...........................................................
Charge for Optional Enhanced Death Benefit Rider........................
Other Charges...........................................................
CONTRACT RIGHTS AND PRIVILEGES..............................................
Free Look...............................................................
Surrender and Withdrawal................................................
Payments................................................................
Surrenders and Withdrawals Under a Tax-Sheltered Annuity Contract.......
Telephone Transaction Privilege.........................................
Available Automated Fund Management Features............................
Dollar Cost Averaging.............................................
Portfolio Rebalancing.............................................
Systematic Withdrawals............................................
Contract Rights Under Certain Plans.....................................
</TABLE>
3
<PAGE> 10
<TABLE>
<S> <C>
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.....................................................
Possible Changes in Taxation........................................
Charge for Tax Provisions...........................................
Rollover Distributions..............................................
Restrictions under Qualified Contracts..............................
Gender Neutrality...................................................
VOTING RIGHTS...............................................................
CHANGES TO VARIABLE ACCOUNT.................................................
ADVERTISING.................................................................
DISTRIBUTION OF THE CONTRACTS...............................................
INSURANCE MARKETPLACE STANDARDS ASSOCIATION.................................
STATEMENTS AND REPORTS......................................................
PREPARING FOR YEAR 2000.....................................................
OWNER INQUIRIES.............................................................
LEGAL PROCEEDINGS...........................................................
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION....................
</TABLE>
4
<PAGE> 11
GLOSSARY
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 continuance of life any annuity payments involving life contingencies
depends.
CODE - The Internal Revenue Code of 1986, as amended.
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.
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.
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 a
Subaccount of the Variable Account will be invested.
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.
5
<PAGE> 12
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) under the Code.
OWNER ("YOU") - 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 any 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 that
purchase shares of underlying Funds shares. Separate Accumulation Units and
Annuity Units are maintained for each Subaccount.
TAX-SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment.
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, when an event occurs or a transaction is to be
effected on a day that is not a Valuation Day, it will be effected 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.
* * *
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<PAGE> 13
* * *
SUMMARY
This summary provides a brief description of some of the features and
charges of the Contract. You will find more detailed information in the rest of
this Prospectus, the Statement of Additional Information and the Contract.
Please keep the Contract and its riders or endorsements, if any, together with
the application. Together they are the entire agreement between you and us.
HOW DO I PURCHASE A CONTRACT?
Generally, you may purchase a Contract if you are 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 generally must be at least $1500
for IRA's or Tax-Sheltered Annuities.
CAN I MAKE ADDITIONAL PREMIUM PAYMENTS?
You may make additional Premium Payments at any time (except for Contracts
purchased in Oregon - see page ), but must be at least $100 ($50 for IRA's). We
may accept lower Premium Payments at our discretion if the Premium Payments are
remitted electronically. The total of all Premium Payments under Contracts
issued on the life of any one Annuitant may not exceed $1,000,000 without our
prior consent (see "Premium Payments," page _____).
HOW DOES THE "FREE LOOK" RIGHT TO EXAMINE THE CONTRACT WORK?
To be sure that you are satisfied with the Contract, you have a ten day
free look right to examine the Contract. Some states may require a longer
period. Within ten days of the day you receive the Contract, you may return the
Contract to our Home Office at the address shown on the cover page of this
Prospectus. When we receive the Contract, we will void the Contract and refund
the Contract Value plus any charges assessed when the Contract was issued,
unless otherwise required by state and/or federal law.
In the case of IRA's and Contracts issued in states that require the
return of Premium Payments, we will refund the greater of: (i) Premium Payments
or (ii) Contract Value plus any amount deducted for state premium taxes. In
these cases, we 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 period, we will allocate
Contract Value among the Subaccounts based on the allocation percentages you
specify in the application. For this purpose, we assume the free look period
ends 20 days after the date the Contract is issued.
WHAT IS THE PURPOSE OF THE VARIABLE ACCOUNT?
The Variable Account is a separate investment account that consists of 27
Subaccounts. Before the Contract Value is applied to a payment option, amounts
in the Variable Account will vary according to the investment performance of the
Fund(s) in which your elected Subaccounts are invested. You may allocate Net
Premium Payments among the Fixed Account and the 27 Subaccounts of the Variable
Account. The assets of each Subaccount are invested in the corresponding
portfolios of the Funds that are listed on the cover page of this Prospectus
(see "The Variable Account" and "Underlying Fund Options," pages _____).
We cannot give any assurance that any Subaccount will achieve its
investment objectives. You bear the entire investment risk on the value of your
Contract which you allocate to the Variable Account. The value of your Contract
may be more or less than the premiums paid.
HOW DOES THE FIXED ACCOUNT WORK?
You may allocate all or part of your Net Premium Payments or make
transfers from the Variable Account to the Fixed Account. Contract Value held
in the Fixed Account will earn an effective annual interest rate of at least
3.0% (see "The Fixed Account").
7
<PAGE> 14
WHEN WILL I RECEIVE PAYMENTS?
After the Contract Value is transferred to a payment option, we will pay
proceeds according to the Annuity Payment Option you select. If the Contract
Value at the Annuitization Date is less than $3,500, the Contract Value may be
distributed in one lump sum instead of annuity payments. If any annuity payment
would be less than $100, we have the right to change the frequency of payments
to intervals that will result in payments of at least $100. In no event will
annuity payments be less frequent than annually (see "Annuitization - Frequency
and Amount of Annuity Payments," page _____).
WHAT HAPPENS IF THE OWNER DIES BEFORE ANNUITIZATION?
If (1) any Owner dies before the Contract Value is transferred to a
payment option ("Annuitization"); (2) the Enhanced Death Benefit Rider is not
elected; and (3) the Owner has not reached age 81, we will pay the Beneficiary
the greater of (a) the Contract Value, or (b) the Net Premium Payments made to
the Contract (less all withdrawals and applicable premium tax charge). For more
information, see "Death of Owner," page .
WHAT HAPPENS IF THE ANNUITANT DIES BEFORE ANNUITIZATION?
If the Annuitant (who is not an Owner) dies before the Contract Value is
transferred to a payment option, we will pay the Beneficiary a Death Benefit
equal to the Cash Surrender Value, unless the Owner selects another available
option (see "Death of Annuitant Prior to the Annuitization Date," page ).
CAN I MAKE A WITHDRAWAL FROM MY CONTRACT?
You may withdraw part or all of the Cash Surrender Value at any time
before the Contract is Annuitized (see "Surrender and Withdrawal," page ). A
Withdrawal or a Surrender may result in federal income tax, including a federal
penalty tax (see "Federal Income Tax Considerations," page ).
WHAT CHARGES WILL I PAY?
Contingent Deferred Sales Charge: We do not deduct a sales charge from
Premium Payments. However, if you surrender the Contract or make a Withdrawal,
we will generally deduct from the 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 (see "Contingent Deferred Sales Charge," page ).
Annual Contract Fee: We deduct an Annual Contract Fee of $30.00 payable on
the Date of Issue and at each Contract Anniversary thereafter as long as the
Contract Value is less than $50,000 (see "Annual Contract Fee," page ).
Administration Charge: We also deduct an Administration Charge each day at
an annual rate of 0.15% from the assets of the Variable Account (see "Deductions
from the Variable Account," page ).
Mortality and Expense Risk Charge: We deduct a mortality and expense risk
charge each day from the assets of the Variable Account at an annual rate of
1.25% (see "Deductions from the Variable Account," page ).
8
<PAGE> 15
Charge for Optional Enhanced Death Benefit Rider: If elected, we deduct an
annual charge of 0.20% of the Contract Value for this option (see "Charge for
Option Enhanced Death Benefit Rider," page ).
Premium Taxes: If a governmental entity imposes premium taxes, we will
make a deduction for premium taxes in a corresponding amount. Certain states
impose a premium tax. Premium taxes may range up to 3.5% (see "Premium
Taxes," page ).
Investment Management Fees: Charges for investment management services and
operating expenses are deducted daily from each portfolio of each Fund (see
"Underlying Fund Annual Expenses," page and the accompanying Fund
prospectuses).
ARE THERE ANY OTHER CONTRACT PROVISIONS?
For information concerning other important Contract provisions, see
"Contract Rights and Privileges," page and the remainder of this Prospectus.
HOW WILL THE CONTRACT BE TAXED?
For a brief discussion of our current understanding of the federal tax
laws concerning us and the Contract, see "Federal Income Tax Considerations,"
page .
WHAT IF I HAVE QUESTIONS?
We will be happy to answer your questions about the Contract or our
procedures. Call or write to us at the phone number or address on the cover
page. All inquiries should include the Contract number and the names of the
Owner and the Annuitant.
If you have questions concerning your investment strategies, please
contact your registered representative.
9
<PAGE> 16
SUMMARY OF CONTRACT EXPENSES
TRANSACTION EXPENSES
<TABLE>
<S> <C>
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
0........................................................7%
1........................................................6%
2........................................................5%
3........................................................4%
4........................................................3%
5........................................................2%
6........................................................1%
7........................................................0%
</TABLE>
<TABLE>
<CAPTION>
VARIABLE ACCOUNT ANNUAL EXPENSES (AS A PERCENTAGE OF AVERAGE ACCOUNT VALUE)
<S> <C>
Mortality and Expense Risk Charge..........................................1.25%
Administration Charge......................................................0.15%
-----
Total Basic Variable Account Annual Percentage Expenses....................1.40%
ANNUAL CONTRACT FEE(3).....................................................$30
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER(4)........................0.20%
</TABLE>
(1) States may 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 Annual Contract Fee is assessed only upon Contracts which as of the Date
of Issue or applicable Contract Anniversary, have a Contract Value of less
than $50,000 and is not assessed on Contract Anniversaries after the
Annuitization Date.
(4) This charge, which applies to the Contract Value, is assessed only if the
Owner has elected the Enhanced Death Benefit Rider. See "Optional Enhanced
Death Benefit Rider", page .
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<PAGE> 17
UNDERLYING FUND ANNUAL EXPENSES(6)(AS A PERCENTAGE OF UNDERLYING FUND AVERAGE
NET ASSETS)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
MANAGEMENT OTHER TOTAL MUTUAL
- ----------------------------------------------------------------------------------------------------------------------------------
FEES, EXPENSES, FUND EXPENSES,
- ----------------------------------------------------------------------------------------------------------------------------------
AFTER EXPENSE AFTER EXPENSE AFTER EXPENSE
- ----------------------------------------------------------------------------------------------------------------------------------
REIMBURSEMENT REIMBURSEMENT REIMBURSEMENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Alger American Small Capitalization Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth Portfolio % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market Portfolio % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond Fund % % %
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value % % %
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity % % %
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities % % %
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company % % %
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners % % %
- ----------------------------------------------------------------------------------------------------------------------------------
</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 voluntary 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 OTHER TOTAL MUTUAL
- ---------------------------------------------------------------------------------------------------------------------------------
FEES EXPENSES FUND EXPENSES
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fidelity VIP Fund II-Index 500 Portfolio % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth Portfolio % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II % % %
- ---------------------------------------------------------------------------------------------------------------------------------
J. P. Morgan International Opportunities % % %
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 18
<TABLE>
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
J. P. Morgan Small Company % % %
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Global Income Fund
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
It is anticipated that these reimbursement arrangements will continue, but there
are no legal obligations to continue these arrangements for any particular
period of time; if they are terminated the affected Fund's expenses may
increase.
12
<PAGE> 19
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. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
-------------------------- ------------------------- ---------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization $ $ $ $ $ $
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market
- ----------------------------------------------------------------------------------------------------------------------------------
Opportunity Fund II, Inc.
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</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.
13
<PAGE> 20
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. 5 Yrs. 10 Yrs. 1 Yr. 3 Yrs. 5 Yrs. 10 Yrs. 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
-------------------------- ------------------------- --------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization $ $ $ $ $ $
- ---------------------------------------------------------------------------------------------------------------------------------
Alger American Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- ---------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Managed
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Bond
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street International
- ---------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market
- ---------------------------------------------------------------------------------------------------------------------------------
Opportunity Fund II, Inc.
- ---------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II
- ---------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- ---------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ---------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ---------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ---------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ---------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ---------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ---------------------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------------------
</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
you 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%.
14
<PAGE> 21
ACCUMULATION UNIT VALUES
The following table sets forth, for each of the Subaccounts which began
operations on June 20, 1997, the accumulation unit value at June 20, 1997 , the
accumulation unit values at December 31, 1997 and 1998, and the number of
accumulation units outstanding at December 31, 1998.
<TABLE>
<CAPTION> Number of
Accumulation Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Unit Value at Outstanding at
Subaccount June 20, 1997 December 31, 1997 Decmber 31, 1998 December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Alger American Small Capitalization $10.00 11.00
- -------------------------------------------------------------------------------------------------------------------------------
Alger American Growth $10.00 10.65
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income $10.00 10.84
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth $10.00 10.71
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income $10.00 10.83
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas $10.00 9.45
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 $10.00 10.88
- -------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund $10.00 10.95
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Growth $10.00 10.68
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth $10.00 11.16
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth $10.00 10.74
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Managed $10.00 10.64
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Bond $10.00 10.42
- -------------------------------------------------------------------------------------------------------------------------------
Market Street International $10.00 9.52
- -------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market $10.00 10.20
- -------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. $10.00 11.16
- -------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II $10.00 11.26
- -------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond $10.00 10.25
- -------------------------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------------------
The following table sets forth, for each of the Subaccounts which began operations on July 31, 1998, the
accumulation unit value on July 31, 1998, the accumulation unit value on December 31, 1998, and the number of
accumulation units outstanding on December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Outstanding at
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Subaccount July 31 , 1998 December 31, 1998 December 31, 1998
- ---------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ---------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ---------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ---------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ---------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ---------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
15
<PAGE> 22
NATIONAL LIFE INSURANCE COMPANY,
THE VARIABLE ACCOUNT, AND THE FUNDS
NATIONAL LIFE INSURANCE COMPANY
National Life is authorized to transact life insurance and annuity
business in Vermont and in 50 other jurisdictions. National Life was originally
chartered as a mutual life insurance company in 1848 under Vermont law. It is
now a stock life insurance company, all of the outstanding stock of which is
indirectly owned by National Life Holding Company, a mutual insurance holding
company established under Vermont law on January 1, 1999. All policyholders of
National Life, including all the Owners of the Contracts, are voting members of
National Life Holding Company. 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
are obligations of National Life. Income, gains and losses, whether or not
realized, from the assets of the Variable Account are 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 of the Fund options designated by the
Owner. A separate Subaccount is established within the Variable Account for each
of the Fund options.
UNDERLYING FUND OPTIONS
You may choose from among a number of different Subaccount options.
However, National Life reserves the right to limit the number of different
Subaccounts, other than the Market Street Money Market Subaccount, used in any
Contract over its entire life to 16.
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 investment objectives and policies of certain Funds are similar to the
investment objectives and policies of other mutual fund portfolios that may be
managed by the same investment adviser or manager. The investment results of the
Funds, however, may be higher or lower than the results of such other
portfolios. There can be no assurance, and no representation is made, that the
investment results of any of the Funds will be comparable to the investment
results of any other portfolios, even if the other portfolio has the same
investment adviser or manager.
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. Fred Alger Management, Inc., acts as the Fund's investment
advisor.
16
<PAGE> 23
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 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.
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
17
<PAGE> 24
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.
-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. FMR is the Fund's manager.
-INDEX 500 PORTFOLIO
Investment Objective: To seek to match the total return of the Standard &
Poor's' Composite Index of 500 Stocks ("S&P 500") while keeping expenses
low. The Fund normally invests at least 80% of its assets in equity
securities of companies that compose the S&P 500. Bankers Trust Company
currently serves as sub-adviser to the Fund and manages the Fund's
Portfolio.
-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. 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.
GROWTH PORTFOLIO
Investment Objective: To seek intermediate and long-term growth of
capital. A reasonable level of income is an important secondary objective. This
Portfolio pursues its objectives by investing primarily in common stocks of
companies believed to offer above-average growth potential over both the
intermediate and the long term.
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.
18
<PAGE> 25
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.
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. Strong Capital Management, Inc. 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 OPPORTUNITY FUND II, INC.
The Strong Opportunity Fund II, Inc. is a diversified, open-end management
company. Strong Capital Management, Inc. 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. The investment advisor and manager is Van Eck Associates Corporation.
19
<PAGE> 26
WORLDWIDE BOND FUND
Investment Objective: To seek high total return through a flexible policy
of investing globally, primarily in debt securities.
AMERICAN CENTURY VARIABLE PORTFOLIOS, INC.
American Century Variable Portfolios, Inc. is a "series" type mutual 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 fund of American Century Variable Portfolios, Inc. American
Century Investment Management, Inc. acts as the investment advisor to these
Funds.
VP VALUE
Investment Objective: To seek long-term capital growth. Income is a
secondary objective. The fund will seek to achieve its investment objective by
investing in securities that management believes to be undervalued at the time
of purchase.
VP INCOME & GROWTH
Investment Objective: To seek dividend growth, current income and capital
appreciation. The fund will seek to achieve its investment objective by
investing in common stocks.
GOLDMAN SACHS VARIABLE INSURANCE TRUST
Goldman Sachs Variable Insurance Trust is a "series" type mutual fund registered
with the SEC as an open-end management investment company issuing a number of
series or classes of shares, each of which represents an interest in a Fund of
Goldman Sachs Variable Insurance Trust. Each Fund, except the Global Income
Fund, is a diversified investment company. Goldman Sachs Asset Management and
Goldman Sachs Asset Management International act as the Funds' investment
advisor.
GOLDMAN SACHS INTERNATIONAL EQUITY FUND
Investment Objective: Seeks long-term capital appreciation through
investments in equity securities of companies that are organized outside the
U.S. or whose securities are principally traded outside the U.S.
GOLDMAN SACHS GLOBAL INCOME FUND
Investment Objective: Seeks a high total return, emphasizing current income
and, to a lesser extent, providing opportunities for capital appreciation. The
Fund invests primarily in a portfolio of high quality fixed-income securities of
U.S. and foreign issuers and foreign currencies.
GOLDMAN SACHS CORE SMALL CAP EQUITY FUND.
Investment Objective: Seeks long-term growth of capital through a broadly
diversified portfolio of equity securities of U.S. issuers which are included in
the Russell 2000 Index at the time of investment.
20
<PAGE> 27
GOLDMAN SACHS MID CAP EQUITY FUND
Investment Objective: Seeks long-term capital appreciation primarily through
investments in equity securities of companies with public stock market
capitalizations within the range of the market capitalization of companies
constituting the Russell Midcap Index at the time of investment (currently
between $ million and $ billion).
J.P. MORGAN SERIES TRUST II
J.P. Morgan Series Fund II is a "series" type mutual 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 J.P. Morgan Series Trust II. J.P. Morgan Asset Management, Inc.
acts as the Fund's investment advisor.
J.P. MORGAN INTERNATIONAL OPPORTUNITIES PORTFOLIO
Investment Objective: Seeks to provide a high total return from a portfolio
comprised of equity securities of foreign corporations. The Portfolio is
designed for investors with a long-term investment horizon who want to diversify
their investments by adding international equities and take advantage of
investment opportunities outside the U.S. As an international investment, the
Portfolio is subject to foreign market, political, and currency risks.
J.P. MORGAN SMALL COMPANY PORTFOLIO
Investment Objective: Seeks to provide a high total return from a portfolio
comprised of equity securities of small companies. The Portfolio invests at
least 65% of the value of its total assets in the common stock of small U.S.
companies primarily with market capitalizations of less than $1 billion. The
Portfolio is designed for investors who are willing to assume the somewhat
higher risk of investing in small companies in order to seek a higher return
over time than might be expected from a portfolio of large companies.
NEUBERGER & BERMAN ADVISERS MANAGEMENT TRUST
Neuberger & Berman Advisers Management Trust is a "series" type mutual 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 Neuberger & Berman Advisers Management Trust.
Neuberger & Berman Management Incorporated acts as the Fund's investment advisor
PARTNERS PORTFOLIO
Investment Objective: To seek capital growth. This Portfolio will seek to
achieve its objective by investing primarily in the common stock of established
companies. Its investment program seeks securities believed to be undervalued
based on fundamentals such as low price-to-earnings ratios, consistent cash
flows, and support from asset values. The objective of the Partners Portfolio is
not fundamental and can be changed by the Trustees of the Neuberger & Berman
Advisers Management Trust without shareholder approval. Shareholders will,
however, receive at least 30 days prior notice thereof.
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 on behalf of the
Variable Account and our other separate accounts. These percentages may differ
and we may be paid a greater percentage by some investment advisers or
distributors than other advisers or distributors. These agreements reflect
administrative services we provide.
The Funds 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 Variable Account
21
<PAGE> 28
and other separate accounts of National Life. Although we do 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, we
will take any steps necessary to protect Owners and variable annuity payees,
including withdrawal of the Variable Account from participation in the
underlying Fund or Funds which are involved in the conflict.
DETAILED DESCRIPTION OF CONTRACT PROVISIONS
ISSUANCE OF A CONTRACT
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 Joint Owner
must be 85 years of age or younger on the Date of Issue. If the Owner is not a
natural person, then the age of the Annuitant must meet the requirements for
Owners.
In order to purchase a Contract, an individual must forward an application
to us 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. We may at our discretion permit initial Premium Payments
lower than these minimums. For Contracts purchased in South Carolina, the
initial Premium Payment for Qualified Contracts must be at least $3000.
Subsequent Premium Payments. Subsequent Premium Payments may be made at
any time, but must be at least $100 ($50 for Individual Retirement Annuities).
We may accept lower Premium Payments at our discretion if the Premium Payments
are remitted electronically. We will price subsequent Premium Payments to the
Variable Account on the basis of the Accumulation Unit Value next computed for
the appropriate Subaccount after the additional Premium Payment is received. For
Contracts purchased in the State of Oregon, we are not permitted to accept
subsequent Premium Payments on or after the third Contract Anniversary.
The total of all Premium Payments under Contracts issued on the life of
any one Annuitant may not exceed $1,000,000 without our prior consent.
Transactions 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. In addition, Premium
Payments will not be allocated and transactions will not be effected to the
Money Market Subaccount on Columbus Day and Veterans 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 us at our 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 or the Fixed Account must be in whole numbers of not less than 5%,
and the sum of the allocation percentages must be 100%. We 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.
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If the application is not properly completed, we 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, we inform the applicant of the reason for the delay and the initial
Premium Payment will be returned immediately, unless the applicant specifically
consents to our retaining the initial Premium Payment until the application is
complete. Once the application is complete, we allocate the initial Net Premium
Payment as designated by the Owner within two business days.
Notwithstanding the foregoing, in jurisdictions where we must refund the
greater of: 1) aggregate Premium Payments or 2) Contract Value (plus any amount
deducted for state premium taxes) in the event you exercise 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 during
the free look period. At the end of that period, the amount in the Market Street
Money Market Subaccount will be allocated to the Subaccounts as designated by
you in proportion to the allocation percentage for each Subaccount set forth in
the Net Premium Payment allocation schedule then in effect. We assume the free
look period ends 20 days after the date the Contract is issued.
We allocate subsequent Net Premium Payments as of the Valuation Date we
receive Net Premium Payments, based on your allocation percentages then in
effect. At the time of allocation, we apply Net Premium Payments to the purchase
of Fund shares. The net asset value of the shares purchased are converted into
Accumulation units.
We reserve the right to limit the number of Variable Account Subaccounts
other than the Market Street Money Market Subaccount used in a single Contract
over the entire life of the Contract to 16.
The Subaccount values will vary with their investment experience, and you
bear the entire investment risk. You should periodically review your allocation
percentages in light of market conditions and your overall financial objectives.
TRANSFERS
You 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. If you elect
the telephone transaction privilege, you may make transfers by telephone. See
"Telephone Transaction Privilege", page . Transfers are made as of the Valuation
Day that the request for transfer is received at the Home Office. Transfers to
or from the Subaccounts may be postponed under certain circumstances. See
"Payments," page .
We currently allow transfers to the Fixed Account of all or any part of
the Variable Account Contract Value, without charge or penalty. We reserve the
right to restrict transfers to the Fixed Account to 25% of the Variable Account
Contract Value during any Contract Year.
You may, (only one each year and within 45 days after the end of the
calendar year) transfer a portion of the value in the Fixed Account to the
Variable Account. Prior to the end of the calendar year, we determine the
maximum percentage that may be transferred from the Fixed Account. This
percentage will be at least 10% of the Contract Value in the Fixed Account.
After a transfer from the Fixed Account to the Variable Account, we reserve the
right to require that the value transferred remain in the Variable Account for
at least one year before it may be transferred back to the Fixed Account.
We do not permit transfers between the Variable Account and the Fixed
Account after the Annuitization Date.
We have no current intention to impose a transfer charge in the
foreseeable future. However, we reserve the right, upon prior notice, 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> 30
VALUE OF A VARIABLE ACCOUNT ACCUMULATION UNIT
We set the value of a Variable Account Accumulation Unit for each
Subaccount at $10 when the Subaccounts commenced operations. We determine the
value for any subsequent Valuation Period 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.
- Changes in the Net Investment Factor may not be directly proportional
to changes in the net asset value of Fund shares, because of the
deduction for the Mortality and Expense Risk Charge and Administration
Charge.
Fund shares are valued at their net asset value. The Net Investment Factor
allows for the monthly reinvestment of daily dividends that are credited by some
Funds (the Market Street Money Market Portfolio).
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.
When charges or deductions are made against the Contract Value, we deduct
an appropriate number of Accumulation Units from the Variable Account and an
appropriate amount from the Fixed Account in the same proportion that the your
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. You select the Maturity Date on the application. Such date
must be at least 2 years after the Date of Issue, unless otherwise approved (10
years after the Date of Issue in the State of Oregon). If no specific Maturity
Date is selected, the Maturity Date will be the date you reach age 90 (the
Annuitant's age 90 if the Owner is not a natural person); or, if later, 10 years
after the Date of Issue.
If you request in writing (see "Ownership Provisions", page ), and we
approve the request, the Maturity Date may be accelerated or deferred.
Election of Payment Options. You may, with prior written notice and, at
any time prior to the Annuitization Date, elect one of the Annuity Payment
Options. We apply the Contract Value in each Subaccount (less any premium tax
previously unpaid) to provide a Variable Annuity payment. We apply and the
Contract Value in the Fixed Account (less any premium tax previously unpaid) to
provide a Fixed Annuity payment.
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If an election of an Annuity Payment Option is not on file with National
Life on the Annuitization Date, we will pay the proceeds as Option 3 - Payments
for Life with 120 months certain. You may elect, revoke or change an Annuity
Payment Option at any time before the Annuitization Date within 30 days prior
written notice. The Annuity Payment Options available are described below.
Frequency and Amount of Annuity Payments. We pay annuity payments as
monthly installments, unless you select annual, semi-annual or quarterly
installments. If the amount to be applied under any Annuity Payment Option is
less than $3,500, we have the right to pay such amount in one lump sum in lieu
of the payments otherwise selected. In addition, if the payments selected would
be or become less than $100, we have the right to change the frequency of
payments that will result in payments of at least $100. In no event will we make
payments under an annuity option less frequently than annually.
ANNUITIZATION - VARIABLE ACCOUNT
We will determine the dollar amount of the first Variable Annuity payment
by dividing the Variable Account Contract Value on the Annuitization Date by
1,000 and applying the result as set forth in the applicable Annuity Table. The
amount of each Variable Annuity payment depends on the age of the Chosen Human
Being at the time the first payment is due, and the sex of the Chosen Human
Being, if applicable, unless otherwise required by law.
- Variable Annuity payments vary in amount in accordance with the
investment performance of the Variable Account;
- To establish the number of Annuity Units representing each monthly
annuity payment, the dollar amount of the first annuity payment as
determined above is divided by the value of an Annuity Unit on the
Annuitization Date;
- The 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; and
- 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.
We guarantee 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 is
set at $10 when the first Fund shares are 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 as to
dollar amount during the annuity payment period. We determine the amount of the
periodic Fixed Annuity payments by
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applying the Fixed Account Contract Value to the applicable Annuity Table in
accordance with the Annuity Payment Option elected. This is done at the
Annuitization Date on an age nearest birthday basis.
We do 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 Fixed Annuity payments.
ANNUITY PAYMENT OPTIONS
Any of the following Annuity Payment Options may be elected:
Option 1-Payments for a Stated Time. We will make monthly payments 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 an 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 under this option for the
payee to receive only one annuity payment if the annuitant dies before
the second annuity payment date, two annuity payments if the Annuitant
dies 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 less than 10 or 20 years, as selected, we guarantee to continue
annuity payments 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 is selected.
In the alternative, the Payee 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 we receive notice of death of the Chosen Human
Being is received by us at our Home Office.
We may allow other Annuity Payment Options.
Some of the stated Annuity Payment Options may not be available in all
states. You may request an alternative non-guaranteed option by giving notice in
writing prior to Annuitization. If a request is approved by us, it will be
permitted under the Contract.
IRA's and Tax-Sheltered Annuities are subject to the minimum Distribution
requirements set forth in the Code.
Under Payment Option 1, you may change to any other Payment Option at any
time. At the time of the change, remaining value will be applied to the new
Payment Option to determine the amount of the new payments. Under Payment Option
1, you may also fully surrender the Contract at any time or make Withdrawals at
any time or from time to time. A surrender or Withdrawal is subject to any
applicable Contingent Deferred Sales Charge at the time of the surrender or
Withdrawal.
DEATH OF OWNER
If you or a Joint Owner dies prior to the Annuitization Date, then, we
will pay (unless the Enhanced Death Benefit Rider has been elected) a Death
Benefit to the Beneficiary.
If you or a Joint Owner dies prior to attaining age 81, the Death Benefit
will be equal to 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), and, minus any applicable premium tax charge
to be assessed upon distribution.
If you or a Joint Owner dies after attaining age 81, then the Death
Benefit shall be equal to the Contract Value, minus any applicable premium tax
charge.
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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, 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. If the Owner is a natural
person and a contingent Annuitant has been named or the Owner names a contingent
Annuitant within 90 days of the Annuitant's death, 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 natural person, then 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 coinciding with or next following the
date we receive 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, we will make payment in accordance
with any applicable laws and regulations governing the payment of Death
Benefits. If an Annuity Payment Option is requested, the Beneficiary must make
an election during the 90-day period commencing with the date we receive
written notice and as otherwise required by law. If no election has been made
by the end of such 90-day period commencing with the date we receive written
notice or as otherwise required by law the Death Benefit will be paid in a
single sum payment.
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GENERATION-SKIPPING TRANSFERS
We 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 possesses an undivided interest in the Contract. The death of
any Joint Owner triggers 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)
requires a written indication of an intent to exercise that right, signed by all
Joint Owners.
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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 "Federal Income Tax Considerations", page
"). 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 and Withdrawal"
provision on page . The change is effective on the date the written request is
signed. A new choice of Owner will not apply to any payment made or action we
take 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 us 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 us.
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. The Fixed Account is not
subject to the Mortality and Expense Risk Charge and the Administration Charge.
We may realize a profit from any of these charges. Any such profit may be used
for any purpose, including payment of distribution expenses.
We deduct the charges described below to cover our costs and expenses,
services provided and risks assumed under the Contracts. We incur 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 we assume include:
(1) the risk that the actual life-span of persons receiving annuity payments
under Contract guarantees will exceed the assumptions reflected in our
guaranteed rates (these rates are incorporated in the Contract and
cannot be changed);
(2) the risk that Death Benefits, or the Enhanced Death Benefit under the
optional Enhanced Death Benefit Rider, will exceed the actual Contract
Value;
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(3) the risk that more Owners than expected will qualify for waivers of the
Contingent Deferred Sales Charge; and
(4) the risk that our costs in providing the services will exceed our
revenues from the Contract charges (which we cannot change).
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 we incur.
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
We make no deduction for a sales charge from the Premium Payments for
these Contracts. However, if a Withdrawal is made or a Contract is surrendered,
we will with certain exceptions, deduct a Contingent Deferred Sales Charge
("CDSC") 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 CDSC is calculated by multiplying the applicable CDSC percentages
noted below by the Net Premium Payments that are withdrawn or surrendered. For
purposes of calculating the CDSC 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. No CDSC is ever assessed with
respect to a Withdrawal or surrender of earnings on Net Premium Payments. 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.
The CDSC applies to Net 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
NET PREMIUM PAYMENT PERCENTAGE NET 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) you may make Withdrawals
without a 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 CDSC 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. This means 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. In
the first Contract Year a CDSC-free Withdrawal is available only by setting up a
monthly systematic Withdrawal program for an amount not exceeding the annual
CDSC-free Withdrawal amount (see "Available Automated Fund Management
Features-Systematic Withdrawals", page ). You may be subject to a tax penalty if
you take Withdrawals prior to age 59 1/2 (see "Federal Income Tax
Considerations", page ). In any states which require that any CDSC-free
Withdrawal provision be available on full surrenders as well as
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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 CDSC 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 CDSC 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 CDSC 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 CDSC;
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 as of the last Contract Anniversary.
We will waive the CDSC if the Owner dies or if the Owner annuitizes.
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 CDSC is paid at the time of payment of the lump sum.
We will also waive the CDSC if, following the first Contract Anniversary,
you are confined to an eligible nursing home for at least the 90 consecutive
days ending on the date of the Withdrawal request.
ANNUAL CONTRACT FEE
For Contracts with a Contract Value of less than $50,000 as of the Date of
Issue or any subsequent Contract Anniversary prior to the Annuitization Date, we
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 is less than $50,000. 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 Fixed Account.
TRANSFER CHARGE
Currently, unlimited free transfers are permitted among the Subaccounts, and
transfers between the Fixed Account and the Variable Account are permitted free
of charge within the limits described on page . We have no present intention to
impose a transfer charge in the foreseeable future. However, we reserve 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, we will deduct the transfer charge 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
made pursuant to the Dollar Cost Averaging and Portfolio Rebalancing features or
if there has been a material change in the investment policy of the Fund from
which the transfer is being made. These transfers will not count against the
twelve free transfers in any Contract Year.
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PREMIUM TAXES
If a governmental entity imposes premium taxes, we make a deduction for
premium taxes in a corresponding amount. Certain states impose a premium tax,
currently ranging up to 3.5%. We will pay premium taxes at the time imposed
under applicable law. Where we are required to pay this premium tax, we may
deduct an amount equal to premium taxes from the Premium Payment. We currently
intend to make this deduction from Premium Payments only in South Dakota. In the
remaining states which assess premium taxes, we currently expect to make
deductions for premium taxes at the time of Annuitization, death of the Owner,
or surrender, although we also reserve the right to make such a deduction at the
time we pay premium taxes to the applicable taxing authority.
CHARGE FOR OPTIONAL ENHANCED DEATH BENEFIT RIDER
Annual charges are made if you elect 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. The annual charge will be deducted at issue (or at the time
of election, if elected after 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, we will discontinue the charge.
We will make the charge pro rata from the Subaccounts of the Variable Account
and 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. Information on the fees and expenses for
the Funds is set forth in "Underlying Fund Annual Expenses" on page .
More detailed information is contained in the Funds' prospectuses which
accompany this prospectus.
CONTRACT RIGHTS AND PRIVILEGES
FREE LOOK
You 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 free look period. Where the Contract Value is refunded, you 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 IRA's and states that require the return of Premium
Payments, we will refund the greater of: (i) Premium Payments or (ii) Contract
Value plus any amount we have deducted for state premium taxes. In such cases,
we 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, we will allocate Contract Value among the Subaccounts
based on the allocation percentages specified in the application. For this
purpose, we assume 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 our
Home Office. Mailing or delivery must occur on or before 10 days after receipt
of the Contract for revocation to be effective, except where we require 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.
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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 you will be paid by us.
SURRENDER AND WITHDRAWAL
At any time prior to the Annuitization Date (or thereafter if Payment
Option 1 has been elected) you may, upon proper written application deemed by us
to be in good order, surrender the Contract Value. "Proper written application"
means that you must request the surrender in writing and include the Contract.
We 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.
We will, upon receipt of any such written request, pay to you the Cash
Surrender Value. The Cash Surrender Value will reflect any applicable CDSC (see
"Contingent Deferred Sales Charge", page ) 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 you made depending on the market value
of the underlying Fund shares, the amount of any applicable CDSC, and other
factors.
We 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. At least $3500 in Contract Value must remain
after any Withdrawal.
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 CDSC. See
"Contingent Deferred Sales Charge", page . However, see "Available Automated
Fund Management Features-Systematic Withdrawals" page , for information on a
limited means of making systematic Withdrawals in the first year free of the
CDSC. 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 CDSD.
The Withdrawal will be taken from the Subaccounts based on your
instructions at the time of the Withdrawal. During the first Contract Year, we
may require that Withdrawals be taken pro rata from the Subaccounts and the
Fixed Account. If you provide specific instructions, amounts must be deducted
first from the Variable Account and may only be deducted from 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,
the Withdrawal will be deducted pro rata from the Subaccounts and from the Fixed
Account. Any CDSC associated with a Withdrawal will be deducted from the
Subaccounts and from the Fixed Account based on the allocation percentages of
the Withdrawal. Any amount of CDSFC that we deduct 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 Fixed Account. If the Withdrawal cannot be
processed in accordance with your instructions, then we will not process it
until we receive further instructions.
A Surrender or a Withdrawal may have tax consequences. See "Federal Income
Tax Considerations", page .
PAYMENTS
We will pay any funds surrendered or withdrawn from the Variable Account
within 7 days of receipt of such request. However, we reserve the right to
suspend or postpone the date of any payment or transfer of any benefit or values
for any Valuation Period:
(1) when the New York Stock Exchange ("Exchange") is closed,
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(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.
The rules and regulations of the Securities and Exchange Commission shall
govern as to whether the conditions prescribed in (2) and (3) exist.
We reserve the right to delay payment of any amounts allocated to the
Fixed Account which are payable as a result of a Surrender or Withdrawal for up
to six months after we receive a written request in a form satisfactory to us.
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:
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
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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 you elect the telephone transaction privilege, you may make changes in
Net Premium Payment allocations, transfers, or initiate dollar costs averaging
or portfolio rebalancing, by providing instructions to us at our Home Office
over the telephone. You can make the election either on the application for the
Contract or by providing a proper written authorization to us. We reserve the
right to suspend telephone transaction privileges at any time and for any
reason. You may, on the application or by a written authorization, authorize
your National Life agent to provide telephone instructions on your behalf.
We employ reasonable procedures to confirm that instructions communicated by
telephone are genuine. If we follow these procedures we will not be liable for
any losses due to unauthorized or fraudulent instructions. We may be liable for
any such losses if those reasonable procedures are not followed. The procedures
followed for telephone transfers will include one or more of the following:
(1) requiring some form of personal identification prior to acting on
instructions received by telephone,
(2) providing written confirmation of the transaction, and
(3) making a tape recording of the instructions given by telephone.
AVAILABLE AUTOMATED FUND MANAGEMENT FEATURES
We currently offer the following free automated fund management features.
However, we are not legally obligated to continue to offer these features and we
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 you to automatically transfer
funds from the Money Market Subaccount to any other Subaccounts on a monthly
basis. You may elect it at issue by marking the appropriate box on the initial
application and completing the appropriate instruction or after issue by filling
out similar information on a change request form and sending it to us.
If you elect this feature, each month on the Monthly Contract Date we will
take the amount to be transferred from the Money Market Subaccount and transfer
it to the Subaccount or Subaccounts designated to receive the funds. This
procedure starts with the Monthly Contract Date next succeeding the Date of
Issue or next succeeding the date of an election subsequent to purchase and
stops when the amount in the Money Market Subaccount 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. You may discontinue
Dollar Cost Averaging at any time by sending an appropriate change request form
to us.
This feature allows you 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. Over time, this
will result, 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 assure a
profit or protect against a loss in declining markets. 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.
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Portfolio Rebalancing. This feature permits you to automatically rebalance
the value in the Subaccounts on a quarterly, semi-annual or annual basis, based
on the premium allocation percentages in effect at the time of the rebalancing.
You may elect it at issue by marking the appropriate box on the initial
application or after issue by completing a change request form and sending it to
us.
In Contracts utilizing Portfolio Rebalancing from the Date of Issue, an
automatic transfer takes place which causes the percentages of the current
values in each Subaccount to match the current premium allocation percentages.
This procedure starts with the Monthly Contract Date three, six or twelve months
after the Date of Issue and continues 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. Subsequent
rebalancing transfers occur every three, six or twelve months thereafter. You
may discontinue Portfolio Rebalancing at any time by submitting an appropriate
change request form.
If you change the Contract's premium allocation percentages, Portfolio
Rebalancing will automatically be discontinued unless you specifically direct
otherwise.
Portfolio Rebalancing results in periodic transfers out of Subaccounts that
have had relatively favorable investment performance and into Subaccounts which
have had relatively unfavorable investment performance.
Systematic Withdrawals. At any time after one year from the Date of Issue,
if the Contract Value at the time of initiation of the program is at least
$15,000, you may elect in writing to take systematic Withdrawals of a specified
dollar amount (of at least $100) on a monthly, quarterly, semi-annual or annual
basis. You may provide specific instructions as to how the systematic
Withdrawals are to be taken, but the Withdrawals must be taken first from the
Subaccounts and may only be taken from the Fixed Account to the extent that the
Contract Value in the Variable Account is insufficient to accomplish the
Withdrawal. If you have not provided specific instructions or if specific
instructions cannot be carried out, we process the Withdrawals by taking
Accumulation Units from all of the Subaccounts in which you have an interest
and the Fixed Account on a pro rata basis. Each systematic Withdrawal is
subject to federal income taxes. In addition, a 10% federal penalty tax may be
assessed on systematic Withdrawals if you are under age 59 1/2. If you direct,
we will withhold federal income taxes from each systematic Withdrawal. A
systematic Withdrawal program terminates automatically when a systematic
Withdrawal would cause the remaining Contract Value to be $3,500 or less. If
this happens, then the systematic Withdrawal transaction causing the Contract
value to fall below $3500 will not be processed. You may discontinue systematic
Withdrawals at any time by notifying us in writing.
A CDSC may apply to systematic Withdrawals in accordance with the
considerations set forth in "Contingent Deferred Sales Charge", page . If you
withdraw amounts pursuant to a systematic Withdrawal program, then, in most
states, you may withdraw in each Contract Year after the first 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 you request 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 in order to
meet minimum Distribution requirements under the Code shall be free of CDSC.
Limited systematic Withdrawals are also available in the first Contract
Year (but after 30 days from issue). These systematic Withdrawals are limited to
monthly systematic Withdrawal programs only. The maximum aggregate amount for
the remaining months of the first Contract Year is the annual amount that may be
withdrawn in Contract Years after the first Contract Year free of a CDSC (i.e.,
either 15% or 10% of the Contract Value, depending on the state). These
systematic Withdrawals will not be subject to a CDSC. The other rules for
systematic Withdrawals made after the first Contract Year, including the $15,000
minimum Contract Value, minimum $100 payment, and allocation rules, will apply
to these systematic Withdrawals.
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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 are 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 are part of our general account, which
supports insurance and annuity obligations. Because of exemptive and
exclusionary provisions, interests in the general account are not 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 relate 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 our general assets, 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. We will invest the assets of the Fixed Account in those assets we
choose and allowed by applicable law.
MINIMUM GUARANTEED AND CURRENT INTEREST RATES
The Contract Value held in the Fixed Account is guaranteed to accumulate
at a minimum effective annual interest rate of 3.0%. We may credit the Contract
Value in the Fixed Account with current rates in excess of the minimum guarantee
but we are not obligated to do so. We have no specific formula for determining
current interest rates. Since we, in our sole discretion, anticipate 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. We declare an interest rate each month to apply to amounts
allocated or transferred to the Fixed Account in that month. The rate declared
on such amounts remains in effect for twelve months. At the end of the 12-month
period, we reserve the right to declare a new current interest rate on such
amounts and accrued interest thereon (which may be a different current interest
rate than the current interest rate on new allocations to the Fixed Account on
that date). We determine any interest credited on the amounts in the Fixed
Account in excess of the minimum guaranteed rate of 3.0% per year in our
discretion. You assume the risk that interest credited may not exceed the
guaranteed minimum rate. Amounts allocated to the Fixed Account do not share in
the investment performance of our general account or any portion thereof.
Amounts deducted from the Fixed Account for the charge for the optional
Enhanced Death Benefit Rider, the Annual Contract Fee 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 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.
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For Contracts purchased in the State of Washington, no Premium Payments or
Contract Value may be allocated to the Fixed Account.
OPTIONAL ENHANCED DEATH BENEFIT RIDER
You may choose to include the Enhanced Death Benefit Rider in your
Contract. The Rider is subject to the restrictions and limitations set forth in
it. Election of this optional benefit involves an additional cost. This Rider
may not be available in all states. If you elected the Enhanced Death Benefit
Rider, then the following enhanced death benefit will be payable to the
Beneficiary if you (or the first of Joint Owners) die 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
the largest Contract Value as of any prior Contract Anniversary after
the Enhanced Death Benefit Rider was applicable to the Contract, plus Net
Premium Payments and minus any Withdrawals (including any CDSC deducted in
connection with such Withdrawals), since such Contract Anniversary.
We calculate this as of the date we receive due proof of death. Any applicable
premium tax charge payable on your death will be applied to reduce the value of
the determined enhanced death benefit (see "Premium Taxes, page ).
If you (or the first of Joint Owners) die 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 is available at issue if you are age 75
or younger. It is available after issue if you are age 75 or younger only on 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 you
reach ago 80, on an age nearest birthday basis, we discontinue the charge. See
"Charge for Optional Enhanced Death Benefit Rider", page .
We distribute the Enhanced Death Benefit in the same manner as the normal
Death Benefit. See "Death of Owner", page .
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FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is general in nature and is not intended as tax
advice. Each person concerned should consult a competent tax advisor. No attempt
is made to consider any applicable state tax or other tax laws.
If you invest in a variable annuity as part of a pension plan or
employer-sponsored retirement program, your contract is called a Qualified
Contract. If your annuity is independent of any formal retirement or pension
plan, it is termed a Non-Qualified Contract. The tax rules applicable to
Qualified Contracts vary according to the type of retirement plan and the terms
and conditions of the plan.
TAXATION OF NON-QUALIFIED CONTRACTS
Non-Natural Person. If a non-natural person (e.g., a corporation or a
trust) owns a Non-Qualified Contract, the taxpayer generally must include in
income any increase in the excess of the account value over the investment in
the Contract (generally, the premiums or other consideration paid for the
contract) during the taxable year. There are some exceptions to this rule and a
prospective owner that is not a natural person should discuss these with a tax
adviser.
The following discussion generally applies to Contracts owned by natural
persons.
Withdrawals. When a withdrawal from a Non-Qualified Contract occurs, the
amount received will be treated as ordinary income subject to tax up to an
amount equal to the excess (if any) of the account value immediately before the
distribution over the Owner's investment in the Contract (generally, the
premiums or other consideration paid for the Contract, reduced by any amount
previously distributed from the Contract that was not subject to tax) at that
time. In the case of a surrender under a Non-Qualified Contract, the amount
received generally will be taxable only to the extent it exceeds the Owner's
investment in the Contract.
Penalty Tax on Certain Withdrawals. In the case of a distribution from a
Non-Qualified Contract, there may be imposed a federal tax penalty equal to ten
percent of the amount treated as income. In general, however, there is no
penalty on distributions:
- made on or after the taxpayer reaches age 59 1/2
- made on or after the death of an Owner;
- attributable to the taxpayer's becoming disabled; or
- made as part of a series of substantially equal periodic payments
for the life (or life expectancy) of the taxpayer.
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Other exceptions may be applicable under certain circumstances and special rules
may be applicable in connection with the exceptions enumerated above. You should
consult a tax adviser with regard to exceptions from the penalty tax.
Annuity Payments. Although tax consequences may vary depending on the
payout option elected under an annuity contract, a portion of each annuity
payment is generally not taxed and the remainder is taxed as ordinary income.
The non-taxable portion of an annuity payment is generally determined in a
manner that is designed to allow you to recover your investment in the contract
ratably on a tax-free basis over the expected stream of annuity payments, as
determined when annuity payments start. Once your investment in the contract has
been fully recovered, however, the full amount of each annuity payment is
subject to tax as ordinary income.
Taxation of Death Benefit Proceeds. Amounts may be distributed from a
Contract because of your 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 payout option, they are taxed in
the same way as annuity payments.
Transfers, Assignments or Exchanges of a Contract. A transfer or
assignment of ownership of a Contract, the designation of an annuitant, the
selection of certain maturity dates, or the exchange of a Contract may result in
certain tax consequences to you that are not discussed herein. An owner
contemplating any such transfer, assignment or exchange, should consult a tax
advisor as to the tax consequences.
Withholding. Annuity distributions are generally subject to withholding
for the recipient's federal income tax liability. Recipients can generally
elect, however, not to have tax withheld from distributions.
Multiple Contracts. All annuity contracts that are issued by us (or our
affiliates) to the same owner during any calendar year are treated as one
annuity contract for purposes of determining the amount includible in such
owner's income when a taxable distribution occurs.
TAXATION OF QUALIFIED CONTRACTS
The tax rules applicable to Qualified Contracts vary according to the type
of retirement plan and the terms and conditions of the plan. Your rights under a
Qualified Contract may be subject to the terms of the retirement plan itself,
regardless of the terms of the Qualified Contract. Adverse tax consequences may
result if you do not ensure that contributions, distributions and other
transactions with respect to the Contract comply with the law.
Individual Retirement Accounts (IRAs), as defined in Section 408 of the
Internal Revenue Code (Code), permit individuals to make annual contributions of
up to the lesser of $2,000 or 100% of adjusted gross income. The contributions
may be deductible in
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whole or in part, depending on the individual's income. Distributions from
certain pension plans may be "rolled over" into an IRA on a tax-deferred basis
without regard to these limits. Amounts in the IRA (other than nondeductible
contributions) are taxed when distributed from the IRA. A 10% penalty tax
generally applies to distributions made before age 59 1/2, unless certain
exceptions apply. The Internal Revenue Service has not reviewed the Contract for
qualification as an IRA, and has not addressed in a ruling of general
applicability whether a death benefit provision such as the optional Enhanced
Death Benefit provision in the Contract comports with IRA qualification
requirements.
SIMPLE IRAs permit certain small employers to establish SIMPLE plans as
provided by Section 408(p) of the Code, under which employees may elect to defer
to a SIMPLE IRA a percentage of compensation up to $6,000 (as increased for cost
of living adjustments). The sponsoring employer is required to make matching or
non-elective contributions on behalf of employees. Distributions from SIMPLE
IRAs 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 percent penalty tax, which
is increased to 25 percent if the distribution occurs within the first two years
after the commencement of the employee's participation in the plan.
Roth IRAs, as described in Code section 408A, permit certain eligible
individuals to contribute to make non-deductible contributions to a Roth IRA in
cash or as a rollover or transfer from another Roth IRA or other IRA. A rollover
from or conversion of an IRA to a Roth IRA is generally subject to tax and other
special rules apply. The Owner may wish to consult a tax adviser before
combining any converted amounts with any other Roth IRA contributions, including
any other conversion amounts from other tax years. Distributions from a Roth IRA
generally are not taxed, except that, once aggregate distributions exceed
contributions to the Roth IRA, income tax and a 10% penalty tax may apply to
distributions made (1) before age 59 1/2 (subject to certain exceptions) or (2)
during the five taxable years starting with the year in which the first
contribution is made to any Roth IRA. A 10% penalty tax may apply to amounts
attributable to a conversion from an IRA if they are distributed during the five
taxable years beginning with the year in which the conversion was made.
Corporate pension and profit-sharing plans under Section 401(a) of the
Code allow corporate employers to establish various types of retirement plans
for employees, and self-employed individuals to establish qualified plans for
themselves and their employees. Adverse tax consequences to the retirement plan,
the participant or both may result if the Contract is transferred to any
individual as a means to provide benefit payments, unless the plan complies with
all the requirements applicable to such benefits prior to transferring the
Contract. The Contract includes an Enhanced Death Benefit that in some cases may
exceed the greater of the premium payments or the account value. The Death
Benefit could be characterized as an incidental benefit, the amount of which is
limited in any pension or profit-sharing plan. Because the Death Benefit may
exceed this limitation, employers using the Contract in connection with such
plans should consult their tax adviser.
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Tax Sheltered Annuities under section 403(b) of the Code allow employees
of certain Section 501(c)(3) organizations and public schools to exclude from
their gross income the premium payments made, within certain limits, on a
contract that will provide an annuity for the employee's retirement. These
premium payments may be subject to FICA (social security) tax.
Distributions of (1) salary reduction contributions made in years beginning
after December 31, 1988; (2) earnings on those contributions; and (3) earnings
on amounts held as of the last year beginning before January 1, 1989, are not
allowed prior to age 59 1/2, separation from service, death or disability.
Salary reduction contributions may also be distributed upon hardship, but would
generally be subject to penalties.
Section 457 Plans, while not actually providing for a qualified plan as
that term is normally used, provides for certain deferred compensation plans
with respect to service for state governments, local governments, political
subdivisions, agencies, instrumentalities and certain affiliates of such
entities, and tax exempt organizations. The Contract can be used with such
plans. Under such plans a participant may specify the form of investment in
which his or her participation will be made. All such investments, however, are
owned by and are subject to, the claims of the general creditors of the
sponsoring employer. In general, all amounts received under a section 457 plan
are taxable and are subject to federal income tax withholding as wages.
Other Tax Issues. Qualified Contracts have minimum distribution rules that
govern the timing and amount of distributions. You should refer to your
retirement plan, adoption agreement, or consult a tax advisor for more
information about these distribution rules.
Distributions from Qualified Contracts generally are subject to
withholding for the Owner's federal income tax liability. The withholding rate
varies according to the type of distribution and the Owner's tax status. The
Owner will be provided the opportunity to elect not have tax withheld from
distributions.
"Eligible rollover distributions" from section 401(a) plans are subject to
a mandatory federal income tax withholding of 20%. An eligible rollover
distribution is the taxable portion of any distribution from such a plan, except
certain distributions such as distributions required by the Code or
distributions in a specified annuity form. The 20% withholding does not apply,
however, if the Owner chooses a "direct rollover" from the plan to another
tax-qualified plan or IRA.
POSSIBLE TAX LAW CHANGES
Although the likelihood of legislative changes is uncertain, there is
always the possibility that the tax treatment of the Contract could change by
legislation or otherwise. Consult a tax adviser with respect to legislative
developments and their effect on the Contract.
We have the right to modify the contract in response to legislative
changes that could otherwise diminish the favorable tax treatment that annuity
contract owners currently receive. We make no guarantee regarding the tax status
of any contact and do not intend the above discussion as tax advice.
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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.
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 our view of present applicable law, we vote the shares
of the Funds held in the Variable Account at regular and special meetings of the
shareholders of the Funds. These shares are voted in accordance with
instructions received from you if you 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
we determine that we are permitted to vote the shares of the Funds in our own
right, we may elect to do so.
The person having the voting interest under a Contract is the Owner. The
number of Fund shares attributable to each Owner is determined by dividing the
Owner's interest in each Subaccount by the net asset value of the Fund
corresponding to the Subaccount.
We determine the number of shares which a person has the right to vote on
a date we choose not more than 90 days prior to the meeting of the Fund. We
solicit voting instructions by written communication at least 21 days prior to
such meeting.
We vote Fund shares held in the Variable Account as to which no timely
instructions are received in the same proportions as to the voting instructions
we receive with respect to all contracts participating in the Variable Account.
Each person having a voting interest will receive periodic reports
relating to the Funds, proxy material and a form with which to give such voting
instructions.
CHANGES TO VARIABLE ACCOUNT
We reserve the right to create one or more new separate accounts, combine
or substitute separate accounts, or to add new investment Funds for use in the
Contracts at any time. In addition, if the shares of the Funds described in this
Prospectus should no longer be available for investment by the Variable Account
or, if in our judgment further investment in such Fund shares should become
inappropriate, we may eliminate Subaccounts, combine two or more Subaccounts or
substitute one or more Funds for other Fund shares already purchased or to be
purchased in the future 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. We 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
45
<PAGE> 50
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
YIELD
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.
PERFORMANCE
We may also from time to time advertise the performance of the
Subaccounts of the Variable Account relative to the performance of other
variable annuity subaccounts or 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.
Market Comparisons. 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 Funds against all funds
over specified periods and against funds in specified categories. The rankings
may or may not include the effects of sales or other charges.
Rating Services. We are 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 our financial strength or claims-paying
ability. The ratings are not intended to reflect the investment experience or
financial strength of the Variable Account. We may advertise these ratings from
time to time. In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations, individuals or other
parties which recommend us or the Contracts. Furthermore, we 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.
46
<PAGE> 51
Historical Performance. We may from time to time advertise several types
of historical performance for the Subaccounts of the Variable Account. We 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."
Standardized Average Annual Total Return.. "Standardized 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 Subaccount has
been in existence, if the Subaccount 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.
The charts below show Standardized Average Annual Total Return for
the Subaccounts for the indicated periods. For the purposes of calculating
Standardized Average Annual Total Return, the Mortality and Expense Risk
Charge of 1.25%, the Administration Charge of 0.15%, the Annual Contract
Fee of $30.00, the applicable CDSC and the optional Enhanced Death
Benefit Charge of 0.20% were deducted.
Based on the method of calculation described above, the Standardized
Average Annual Total Returns for the Subaccounts for the periods ending
December 31, 1998 were:
<TABLE>
<CAPTION>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN (ASSUMING THE ENHANCED DEATH BENEFIT RIDER IS
ELECTED)
- -------------------------------------------------------------------------------------------
1 YEAR TO LIFE OF FUND DATE FUND
- -------------------------------------------------------------------------------------------
12/31/98 TO 12/31/98 EFFECTIVE
===========================================================================================
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Alger American Small Capitalization % % %
- -------------------------------------------------------------------------------------------
Alger American Growth
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- -------------------------------------------------------------------------------------------
Market Street Growth
- -------------------------------------------------------------------------------------------
Market Street Sentinel Growth
- -------------------------------------------------------------------------------------------
Market Street Aggressive Growth
- -------------------------------------------------------------------------------------------
Market Street Managed
- -------------------------------------------------------------------------------------------
Market Street Bond
- -------------------------------------------------------------------------------------------
Market Street International
- -------------------------------------------------------------------------------------------
Market Street Money Market
- -------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc.
- -------------------------------------------------------------------------------------------
Strong Growth Fund II
- -------------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- -------------------------------------------------------------------------------------------
American Century VP Value
- -------------------------------------------------------------------------------------------
American Century VP Income & Growth
- -------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- -------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- -------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- -------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- -------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- -------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- -------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- -------------------------------------------------------------------------------------------
</TABLE>
The chart below shows Standardized Average Annual Total Returns for a Contract
which does not elect the optional Enhanced Death Benefit Rider.
<TABLE>
<CAPTION>
STANDARDIZED AVERAGE ANNUAL TOTAL RETURN (ASSUMING THE ENHANCED DEATH BENEFIT RIDER IS NOT
ELECTED)
- -------------------------------------------------------------------------------------------
1 YEAR TO LIFE OF FUND DATE FUND
- -------------------------------------------------------------------------------------------
12/31/98 TO 12/31/98 EFFECTIVE
===========================================================================================
<S> <C> <C> <C>
- -------------------------------------------------------------------------------------------
Alger American Small Capitalization % % %
- -------------------------------------------------------------------------------------------
Alger American Growth
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- -------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- -------------------------------------------------------------------------------------------
Market Street Growth
- -------------------------------------------------------------------------------------------
Market Street Sentinel Growth
- -------------------------------------------------------------------------------------------
Market Street Aggressive Growth
- -------------------------------------------------------------------------------------------
Market Street Managed
- -------------------------------------------------------------------------------------------
Market Street Bond
- -------------------------------------------------------------------------------------------
Market Street International
- -------------------------------------------------------------------------------------------
Market Street Money Market
- -------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc.
- -------------------------------------------------------------------------------------------
Strong Growth Fund II
- -------------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- -------------------------------------------------------------------------------------------
American Century VP Value
- -------------------------------------------------------------------------------------------
American Century VP Income & Growth
- -------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- -------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- -------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- -------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- -------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- -------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- -------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- -------------------------------------------------------------------------------------------
</TABLE>
47
<PAGE> 52
Other Total Returns. Other "total returns" include nonstandardized
Subaccount average annual total returns and adjusted historic fund
performance data.
Nonstandardized Average Annual Total Return.
Nonstandardized "Average Annual Total Return" will be calculated
in a similar manner and for the same time periods as the standardized
average annual total return but will assume an initial investment of
$10,000 and will not reflect the deduction of any applicable
CDSC 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. Nonstandardized performance data will only be disclosed if
standardized average annual total return for the Subaccounts for the
required periods is also disclosed.
The charts below show Nonstandardized Average Annual Total Return
for the Subaccounts for the indicated periods. For the purposes of
calculating Nonstandardized Average Annual Total Return, the Mortality and
Expense Risk Charge of 1.25%, the Administration Charge of 0.15%, the
Annual Contract Fee of $30.00, and the optional Enhanced Death Benefit
Rider Charge of 0.20% were deducted.
Based on the method of calculation described above, the
Nonstandardized Subaccount Average Annual Total Returns for the
Subaccounts for the period ending December 31, 1998, were:
<TABLE>
<CAPTION>
NONSTANDARDIZED AVERAGE ANNUAL TOTAL RETURN (ASSUMING THE ENHANCED DEATH BENEFIT RIDER IS
ELECTED)
- -----------------------------------------------------------------------------------------------
1 YEAR TO LIFE OF FUND DATE FUND
- -----------------------------------------------------------------------------------------------
12/31/98 TO 12/31/98 EFFECTIVE
===============================================================================================
<S> <C> <C>
- -----------------------------------------------------------------------------------------------
Alger American Small Capitalization % %
- -----------------------------------------------------------------------------------------------
Alger American Growth
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- -----------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- -----------------------------------------------------------------------------------------------
Market Street Growth
- -----------------------------------------------------------------------------------------------
Market Street Sentinel Growth
- -----------------------------------------------------------------------------------------------
Market Street Aggressive Growth
- -----------------------------------------------------------------------------------------------
Market Street Managed
- -----------------------------------------------------------------------------------------------
Market Street Bond
- -----------------------------------------------------------------------------------------------
Market Street International
- -----------------------------------------------------------------------------------------------
Market Street Money Market
- -----------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc.
- -----------------------------------------------------------------------------------------------
Strong Growth Fund II
- -----------------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- -----------------------------------------------------------------------------------------------
American Century VP Value
- -----------------------------------------------------------------------------------------------
American Century VP Income & Growth
- -----------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- -----------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- -----------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- -----------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- -----------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- -----------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- -----------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- -----------------------------------------------------------------------------------------------
</TABLE>
The chart below shows the Nonstandardized Average Annual Total Returns for a
Contract which does not elect the optional Enhanced Death Benefit Rider.
<TABLE>
<CAPTION>
NONSTANDARDIZED AVERAGE ANNUAL TOTAL RETURN (ASSUMING THE ENHANCED DEATH BENEFIT RIDER
IS NOT ELECTED)
- -------------------------------------------------------------------------------------
1 YEAR TO LIFE OF FUND DATE FUND
- -------------------------------------------------------------------------------------
12/31/98 TO 12/31/98 EFFECTIVE
=====================================================================================
<S> <C> <C>
- -------------------------------------------------------------------------------------
Alger American Small Capitalization % %
- -------------------------------------------------------------------------------------
Alger American Growth
- -------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income
- -------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth
- -------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income
- -------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas
- -------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500
- -------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund
- -------------------------------------------------------------------------------------
Market Street Growth
- -------------------------------------------------------------------------------------
Market Street Sentinel Growth
- -------------------------------------------------------------------------------------
Market Street Aggressive Growth
- -------------------------------------------------------------------------------------
Market Street Managed
- -------------------------------------------------------------------------------------
Market Street Bond
- -------------------------------------------------------------------------------------
Market Street International
- -------------------------------------------------------------------------------------
Market Street Money Market
- -------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc.
- -------------------------------------------------------------------------------------
Strong Growth Fund II
- -------------------------------------------------------------------------------------
Van Eck Worldwide Bond
- -------------------------------------------------------------------------------------
American Century VP Value
- -------------------------------------------------------------------------------------
American Century VP Income & Growth
- -------------------------------------------------------------------------------------
Goldman Sachs International Equity
- -------------------------------------------------------------------------------------
Goldman Sachs Global Income
- -------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- -------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- -------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- -------------------------------------------------------------------------------------
J.P. Morgan Small Company
- -------------------------------------------------------------------------------------
Neuberger & Berman Partners
- -------------------------------------------------------------------------------------
</TABLE>
Adjusted Historic Average Annual Total Return. In addition, historic
performance data may be presented for the Funds since their inception,
reduced by some or all of the fees and charges under the Contracts. Such
adjusted historic Fund performance includes data that precedes the
inception date of the Subaccounts. This data is designed to show
performance
<PAGE> 53
that would have resulted if the Contract had been in existence
during that time. Adjusted historic Fund performance data will be shown
only if standard performance data for the Subaccounts is also shown.
The charts below show adjusted historic total return for the Funds
for the indicated periods. For the purposes of calculating Adjusted
Historic Fund Average Annual Total Return, the Mortality and Expense Risk
Charge of 1.25%, the Administration Charge of 0.15%, the Annual Contract
Fee of $30.00, and (if so indicated) the applicable CDSC and/or the
optional Enhanced Death Benefit Rider Charge of 0.20% were deducted.
Based on the method of calculation described above, the Adjusted
Historic Average Annual Total Returns for the Funds for the periods ending
December 31, 1998 were:
ADJUSTED HISTORIC AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS NOT ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS NOT DEDUCTED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/98 TO 12/31/98 TO 12/31/98 EFFECTIVE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization % % % % 9/21/88
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 1/9/89
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 9/19/85
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 1/28/87
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 8/27/92
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 1/3/95
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 3/18/96
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 5/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 12/12/85
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International 11/1/91
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 5/8/92
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II 1/1/97
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond 9/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ----------------------------------------------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
48
<PAGE> 54
ADJUSTED HISTORIC AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS NOT ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS DEDUCTED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/98 TO 12/31/98 12/31/98 EFFECTIVE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization % % % % 9/21/88
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 1/9/89
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 9/19/85
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 1/28/87
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 8/27/92
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 1/3/95
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 2/24/94
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 3/18/96
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 5/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 12/12/85
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International 11/1/91
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 5/8/92
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II 1/1/97
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond 9/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ADJUSTED HISTORIC AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS NOT DEDUCTED)
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/98 TO 12/31/98 12/31/98 EFFECTIVE
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization % % % % 9/21/88
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 1/9/89
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 9/19/85
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 1/28/87
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 8/27/92
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 1/3/95
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
49
<PAGE> 55
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 2/24/94
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 3/18/96
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 5/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 12/12/85
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International 11/1/91
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 5/8/92
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II 1/1/97
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond 9/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ----------------------------------------------------------------------------------------------------------------------------------
ADJUSTED HISTORIC AVERAGE ANNUAL TOTAL RETURN
(ASSUMING ENHANCED DEATH BENEFIT RIDER IS ELECTED AND
THE CONTINGENT DEFERRED SALES CHARGE IS DEDUCTED)
- ----------------------------------------------------------------------------------------------------------------------------------
1 YEAR TO 5 YEARS TO 10 YEARS TO LIFE OF FUND DATE FUND
- ----------------------------------------------------------------------------------------------------------------------------------
12/31/98 12/31/98 TO 12/31/98 12/31/98 EFFECTIVE
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization % % % % 9/21/88
- ----------------------------------------------------------------------------------------------------------------------------------
Alger American Growth 1/9/89
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth 10/9/86
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income 9/19/85
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas 1/28/87
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 8/27/92
- ----------------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund 1/3/95
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Growth 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth 3/18/96
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth 5/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Managed 12/12/85
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Bond 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street International 11/1/91
- ----------------------------------------------------------------------------------------------------------------------------------
Market Street Money Market 2/24/84
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. 5/8/92
- ----------------------------------------------------------------------------------------------------------------------------------
Strong Growth Fund II 1/1/97
- ----------------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond 9/1/89
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Value
- ----------------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
50
<PAGE> 56
<TABLE>
<S> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Equity
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities
- ----------------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company
- ----------------------------------------------------------------------------------------------------------------------------------
Neuberger & Berman Partners
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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.
DISTRIBUTION OF THE CONTRACTS
The principal underwriter for the contracts is ESI, which is an
SEC-registered broker-dealer firm and 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 services. The maximum commission payable for selling the
Contracts will be 6.5%.
INSURANCE MARKETPLACE STANDARDS ASSOCIATION
National Life Insurance Company is a member of the Insurance Marketplace
Standards Association ("IMSA"), and as such may include the IMSA logo and
information about IMSA membership in its advertisements. Companies that belong
to IMSA subscribe to a set of ethical standards covering the various aspects of
sales and service for individually sold life insurance and annuities.
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.
PREPARING FOR YEAR 2000
Many computer systems were designed using only two digits to designate
years. These systems may not be able to distinguish the year 2000 from the year
1900. Like all financial services providers, National Life utilizes computer
systems that may be effected by Year 2000 transition issues, and National Life
relies on service providers, including the Funds, that also may be affected.
National Life has developed, and is in the process of implementing, a Year 2000
transition plan, and is confirming that its service providers are also so
engaged. The resources that are being devoted to this effort are substantial. It
is difficult to predict with precision whether the amount of resources
ultimately devoted, or the outcome of these efforts, will have any negative
impact on National Life. However, as of the date of this prospectus, it is not
anticipated that any Policy Owners will experience negative effects on their
investment, or on the services provided in connection therewith, as a result of
Year 2000 transition implementation. National Life currently anticipates that
its computer systems will be
51
<PAGE> 57
Year 2000 compliant on or about January 1, 1999, but there can be no assurance
that National Life will be successful, or that interaction with other service
providers will not impair National Life's services at that time.
OWNER INQUIRIES
Owner inquiries may be directed to National Life Insurance Company by
writing to us at National Life Drive, Montpelier, Vermont 05604, or calling
1-800-537-7003.
LEGAL PROCEEDINGS
In recent years life insurance companies have been named as defendants in
class action lawsuits relating to life insurance pricing and sales practices.
During 1998, National Life settled a group of class action lawsuits of this
nature. While the ultimate cost of the settlement is not yet known, National
Life set aside a reserve during 1998 of $40.6 million to account for the cost of
the settlement of these cases. National Life is a party to ordinary routine
litigation incidental to the business, none of which is expected to have a
material adverse effect upon its ability to meet its obligations under the
Contracts. ESI is not engaged in any litigation of any material nature.
52
<PAGE> 58
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION
<TABLE>
<S> <C>
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.
Tax Status of the Policy....................................
Distribution of the Contracts...............................
Safekeeping of Account Assets...............................
State Regulation............................................
Records and Reports.........................................
Legal Matters...............................................
Experts.....................................................
Other Information...........................................
Financial Statements:
National Life:
1998-1997 Financial Statements.....................F-1
National Variable Annuity Account II:
1998-1997 Financial Statements
</TABLE>
53
<PAGE> 59
PART B
STATEMENT OF ADDITIONAL INFORMATION
<PAGE> 60
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> 61
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> 62
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 Sentinel Advantage Variable Annuity
Contract ("Contract") offered by National Life Insurance Company. You may obtain
a copy of the Prospectus dated May 1, 1999 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 May 1, 1999
1
<PAGE> 63
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..................
Tax Status of the Policy........................................................
Distribution of the Contracts ..................................................
Safekeeping of Account Assets...................................................
State Regulation................................................................
Records and Reports.............................................................
Legal Matters...................................................................
Experts
Other Information...............................................................
Financial Statements
National Life:
1998-1997 Financial Statements................................................
National Variable Annuity Account II:
1998-1997 Financial Statements................................................
2
<PAGE> 64
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.
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> 65
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, or income other than investment income, 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), and exclusive of income other than investment
income 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> 66
depreciation, and exclusive of income other than
investment income) 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, and exclusive
of income other than investment income) 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,
1998 was ____%,and the effective yield for that Subaccount as of the same date
was ____%. These yields were calculated based on the performance of the Market
Street Money Market Portfolio for the seven days ended December 31, 1998, 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> 67
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.
Total Returns
6
<PAGE> 68
From time to time, sales literature or advertisements may also quote
total returns for periods after or prior to the date the Variable Account
commenced operations. For periods prior to the date the Variable Account
commenced operations, 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.
A. Standardized Average Annual Total Returns
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.
Standardized Average Annual Total Return is calculated using
Subaccount unit values which we calculate on each Valuation Day based on the
performance of the Subaccount's underlying fund, the deductions for the
Mortality and Expense Risk Charge, the deductions for the asset-based
Administration Charge and the policy fee. 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.
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> 69
Such average annual total return information for the Subaccounts is set
forth in the Prospectus.
B. Other Total Returns
Nonstandardized Subaccount Average Annual Total Return. From time to
time, sales literature or advertisements may also quote nonstandardized average
annual total returns for the Subaccounts that do not reflect the CDSC. 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.
Cumulative Subaccount Total Return. 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.
Adjusted Historic Fund Performance. Sales literature or
advertisements may quote nonstandardized "adjusted" total returns for the Funds
since their inception reduced by some or all of the fees and charges under the
Policy. Such adjusted historic fund performance includes data that precedes the
inception dates of the Subaccounts. This data is designed to show the
performance that would have resulted if the Policy had been in existence during
that time.
When the standard performance data for the Subaccounts is available,
nonstandardized Subaccount and adjusted historic Fund performance data will be
disclosed together with the standard performance data for the required periods.
The Funds have provided the total return information, which includes
the adjusted historic Fund total return information used to calculate the
adjusted historic total returns of the Funds 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.,
Strong Variable Insurance Funds, Inc. , American Century Investment Management,
Inc., Neuberger & Berman Advisers Management Trust, J. P. Morgan Series Trust II
and Goldman Sachs Variable Insurance Trust, are not affiliated with us.
Such adjusted historic total return information for the Funds is set
forth in the Prospectus.
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> 70
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.
ESI, a wholly-owned subsidiary of the Company and a member of the National
Association Securities, Inc. ESI also serves as principal underwriter of the
National Variable Life Insurance Account and the Life of the Southwest LSW
Variable Annuity Account I, which are unit investment trusts registered under
the Investment Company Act of 1940. 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 ESI will have executed Selling Agreements with ESI. As principal
underwriter of the Variable Accounts, ESI received and retained underwriting
commissions of _____ in 1998.
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 Michele S. Gatto, Senior Vice President
& General Counsel of National Life. Sutherland, Asbill & Brennan LLP
9
<PAGE> 71
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, 1998 and 1997, and the financial statements of the
Variable Account as of and for the years ended December 31, 1998 and 1997, which
are included in this Statement of Additional Information and in the registration
statement, have been audited by PricewaterhouseCoopers 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, 1998 and 1997, 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> 72
PART C
OTHER INFORMATION
<PAGE> 73
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, 1998 and 1997.
Consolidated Statements of Operations and Policyholder's
Equity (GAAP basis) for the years ended December 31, 1998
and 1997.
Consolidated Statements of Cash Flows (GAAP Basis) for the
years ended December 31, 1998 and 1997.
Notes to Consolidated Financial Statements
Independent Auditor's Report.
National Variable Annuity Account II
Independent Auditor's Report
Statement of Assets
Statement of Operations
Statement of Changes in Net Assets
Notes to Financial Statement
(b) Exhibits
(1) Resolution of the Depositor's Board of
Directors authorizing the establishment of
the Registrant.(1)
(2) Not Applicable
(3) Distribution Agreement between the Variable
Account/Registrant and Principal
Underwriter (2)
(4) (a) The form of the variable annuity
contract (2)
(b) Enhanced Death Benefit Rider (2)
(5) Variable Annuity Application (2)
(6) Articles of Incorporation and By-Laws of
Depositor (3).
(7) Not Applicable
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<PAGE> 74
(8) (a) Participation Agreement by and
among Market Street Fund, Inc., National
Life Insurance Company and PML Securities
Company. dated January, 30, 1996 (4).
1. Form of Amendment No. 1 dated
June 20, 1997 by & among Market Street
Fund, Inc., National Life Insurance
Company, and 1717 Capital Management
(formerly PML Securities Company).
(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
(5).
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 (2).
(c) Participation Agreement by
and among The Alger American Fund, National
Life Insurance Company and Fred Alger and
Company, dated January 31, 1995 (4).
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 (2).
(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 (2).
(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 (2).
(f) Form of Participation Agreement by
and among Van Eck Worldwide Insurance Trust
and National Life Insurance Company dated
June 27, 1997 (2).
(g) Form of Participation Agreement
between National Life Insurance Company and
American Century Investment, Inc. (6).
(h) Form of Participation Agreement
between National Life Insurance Company and
Neuberger & Berman Advisers Managers
Trust (6).
(i) Form of Participation Agreement
between National Life Insurance Company and
J. P. Morgan Series Trust II (6).
(j) Form of Participation Agreement
between National Life Insurance Company and
Goldman Sachs Variable Insurance
Trust (6).
(9) Opinion and consent of Michele S. Gatto,
Senior Vice President & General Counsel of
National Life Insurance Company.
(10) (a) Consent of Sutherland, Asbill &
Brennan, L.L.P. (7)
(b) Consent of Price Waterhouse
LLP. (7)
(11) Not Applicable.
(12) Not Applicable.
(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
(1) 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> 75
(2) Incorporated herein by reference to Pre-Effective Amendment No. 2 to the
Form S-6 Registration Statement (File No. 333-19583) for National
Variable Annuity Account II filed May 28, 1997.
(3) Incorporated herein by reference to the to the Pre-Effective Amendment
No. 2 to the Form S-6 Registration Statement (File No. 333-67003) for
National Variable Life Insurance Account (COLI) filed on February 11,
1999.
(4) 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.
(5) 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.
(6) Incorporated herein by reference to Pre-Effective Amendment No. 1 to the
Form S-6 Registration Statement filed April 16, 1998 (File No.
333-44723), Accession No. 950133-98-1468
(7) To be filed by Amendment
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
Earle H. Harbison, Jr. Director
Harbison Corporation
8112 Maryland Avenue, Suite 250
St. Louis, MO 63105
</TABLE>
C-3
<PAGE> 76
<TABLE>
<S> <C>
A. Gary Shilling Director
A. Gary Shilling & Co., Inc.
500 Morris Avenue
Springfield, New Jersey 07081-1020
James A. Mallon Executive Vice President
& Chief Marketing Officer
William A. Smith Executive Vice President
& Chief Financial Officer
Rodney A. Buck Senior Vice President & Chief
Investment Officer
Gregory H. Doremus Senior Vice President-
New Business & Customer
Services
Michele S. Gatto Senior Vice President &
General Counsel
Charles C. Kittredge Senior Vice President-Sales
& Distribution
Michael A. Tahan Senior Vice President & Chief
Information Officer
</TABLE>
*Unless otherwise indicated, the principal business address is National Life
Drive, Montpelier, Vermont 05604.
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<PAGE> 77
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
As of January 31, 1999, 1,220 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
7.1 Indemnification.
(a) The Corporation shall indemnify and hold harmless any officer,
director, employee or agent of the Corporation to the fullest extent
permitted under Title 11A, Chapter 8, Subchapter 5 of the Vermont
Statutes Annotated, as the same may be amended from time to time. Any
repeal or modification of this Section 7.1 or of Title 11A, Chapter 8,
Subchapter 5 of the Vermont Statutes Annotated shall not adversely
affect any right of indemnification of any officer, director or
employee of the Corporation existing at any time prior to such repeal
or modification. Provided, however, that the Corporation shall not be
required to indemnify a person in connection with a proceeding
initiated by such person, including a counterclaim or crossclaim,
unless the proceeding was authorized by the Board of Directors.
(b) The Corporation may pay or reimburse the reasonable expenses
incurred in defending any proceeding in advance of its final
disposition if the Corporation has received in advance an undertaking
by the person receiving such payment or reimbursement to repay all
amounts advanced if it should be ultimately determined that he or she
is not entitled to be indemnified under this article or otherwise. The
Corporation may require security for any such undertaking.
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
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<PAGE> 78
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, President & Director
John M. Grab, Jr. Senior Vice President & Chief Financial Officer
Stephen A. Englese Vice President - Financial Products
Budd A. Shedaker Assistant Vice President - Communications
Greg D. Teese Vice President - Compliance
D. Russell Morgan Counsel
Sharon E. Bernard Treasurer & Controller
Lisa A. Pettrey Secretary
JoAnn K. Morissette Assistant Secretary
Thomas H. MacLeay Director
Rodney A. Buck Director
Patrick E. Welch 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
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<PAGE> 79
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.
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<PAGE> 80
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 Post-Effective Amendment No. 2 to the
Registration Statement to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Montpelier and the State of Vermont, on the
25th day of February, 1999.
NATIONAL VARIABLE ANNUITY ACCOUNT II
(Registrant)
By: NATIONAL LIFE INSURANCE COMPANY
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Christine M. Bilbrey Patrick E. Welch, Chairman
Assistant Secretary of the Board and Chief Executive
Officer
By: NATIONAL LIFE INSURANCE COMPANY
(Depositor)
Attest: /s/ Christine M. Bilbrey By: /s/ Patrick E. Welch
--------------------------- ---------------------------------
Christine M. Bilbrey Patrick E. Welch, Chairman
Assistant Secretary of the Board and Chief Executive
Officer
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, this Post
Effective Amendment No.2 to the 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 Feb. 25, 1999
- ----------------------------- and Chief Executive Officer,
Patrick E. Welch and Director
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<PAGE> 81
/s/ Thomas H. MacLeay President & Chief Operating Feb. 25, 1999
- ----------------------------- Officer, and Director
Thomas H. MacLeay
/s/ William A. Smith Executive Vice President & Feb. 25, 1999
- ----------------------------- Chief Financial Officer
William A. Smith
/s/ Robert E. Boardman* Director
- -----------------------------
Robert E. Boardman
/s/ Earle H. Harbison, Jr.* Director
- -----------------------------
Earle H. Harbison, Jr.
/s/ A. Gary Shilling* Director
- -----------------------------
A. Gary Shilling
C-9
<PAGE> 82
*By /s/ Patrick E. Welch Date: February 25, 1999
----------------------
Patrick E. Welch
Pursuant to Power of Attorney
<PAGE> 1
EXHIBIT (b)(8)(a)(1)
Amendment No.1, dated June 30, 1997,
to the
Participation Agreement
dated January 30, 1996
By and Among
MARKET STREET FUND, INC.
and
NATIONAL LIFE INSURANCE COMPANY
and
1717 CAPITAL MANAGEMENT COMPANY
(formerly PML SECURITIES COMPANY)
This Amendment No. 1, dated as of June 30, 1997, to the Participation
Agreement dated January 30, 1996 (the "Participation Agreement"), by and among
NATIONAL LIFE INSURANCE COMPANY, a Vermont insurance company (the "Company"),
the MARKET STREET FUND, INC., an open-end diversified investment company
organized under the laws of the State of Maryland (the "Fund") and 1717 CAPITAL
MANAGEMENT COMPANY (formerly PML SECURITIES COMPANY), a Delaware corporation
(the "Underwriter"), is made and entered into as of June 30, 1997.
WHEREAS, the Company has formed a new separate account which is to offer
variable annuity contracts, such separate account being known as "National
Variable Annuity Account II" (the "New Separate Account"); and
WHEREAS, the Company desires to purchase shares of the Portfolios on
behalf of the New Separate Account to fund variable annuity contracts, an the
Fund and the Underwriter are willing to to sell such shares to the Company for
such purpose;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree to amend the Participation Agreement as
follows:
1. Definitions. Unless otherwise specifically provided for herein, all
capitalized terms defined in the Participation Agreement shall have the same
meanings when used herein as in the Participation Agreement. The definition of
the term "Policy" is hereby broadened to include the variable annuity contracts
to be offered by the New Separate Account, as well as the flexible premium
adjustable benefit variable life insurance policies offered by National Variable
Life Insurance Account, and the definition of the term "Account" shall mean,
collectively, National Variable Life Insurance Account and the New Separate
Account.
2. Sale of Fund Shares. The Underwriter agrees to sell shares of the Fund,
and the Fund agrees to make available its shares for such sale, to the Company
on behalf of the New Separate Account, on the same terms and conditions as the
Underwriter currently sells shares of the Fund, and the Fund currently makes its
shares available for such sale to the Company on behalf of the National Variable
Life Insurance Account.
<PAGE> 2
3. Section 2.2 is hereby amended to add the words "or annuity contracts"
after the word "policies" in the first sentence thereof.
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 behalf by
its duly authorized representative as of the date set forth above.
NATIONAL LIFE INSURANCE COMPANY
---------------------------------------------
by: Margaret K. Arthur, Senior Vice President
MARKET STREET FUND, INC.
--------------------------
by:
1717 CAPITAL MANAGEMENT COMPANY
---------------------------
by:
<PAGE> 1
EXHIBIT (b)(8)(b)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND
FIDELITY DISTRIBUTORS CORPORATION
and
VERMONT LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this 1st day of August, 1989 by
and among VERMONT 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 C hereto as may be amended from time to time
(each such account hereinafter referred to as the "Account"), and the VARIABLE
INSURANCE PRODUCTS FUND, an unincorporated business trust organized under the
laws of the State of Vermont (hereinafter the "Fund") and FIDELITY DISTRIBUTORS
CORPORATION (hereinafter the "Underwriter"), a Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
substantially identical to this Agreement (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing the interest in
a particular managed portfolio of securities and other assets; and
-1-
<PAGE> 2
WHEREAS, the Fund has obtained an order from the Securities and
Exchange Commission, dated October 15, 1985 (File No. 812-6102), granting
Participating Insurance Companies and variable annuity and variable life
insurance separate accounts exemptions from the provisions of sections 9(a),
13(a), 15(a), and 15(b) of the Investment Company Act of 1940, as amended,
(hereinafter the "1940 Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15)
thereunder, to the extent necessary to permit shares of the Fund to be sold to
and held by variable annuity and variable life insurance separate accounts of
both affiliated and unaffiliated life insurance companies (hereinafter the
"Shared Funding Exemptive Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is
duly registered as an investment adviser under the federal Investment Advisers
Act of 1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing
segregated asset account, established by resolution of the Board of Directors of
the Company on the date shown for such Account on Schedule C hereto, to set
aside and invest assets attributable to the aforesaid variable life insurance
contracts; and
WHEREAS, the Company has registered or will register each Account as
a unit investment trust under the 1940 Act; and
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act
-2-
<PAGE> 3
of 1934, as amended, (hereinafter the "1934 Act"), and is a member in good
standing of the National Association of Securities Dealers, Inc. (hereinafter
"NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life insurance
contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the
Company, the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of
the Fund which each Account orders, executing such orders on a daily basis at
the net asset value next computed after receipt by the Fund or its designee of
the order for the shares of the Fund. For purposes of this Section 1.1, the
Company shall be the designee of the Fund for receipt of such orders from each
Account and receipt by such designee shall constitute receipt by the Fund;
provided that the Fund receives notice of such order by 9:30 a.m. Boston time on
the next following Business Day. "Business Day" shall mean any day on which the
New York Stock Exchange is open for trading and on which the Fund calculates its
net asset value pursuant to the rules of the Securities and Exchange Commission.
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset
-3-
<PAGE> 4
value pursuant to rules of the Securities and Exchange Commission and the Fund
shall use reasonable efforts to calculate such net asset value on each day which
the New York Stock Exchange is open for trading. Notwithstanding the foregoing,
the Board of Trustees of the Fund (hereinafter the "Trustees") may refuse to
sell shares of any Portfolio to any person, or suspend or terminate the offering
of shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Trustees
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the designee of the Fund for receipt of
requests for redemption from each Account and receipt by such designee shall
constitute receipt by the Fund; provided that the Fund receives notice of such
request for redemption on the next following Business Day.
-4-
<PAGE> 5
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable life insurance contracts with the form number(s)
which are listed on Schedule A attached hereto and incorporated herein by this
reference, as such Schedule A may be amended from time to time hereafter by
mutual written agreement of all the parties hereto, (the "Contracts") shall be
invested in the Fund, in such other Funds advised by the Adviser as may be
mutually agreed to in writing by the parties hereto, or in the Company's general
account, provided that such amounts may also be invested in an investment
company other than the Fund if (a) such other investment company, or series
thereof, has investment objectives or policies that are substantially different
from the investment objectives and policies of all the Portfolios of the Fund;
or (b) the Company gives the Fund and the Underwriter 45 days written notice of
its intention to make such other investment company available as a funding
vehicle for the Contracts; or (c) such other investment company was available as
a funding vehicle for the Contracts prior to the date of this Agreement and the
Company so informs the Fund and Underwriter prior to their signing this
Agreement; or (d) the Fund or Underwriter consents to the use of such other
investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the provisions
of Section 1.1 hereof. Payment shall be in federal funds transmitted by wire.
For purpose of 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.
-5-
<PAGE> 6
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 the
Accounts. 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 Funds' shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10.The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be issued and
sold in compliance in all material respects with all applicable Federal and
State laws and that the sale of the Contracts shall comply in all material
respects with state insurance suitability requirements. The Company further
represents and warrants that it is an insurance company duly organized and in
good standing under applicable law and that it has legally and validly
-6-
<PAGE> 7
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 3855-59 of the Vermont Insurance Code and has
registered or, prior to any issuance or sale of the Contracts, will register
each Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Vermont and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon having a reasonable basis
for believing that it has ceased to so qualify or that it might not so qualify
in the future.
2.4. The Company represents that the Contracts are currently treated
as life insurance contracts, under applicable provisions of the Code, and that
it will make every effort to maintain such treatment and that it will notify the
Fund and the Underwriter immediately upon having a reasonable basis for
-7-
<PAGE> 8
believing that the Contracts have ceased to be so treated or that they might not
be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-l under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-l Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-1, the Fund undertakes to have a
board of trustees, a majority of whom are not interested persons of the Fund,
formulate and approve any plan under Rule 12b-l to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of
its operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Vermont and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Vermont to the extent required to perform this
Agreement.
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Vermont and all applicable state and
federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
-8-
<PAGE> 9
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 the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Vermont and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of
their directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Section 17g-(l) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund are and shall continue to be at all
tines covered by a blanket fidelity bond or similar coverage for the benefit of
the Fund, in an amount not less than the minimal coverage as required currently
by Section 270.17g-l of the 1940 Act or related provisions as may be promulgated
from time to time. The aforesaid Bond shall include coverage for larceny and
embezzlement and shall be issued by a reputable bonding company.
-9-
<PAGE> 10
2.12. The Company represents and warrants that it will not purchase
Fund shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal Internal Revenue Code, as may be
amended. The company may purchase Fund shares with Account assets derived from
any sale of a Contract to any other type of tax-advantaged employee benefit
plan; provided however that such plan has no more than 500 employees who are
eligible to participate at the time of the first such purchase hereunder by the
Company of Fund shares derived from the sale of such Contract.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
3.2. The Fund's prospectus shall state that the Statement of
Additional Information for the Fund is available from the Underwriter (or in the
Fund's discretion, the Prospectus shall state that such Statement is available
from the Fund), and the Underwriter (or the Fund), at its expense, shall print
and provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement
-10-
<PAGE> 11
3.3. The Fund, at its expense, shall provide the Company with copies
of its proxy material, reports to stockholders and other communications to
stockholders 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 the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such portfolio
for which instructions have been received:
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the Investment Company Act to require pass-through voting
privileges for variable contract owners. The Company reserves the right to vote
Fund shares held in any segregated asset account in its own right, to the extent
permitted by law. Participating Insurance Companies shall be responsible for
assuring that each of their separate accounts participating in the Fund
calculates voting privileges in a manner consistent with the standards set forth
on Schedule B attached hereto and incorporated herein by this reference, which
standards will also be provided to the other Participating Insurance Companies.
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well as
with Sections 16(a) and, if and when applicable, 16(b).
-11-
<PAGE> 12
Further, the Fund will act in accordance with the Securities and Exchange
Commission's interpretation of the requirements of Section 16(a) with respect to
periodic elections of trustees and with whatever rules the Commission may
promulgate with respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished, to
the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee object to such use within fifteen Business
Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee object to such use
within fifteen Business Days after receipt of such material.
-12-
<PAGE> 13
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, solicitations for voting instructions, sales literature
and other promotional materials, applications for exemptions, requests for no
action letters, and all amendments to any of the above, that relate to the
Contracts or each Account, contemporaneously with the filing of such document
with the Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
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<PAGE> 14
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan pursuant to Rule 12b-l to finance distribution
expenses, then the Underwriter may make payments to the Company or to the
underwriter for the Contracts if and in amounts agreed to by the Underwriter in
writing and such payments will be made out of existing fees otherwise payable to
the Underwriter, past profits of the Underwriter or other resources available to
the Underwriter. No such payments shall be made directly by the Fund. Currently,
no such payments are contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
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<PAGE> 15
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder. Without limiting
the scope of the foregoing, the Fund will at all times comply with Section
817(h) of the Code and Treasury Regulation Section 1.817-5 relating to the
diversification requirements for variable annuity, endowment, or life insurance
contracts and any amendments or other modifications to such Section or
Regulations.
ARTICLE VII. Potential Conflicts
7.1. The Board of Trustees of the Fund (the "Board") will monitor the
Fund for the existence of any material irreconcilable conflict between the
interests of the contract owners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
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<PAGE> 16
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a decision
by an insurer to disregard the voting instructions of contract owners. The Board
shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive Order, by providing
the Board with all information reasonably necessary for the Board to consider
any issues raised. This includes, but is not limited to, an obligation by the
Company to inform the Board whenever contract owner voting instructions are
disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a vote
of all affected contract owners and, as appropriate,
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<PAGE> 17
segregating the assets of any appropriate group (i.e., annuity contract owners,
life insurance contract owners, or variable contract owners of one or more
Participating Insurance Companies) that votes in favor of such segregation, or
offering to the affected contract owners the option of making such a change; and
(2), establishing a new registered management investment company or managed
separate account.
7.4. If a material irreconcilable conflict arises because of a
decision by the Company to disregard contract owner voting instructions and that
decision represents a minority position or would preclude a majority vote, the
Company may be required, at the Fund's election, to withdraw each Account's
investment in the Fund and terminate this Agreement; provided, however that such
withdrawal and termination shall be limited to the extent required by the
foregoing material irreconcilable conflict as determined by a majority of the
disinterested members of the Board. Any such withdrawal and termination must
take place within six (6) months after the Fund gives written notice that this
provision is being implemented, and until the end of that six month period the
Underwriter and Fund shall continue to accept and implement orders by the
Company for the purchase (and redemption) of shares of the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw each Account's investment in the Fund and terminate this Agreement
within six months after the Board informs the Company in writing that it has
determined that such decision has created an irreconcilable material conflict;
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Until the
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end of the foregoing six month period, the Underwriter and Fund shall continue
to accept and implement orders by the Company for the purchase (and redemption)
of shares of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but in
no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an offer to do so has been declined by vote
of a majority of Contract owners materially adversely affected by the
irreconcilable material conflict. In the event that the Board determines that
any proposed action does not adequately remedy any irreconcilable material
conflict, then the Company will withdraw each Account's investment in the Fund
and terminate this Agreement within six (6) months after the Board informs the
Company in writing of the foregoing determination, provided, however, that such
withdrawal and termination shall be limited to the extent required by any such
material irreconcilable conflict as determined by a majority of the
disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3,
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<PAGE> 19
7.4, and 7.5 of this Agreement shall continue in effect only to the extent
that terms and conditions substantially identical to such Sections are
contained in such Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the Fund
and each of its Trustees and officers and each person, if any, who controls the
Fund within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.1) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Company) or litigation (including legal and other
expenses), to which the Indemnified Parties may become subject under any
statute, regulation, at common law or otherwise, insofar as such losses, claims,
damages, liabilities or expenses (or actions in respect thereof) or settlements
are related to the sale or acquisition of the Fund's shares or the Contracts
and:
(i) arise out of or are based upon any untrue statements or
alleged untrue statements of any material fact contained in the
Registration Statement or prospectus for the Contracts or
contained in the Contracts or sales literature for the Contracts
(or any amendment or supplement to any of the foregoing), or arise
out of or are based upon the omission or the alleged omission to
state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, provided
that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission
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<PAGE> 20
or such alleged statement or omission was made in reliance upon
and in conformity with information furnished to the Company by
or on behalf of the Fund for use in the Registration Statement
or prospectus for the Contracts or in the Contracts or sales
literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares; or
(ii) arise out of or as a result of statements or
representations (other than statements or representations
contained in the Registration Statement, prospectus or sales
literature of the Fund not supplied by the Company, or persons
under its control) or wrongful conduct of the Company or persons
under its control, with respect to the sale or distribution of
the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue
statement of a material fact contained in a Registration
Statement, prospectus, or sales literature of the Fund or any
amendment thereof or supplement thereto or the omission or
alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading if such a statement or omission was made in reliance
upon information furnished to the Fund by or on behalf of the
Company: or
(iv) arise as a result of any failure by the Company to provide
the services and furnish the materials under the terms of this
Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this
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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 losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations or duties under this Agreement or to
the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel
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<PAGE> 22
retained by it, and the Company will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.1(d). The Indemnified Parties will promptly notify the Company of
the commencement of any litigation or proceedings against them in connection
with the issuance or sale of the Fund Shares or the Contracts or the operation
of the Fund.
8.2. Indemnification by the Underwriter
8.2 (a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the
Registration Statement or prospectus or sales literature of the
Fund (or any amendment or supplement to any of the foregoing), or
arise out of or are based upon the omission or the alleged
omission to state therein a material fact required to be stated
therein or necessary to make the statements therein not
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<PAGE> 23
misleading, provided that this agreement to indemnify shall not apply as to any
Indemnified Party if such statement or omission or such alleged statement or
omission was made in reliance upon and in conformity with information furnished
to the Underwriter or Fund by or on behalf of the Company for use in the
Registration Statement or prospectus for the Fund or in sales literature (or any
amendment or supplement) or otherwise for use in connection with the sale of the
Contracts or Fund shares: or
(ii) arise out of or as a result of statements or representations (other than
statements or representations contained in the Registration Statement,
prospectus or sales literature for the Contracts not supplied by the
Underwriter or persons under its control) or wrongful conduct of the Fund,
Adviser or Underwriter or persons under their control, with respect to the sale
or distribution of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or sales
literature covering the Contracts, or any amendment thereof or supplement
thereto, or the omission or alleged omission to state therein a material fact
required to be stated therein or necessary to make the statement or statements
therein not misleading, if such statement or omission was made in reliance upon
information furnished to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the services and
furnish the materials under the terms of this
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<PAGE> 24
Agreement (including a failure, whether unintentional or in good
faith or otherwise, to comply with the diversification
requirements specified in Article VI of this Agreement); or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this
indemnification provision with respect to any losses, claims, damages,
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations and duties
under this Agreement or to the Company or each Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this
indemnification provision with respect to any claim made against an Indemnified
Party unless such Indemnified Party shall have 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
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provision. In case any such action is brought against the Indemnified Parties,
the Underwriter will be entitled to participate, at its own expense, in the
defense thereof. The Underwriter also shall be entitled to assume the defense
thereof, with counsel satisfactory to the party named in the action. After
notice from the Underwriter to such party of the Underwriter's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Underwriter will not
be liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company
and each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any statute,
at common law or otherwise, insofar as such losses, claims, damages, liabilities
or expenses (or actions in respect thereof) or settlements result from the gross
negligence, bad faith or willful misconduct of the Trustees any member thereof,
are related to the operations of the Fund and:
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<PAGE> 26
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
Agreement (including a failure to comply with the
diversification requirements specified in Article VI of this
Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this
Agreement or arise out of or result from any other material
breach of this Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
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
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall net relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
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account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Fund will be entitled to participate, at
its own expense, in the defense thereof. The Fund also shall be entitled to
assume the defense thereof, with counsel satisfactory to the party named in the
action. After notice from the Fund to such party of the Fund's election to
assume the defense thereof, the Indemnified Party shall bear the fees and
expenses of any additional counsel retained by it, and the Fund will not be
liable to such party under this Agreement for any legal or other expenses
subsequently incurred by such party independently in connection with the defense
thereof other than reasonable costs of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, the operation of each Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
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ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written
notice to the other parties; provided, however such notice shall
not be given earlier than one year following the date of this
Agreement; or
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements
of the Contracts as determined by the Company, provided however,
that such termination shall apply only to the Portfolio(s) not
reasonably available. Prompt notice of the election to terminate
for such cause shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal
administrative proceedings are instituted against the Company by
the National Association of Securities Dealers, Inc. ("NASD"),
the Securities and Exchange Commission, the Insurance
Commissioner or any other regulatory body regarding the
Company's duties under this Agreement or related to the sale of
the Contracts, the operation of any Account, or the purchase of
the Fund shares, provided, however, that the Fund determines in
its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect
upon the ability of the Company to perform its obligations under
this Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
Underwriter by the NASD, the Securities and Exchange Commission,
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<PAGE> 29
or any state securities or insurance department or any other regulatory body,
provided, however, that the Company determines in its sole judgment exercised in
good faith, that any such administrative proceedings will have a material
adverse effect upon the ability of the Fund or Underwriter to perform its
obligations under this Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract owners
having an interest in such Account (or any subaccount) to substitute the shares
of another investment company for the corresponding Portfolio shares of the Fund
in accordance with the terms of the Contracts for which those Portfolio shares
had been selected to serve as the underlying investment media. The Company will
give 30 days' prior written notice to the Fund of the date of any proposed vote
to replace the Fund's shares; or
(f) at the option of the Company, in the event 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; or
(g) at the option of the Company, if the Fund ceases to qualify as a Regulated
Investment Company under Subchapter M of the Code or under any successor or
similar provision, or if the Company reasonably believes that the Fund may fail
to so qualify; or
(h) at the option of the Company, if the Fund fails to meet the diversification
requirements specified in Article VI hereof; or
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(i) at the option of either the Fund or the Underwriter, if (1) the Fund or the
Underwriter, respectively, shall determine, in their sole judgment reasonably
exercised in good faith, that the Company has suffered a material adverse change
in its business or financial condition or is the subject of material adverse
publicity and such material adverse change or material adverse publicity will
have a material adverse impact upon the business and operations of either the
Fund or the Underwriter, (2) the Fund or the Underwriter shall notify the
Company in writing of such determination and its intent to terminate this
Agreement, and (3) after considering the actions taken by the Company and any
other changes in circumstances since the giving of such notice, such
determination of the Fund or the Underwriter shall continue to apply on the
sixtieth (60th) day following the giving of such notice, which sixtieth day
shall be the effective date of termination; or
(j) at the option of the Company, if (1) the Company shall determine, in its
sole judgment reasonably exercised in good faith, that either the Fund or the
Underwriter has suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such material
adverse change or material adverse publicity will have a material adverse impact
upon the business and operations of the Company,
(2) the Company shall notify the Fund and the Underwriter in writing of such
determination and its intent to terminate the Agreement, and (3) after
considering the actions taken by the Fund and/or the Underwriter and any other
changes in
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circumstances since the giving of such notice, such
determination shall continue to apply on the sixtieth (60th) day
following the giving of such notice, which sixtieth day shall be
the effective date of termination; or
(k) at the option of either the Fund or the Underwriter, if the
Company gives the Fund and the Underwriter the written notice
specified in Section 1.6(b) hereof and at the time such notice
was given there was no notice of termination outstanding under
any other provision of this Agreement; provided, however any
termination under this Section 10.1(k) shall be effective forty
five (45) days after the notice specified in Section 1.6(b) was
given.
10.2. It is understood and agreed that the right of any party hereto
to terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. Notice Requirement. No termination of this Agreement shall
be effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the
provisions of Article VII, or the provision of Section 10.1(a),
10.1(i), 10.1(j) or 10.1(k) of this Agreement, such prior
written notice shall be given in advance of the effective date
of termination as required by such provisions; and
(b) in the event that any termination is based upon the
provisions of Section 10.1(c) or 10.1(d) of this Agreement, such
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prior written notice shall be given at least ninety (90) days
before the effective date of termination.
10.4. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in each Account) except (i) as necessary to implement Contract Owner initiated
transactions, or (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption"). Upon request, the Company will promptly
furnish to the Fund and the Underwriter the opinion of counsel for the Company
(which counsel shall be reasonably satisfactory to the Fund and the Underwriter)
to the effect that any redemption pursuant to clause (ii) above is a Legally
Required Redemption. Furthermore, except in cases where permitted under the
terms of the Contracts, the Company shall not prevent Contract Owners from
allocating payments to a Portfolio that was otherwise available under the
Contracts without first giving the Fund or the Underwriter 90 days notice of its
intention to do so.
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<PAGE> 33
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Vermont Life Insurance Company
National Life Drive
Montpelier, VT 05604
Attention: Registered Insurance Contracts
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1. All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, 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.
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<PAGE> 34
12.3 The captions in this Agreement are included for convenience
of reference only and in no way define or delineate any of the provisions hereof
or otherwise affect their construction or effect.
12.4 This Agreement may be executed simultaneously in two or more
counterparts, each of which taken together shall constitute one and the same
instrument.
12.5 If any provision of this Agreement shall be held or made invalid
by a court decision, statute, rule or otherwise, the remainder of the Agreement
shall not be affected thereby.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators) and
shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain whether the variable life insurance operations of the Company are
being conducted in a manner consistent with the California Variable Life
Insurance Regulations and any other applicable law or regulations.
12.7 The Fund and Underwriter agree that to the extent any advisory
or other fees received by the Fund, the Underwriter or the Adviser are
determined to be unlawful in legal or administrative proceedings under the 1973
NAIC model variable life insurance regulation in the states of California,
Colorado, Maryland or Michigan, the
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<PAGE> 35
Underwriter shall indemnify and reimburse the Company for any out of pocket
expenses and actual damages the Company has incurred as a result of any such
proceeding; provided however that the provisions of Section 8.2(b) of this and
8.2(c) shall apply to such indemnification and reimbursement obligation. Such
indemnification and reimbursement obligation shall be in addition to any other
indemnification and reimbursement obligations of the Fund and/or the Underwriter
under this Agreement.
12.8. 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.
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.
Company:
VERMONT LIFE INSURANCE COMPANY
By its authorized officer,
SEAL By: /s/ RICHARD J. BORDA
---------------------------
Title: Vice Chairman
------------------------
Date: August 17, 1989
------------------------
Richard J. Borda
Fund:
VARIABLE INSURANCE PRODUCTS FUND
By its authorized officer,
SEAL By: [SIG]
---------------------------
Title: Senior Vice President
------------------------
Date: August 25, 1989
------------------------
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<PAGE> 36
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
SEAL By: [SIG]
-------------------------------
Title: President
----------------------------
Date: August 22, 1989
----------------------------
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<PAGE> 37
Schedule A
Contracts
Contract Form VL-8-86, VL-6-87
-37-
<PAGE> 38
SCHEDULE B
PROXY VOTING PROCEDURE
The following is a list of procedures and corresponding responsibilities for the
handling of proxies relating to the Fund by the Underwriter, the Fund and the
Company. The defined terms herein shall have the meanings assigned in the
Participation Agreement except that the term "Company" shall also include the
department or third party assigned by the Insurance Company to perform the steps
delineated below.
1. The number of proxy proposals is given to the Company by the Underwriter
as early as possible before the date set by the Fund for the shareholder
meeting (the "Record Date") to facilitate the establishment of tabulation
procedures. At this time the Underwriter will inform the Company of the
Record, Mailing and Meeting dates. This will be done verbally
approximately two months before meeting.
2. Promptly after the Record Date, the Company will perform a "tape run", or
other activity, which will generate the names, addresses and number of
units/shares which are attributed to each contractowner/policyholder
(the "Customer") as of the Record Date. Allowance should be made for
account adjustments made after this date that could affect the status of
the Customers' accounts as of the Record Date.
Note: The number of voting instruction cards is determined by
the activities described in Step #2. The Company will
use its best efforts to call in the number of Customers
to Fidelity, as soon as possible, but no later than two
weeks after the Record Date.
3. The Fund's Annual Report must be sent to each Customer by the Company
either before or together with the Customers' receipt of a proxy
statement. Underwriter will provide at least one copy of the last Annual
Report to the Company.
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<PAGE> 39
d. "urge buckslip" - optional, but recommended. (This is a
small, single sheet of paper that requests Customers to vote
as quickly as possible and that their vote is important. One
copy will be supplied by the Fund.)
e. cover letter - optional, supplied by Company and reviewed and
approved in advance by Fidelity Legal.
8. The above contents should be received by the Company approximately 3-5
business days before mail date. Individual in charge at Company reviews
and approves the contents of the mailing package to ensure correctness
and completeness. Copy of this approval sent to Fidelity Legal.
9. Package mailed by the Company.
* The Fund must allow at least a 15-day solicitation time to the
Company as the shareowner. (A 5-week period is recommended, but not
necessary, to receive a proper response percentage.) Solicitation
time is calculated as days from (but not including) the meeting,
counting backwards.
** If the Customers were actually the shareholders, at least 50% of the
outstanding shares must be represented and 66 2/3% of that 50% must
have voted affirmatively on the proposals to have an effective vote.
However, since the Company is the shareholder, the Customers' votes
will (except in certain limited circumstances) be used to dictate
how the Company will vote.
10. Collection and tabulation of Cards begins. Tabulation usually takes place
in another department or another vendor depending on process used. An
often used procedure is to sort Cards on arrival into vote categories of
all yes, no, or mixed replies, and to begin data entry.
* Postmarks are not generally needed. A need for postmark
information would be due to an insurance company's internal
procedure and has not been required by Fidelity in the past.
-40-
<PAGE> 40
18. Vote is verified by the Company and is sent to Fidelity Legal.
17. Company then votes its proxy in accordance with the votes received from
the Customers the morning of the meeting (except in limited circumstances
as may be otherwise required by law). A letter documenting the Company's
vote is supplied by Fidelity Legal and is sent to officer of company for
his signature. This letter is normal sent after the meeting has taken
place.
18. The Company will be required to box and archive the Cards received from
the Customers. In the event that any vote is challenged or if otherwise
necessary for legal, regulatory, or accounting purposes, Fidelity will be
permitted reasonable access to such Cards.
19. All approvals and "signing-off" may be done orally, but must always be
followed up in writing.
20. During tabulation procedures, the Fund and Company determine if a
resolicitation is required and what form that resolicitation should take,
whether it should be by a mailing, or by recorded telephone line. A
resolicitation is considered when the vote response is slow and it
appears that not enough votes would be received by the meeting date. The
meeting could be adjourned to leave enough time for the resolicitation.
A determination is made by the Company and the Fund to find the most cost
effective candidates for resolicitation. These are Customers who have not
yet voted, but whose balances are large enough to bring in the required
vote with minimal costs.
a. By mail: Fidelity Legal amends the voting instruction cards, if
necessary, and writes a resolicitation letter. The Fund supplies
these to the Company. The Company generates a mailing list etc.,
as per step 2 onward.
b. By phone: Rarely used. This must be done on a recorded line.
Fidelity Legal and the Fund will supply the necessary procedures
and script if a phone resolicitation were to be required.
2/1/88
/proxy1/
<PAGE> 41
Schedule C
Accounts
Name of Account Date of Resolution of Company's Board
which Established the Account
Vermont Variable Life Insurance Account February 5, 1985
<PAGE> 1
Exhibit (b)(8)(e)
PARTICIPATION AGREEMENT
Among
VARIABLE INSURANCE PRODUCTS FUND II
FIDELITY DISTRIBUTORS CORPORATION
and
VERMONT LIFE INSURANCE COMPANY
THIS AGREEMENT, made and entered into this 1st day of April, 1990
by and among VERMONT 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 C hereto as may be amended from
time to time (each such account hereinafter referred to as the "Account"), and
the VARIABLE INSURANCE PRODUCTS FUND II, an unincorporated business trust
organized under the laws of the Commonwealth at Massachusetts (hereinafter the
"Fund") and FIDELITY DISTRIBUTORS CORPORATION (hereinafter the "Underwriter), a
Massachusetts corporation.
WHEREAS, the Fund engages in business as an open-end management
investment company and is available to act as the investment vehicle for
separate accounts established for variable life insurance policies and variable
annuity contracts (collectively, the "Variable Insurance Products") to be
offered by insurance companies which have entered into participation agreements
substantially identical to this Agreement (hereinafter "Participating Insurance
Companies"); and
WHEREAS, the beneficial interest in the Fund is divided into several
series of shares, each designated a "Portfolio" and representing
-1-
<PAGE> 2
the interest in a particular managed portfolio of securities and other assets;
and
WHEREAS, the Fund has obtained an order from the Securities and Exchange
Commission, dated September 17, 1986 (File No. 812-6422), granting Participating
Insurance Companies and variable annuity and variable life insurance separate
accounts exemptions from the provisions of sections 9(a), 13(a), 15(a), and
15(b) of the Investment Company Act of 1940, as amended, (hereinafter the "1940
Act") and Rules 6e-2(b) (15) and 6e-3(T) (b) (15) thereunder, to the extent
necessary to permit shares of the Fund to be sold to and held by variable
annuity and variable life insurance separate accounts of both affiliated and
unaffiliated life insurance companies (hereinafter the "Shared Funding Exemptive
Order"); and
WHEREAS, the Fund is registered as an open-end management investment
company under the 1940 Act and its shares are registered under the Securities
Act of 1933, as amended (hereinafter the "1933 Act"); and
WHEREAS, Fidelity Management & Research Company (the "Adviser") is duly
registered as an investment adviser under the federal Investment Advisers Act of
1940 and any applicable state securities law; and
WHEREAS, the Company has registered or will register certain variable
life insurance contracts under the 1933 Act; and
WHEREAS, each Account is a duly organized, validly existing segregated
asset account, established by resolution of the Board of Directors of the
Company on the date shown for such Account on Schedule C hereto, to set aside
and invest assets attributable to the aforesaid variable life insurance
contracts; and
WHEREAS, the Company has registered or will register each Account as a
unit investment trust under the 1940 Act; and
-2-
<PAGE> 3
WHEREAS, the Underwriter is registered as a broker dealer with the
Securities and Exchange Commission under the Securities Exchange Act of 1934, as
amended, (hereinafter the "1934 Act"), and is a member in good standing of the
National Association of Securities Dealers, Inc. (hereinafter "NASD"); and
WHEREAS, to the extent permitted by applicable insurance laws and
regulations, the Company intends to purchase shares in the Portfolios on behalf
of each Account to fund certain of the aforesaid variable life insurance
contracts and the Underwriter is authorized to sell such shares to unit
investment trusts such as each Account at net asset value;
NOW, THEREFORE, in consideration of their mutual promises, the Company,
the Fund and the Underwriter agree as follows:
ARTICLE I. Sale of Fund Shares
1.1. The Underwriter agrees to sell to the Company those shares of the
Fund which each Account orders, executing such orders on a daily basis at the
net asset value next computed after receipt by the Fund or its designee of the
order for the shares of the Fund. For purposes of this Section 1.1, the Company
shall be the designee of the Fund for receipt of such orders from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such order by 9:30 a.m. Boston time on the next
following Business Day. "Business Day" shall mean any day on which the New York
Stock Exchange is open for trading and on which the Fund calculates its net
asset value pursuant to the rules of the Securities and Exchange Commission.
-3-
<PAGE> 4
1.2. The Fund agrees to make its shares available indefinitely for
purchase at the applicable net asset value per share by the Company and its
Accounts on those days on which the Fund calculates its net asset value pursuant
to rules of the Securities and Exchange Commission and the Fund shall use
reasonable efforts to calculate such net asset value on each day which the New
York Stock Exchange is open for trading. Notwithstanding the foregoing, the
Board of Trustees of the Fund (hereinafter the "Trustees") may refuse to sell
shares of any Portfolio to any person, or suspend or terminate the offering of
shares of any Portfolio if such action is required by law or by regulatory
authorities having jurisdiction or is, in the sole discretion of the Trustees
acting in good faith and in light of their fiduciary duties under federal and
any applicable state laws, necessary in the best interests of the shareholders
of such Portfolio.
1.3. The Fund and the Underwriter agree that shares of the Fund will
be sold only to Participating Insurance Companies and their separate accounts.
No shares of any Portfolio will be sold to the general public.
1.4. The Fund and the Underwriter will not sell Fund shares to any
insurance company or separate account unless an agreement containing provisions
substantially the same as Articles I, III, V, VII and Sections 2.5 and 2.12 of
Article II of this Agreement is in effect to govern such sales.
1.5. The Fund agrees to redeem for cash, on the Company's request,
any full or fractional shares of the Fund held by the Company, executing such
requests on a daily basis at the net asset value next computed after receipt by
the Fund or its designee of the request for redemption. For purposes of this
Section 1.5, the Company shall be the
-4-
<PAGE> 5
designee of the Fund for receipt of requests for redemption from each Account
and receipt by such designee shall constitute receipt by the Fund; provided that
the Fund receives notice of such request for redemption on the next following
Business Day.
1.6. The Company agrees to purchase and redeem the shares of each
Portfolio offered by the then current prospectus of the Fund and in accordance
with the provisions of such prospectus. The Company agrees that all net amounts
available under the variable life insurance contracts with the form number(s)
which are listed on Schedule A attached hereto and incorporated herein by this
reference, as such Schedule A may be amended from time to time hereafter by
mutual written agreement of all the parties hereto, (the "Contracts") shall be
invested in the Fund, in such other Funds advised by the Adviser as may be
mutually agreed to in writing by the parties hereto, or in the Company's general
account, provided that such amounts may also be invested in an investment
company other than the Fund if (a) such other investment company, or series
thereof, has investment objectives or policies that are substantially different
from the investment objectives and policies of all the Portfolios of the Fund;
or (b) the Company gives the Fund and the Underwriter 45 days written notice of
its intention to make such other investment company available as a funding
vehicle for the Contracts; or (c) such other investment company was available as
a funding vehicle for the Contracts prior to the date of this Agreement and the
Company so informs the Fund and Underwriter prior to their signing this
Agreement; or (d) the Fund or Underwriter consents to the use of such other
investment company.
1.7. The Company shall pay for Fund shares on the next Business Day
after an order to purchase Fund shares is made in accordance with the
-5-
<PAGE> 6
provisions of Section 1.1 hereof. Payment shall be in federal funds transmitted
by wire. For purpose 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 the Accounts.
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 Funds' shares. The Company hereby
elects to receive all such income dividends and capital gain distributions as
are payable on the Portfolio shares in additional shares of that Portfolio. The
Company reserves the right to revoke this election and to receive all such
income dividends and capital gain distributions in cash. The Fund shall notify
the Company of the number of shares so issued as payment of such dividends and
distributions.
1.10. The Fund shall make the net asset value per share for each
Portfolio available to the Company on a daily basis as soon as reasonably
practical after the net asset value per share is calculated and shall use its
best efforts to make such net asset value per share available by 7 p.m. Boston
time.
ARTICLE II. Representations and Warranties
2.1. The Company represents and warrants that the Contracts are or
will be registered under the 1933 Act; that the Contracts will be
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<PAGE> 7
issued and sold in compliance in all material respects with all applicable
Federal and State laws and that the sale of the Contracts shall comply in all
material respects with state insurance suitability requirements. The Company
further represents and warrants that it is an insurance company duly organized
and in good standing under applicable law and that it has legally and validly
established each Account prior to any issuance or sale thereof as a segregated
asset account under Section 3855-59 of the Vermont Insurance Code and has
registered or, prior to any issuance or sale of the Contracts, will register
each Account as a unit investment trust in accordance with the provisions of the
1940 Act to serve as a segregated investment account for the Contracts.
2.2. The Fund represents and warrants that Fund shares sold pursuant
to this Agreement shall be registered under the 1933 Act, duly authorized for
issuance and sold in compliance with the laws of the State of Vermont and all
applicable federal and state securities laws and that the Fund is and shall
remain registered under the 1940 Act. The Fund shall amend the Registration
Statement for its shares under the 1933 Act and the 1940 Act from time to time
as required in order to effect the continuous offering of its shares. The Fund
shall register and qualify the shares for sale in accordance with the laws of
the various states only if and to the extent deemed advisable by the Fund or the
Underwriter.
2.3. The Fund represents that it is currently qualified as a
Regulated Investment Company under Subchapter M of the Internal Revenue Code of
1986, as amended, (the "Code") and that it will make every effort to maintain
such qualification (under Subchapter M or any successor or similar provision)
and that it will notify the Company immediately upon
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<PAGE> 8
having a reasonable basis for believing that it has ceased to so qualify or that
it might not so qualify in the future.
2.4. The Company represents that the Contracts are currently treated as
life insurance contracts, under applicable provisions of the Code, and that it
will make every effort to maintain such treatment and that it will notify the
Fund and the Underwriter immediately upon having a reasonable basis for
believing that the Contracts have ceased to be so treated or that they might not
be so treated in the future.
2.5. The Fund currently does not intend to make any payments to
finance distribution expenses pursuant to Rule 12b-l under the 1940 Act or
otherwise, although it may make such payments in the future. The Fund has
adopted a "no fee" or "defensive" Rule 12b-1 Plan under which it makes no
payments for distribution expenses. To the extent that it decides to finance
distribution expenses pursuant to Rule 12b-l, 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-l to finance distribution
expenses.
2.6. The Fund makes no representation as to whether any aspect of its
operations (including, but not limited to, fees and expenses and investment
policies) complies with the insurance laws or regulations of the various states
except that the Fund represents that the Fund's investment policies, fees and
expenses are and shall at all times remain in compliance with the laws of the
State of Vermont and the Fund and the Underwriter represent that their
respective operations are and shall at all times remain in material compliance
with the laws of the State of Vermont to the extent required to perform this
Agreement.
-8-
<PAGE> 9
2.7. The Underwriter represents and warrants that it is a member in
good standing of the NASD and is registered as a broker-dealer with the SEC. The
Underwriter further represents that it will sell and distribute the Fund shares
in accordance with the laws of the State of Vermont and all applicable state and
federal securities laws, including without limitation the 1933 Act, the 1934
Act, and the 1940 Act.
2.8. The Fund represents that it is lawfully organized and validly
existing under the laws of the Commonwealth of Massachusetts and that it does
and will comply in all material respects with the 1940 Act.
2.9. The Underwriter represents and warrants that the Adviser is and
shall remain duly registered in all material respects under all applicable
federal and state securities laws and that the Adviser shall perform its
obligations for the Fund in compliance in all material respects with the laws of
the State of Vermont and any applicable state and federal securities laws.
2.10. The Fund and Underwriter represent and warrant that all of their
directors, officers, employees, investment advisers, and other
individuals/entities dealing with the money and/or securities of the Fund are
and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund in an amount not less than the
minimal coverage as required currently by Section 17g-(1) of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.11. The Company represents and warrants that all of its directors,
officers, employees, investment advisers, and other individuals/entities dealing
with the money and/or securities of the Fund
-9-
<PAGE> 10
are and shall continue to be at all times covered by a blanket fidelity bond or
similar coverage for the benefit of the Fund, in an amount not less than the
minimal coverage as required currently by Section 270.17g-1 of the 1940 Act or
related provisions as may be promulgated from time to time. The aforesaid Bond
shall include coverage for larceny and embezzlement and shall be issued by a
reputable bonding company.
2.12. The Company represents and warrants that it will not purchase Fund
shares with Account assets derived from the sale of Contracts to deferred
compensation plans with respect to service for state and local governments which
qualify under Section 457 of the federal Internal Revenue Code, as may be
amended. The company may purchase Fund shares with Account assets derived from
any sale of a Contract to any other type of tax-advantaged employee benefit
plan; provided however that such plan has no more than 500 employees who are
eligible to participate at the time of the first such purchase hereunder by the
Company of Fund shares derived from the sale of such Contract.
ARTICLE III. Prospectuses and Proxy Statements; Voting
3.1. The Underwriter shall provide the Company (at the Company's
expense) with as many copies of the Fund's current prospectus as the Company may
reasonably request. If requested by the Company in lieu thereof, the Fund shall
provide such documentation (including a final copy of the new prospectus as set
in type at the Fund's expense) and other assistance as is reasonably necessary
in order for the Company once each year (or more frequently if the prospectus
for the Fund is amended) to have the prospectus for the Contracts and the Fund's
prospectus printed together in one document (such printing to be at the
Company's expense).
-10-
<PAGE> 11
3.2. The Fund's prospectus shall state that the Statement of Additional
Information for the Fund is available from the Underwriter (or in the Fund's
discretion, the Prospectus shall state that such Statement is available from
the Fund), and the Underwriter (or the Fund), at its expense, shall print and
provide such Statement free of charge to the Company and to any owner of a
Contract or prospective owner who requests such Statement.
3.3. The Fund, at its expense, shall provide the Company with
copies of its proxy material, reports to stockholders and other communications
to stockholders 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 the Fund shares in accordance with instructions
received from Contract owners; and
(iii) vote Fund shares for which no instructions have been
received in the same proportion as Fund shares of such
portfolio for which instructions have been received:
so long as and to the extent that the Securities and Exchange Commission
continues to interpret the Investment Company Act to require pass-through
voting privileges for variable contract owners. The Company reserves the right
to vote Fund shares held in any segregated asset account in its own right, to
the extent permitted by law. Participating Insurance Companies shall be
responsible for assuring that each of their separate accounts participating in
the Fund calculates voting privileges in a manner consistent with the standards
set forth on Schedule B attached hereto and incorporated herein by this
reference, which standards will also be provided to the other Participating
Insurance Companies.
-11-
<PAGE> 12
3.5. The Fund will comply with all provisions of the 1940 Act
requiring voting by shareholders, and in particular the Fund will either provide
for annual meetings or comply with Section 16(c) of the 1940 Act (although the
Fund is not one of the trusts described in Section 16(c) of that Act) as well
as with Sections 16(a) and, if and when applicable, 16(b). Further, the Fund
will act in accordance with the Securities and Exchange Commission's
interpretation of the requirements of Section 16(a) with respect to periodic
elections of trustees and with whatever rules the Commission may promulgate with
respect thereto.
ARTICLE IV. Sales Material and Information
4.1. The Company shall furnish, or shall cause to be furnished,
to the Fund or its designee, each piece of sales literature or other promotional
material in which the Fund or its investment adviser or the Underwriter is
named, at least fifteen Business Days prior to its use. No such material shall
be used if the Fund or its designee object to such use within fifteen Business
Days after receipt of such material.
4.2. The Company shall not give any information or make any
representations or statements on behalf of the Fund or concerning the Fund in
connection with the sale of the Contracts other than the information or
representations contained in the registration statement or prospectus for the
Fund shares, as such registration statement and prospectus may be amended or
supplemented from time to time, or in reports or proxy statements for the Fund,
or in sales literature or other promotional material approved by the Fund or its
designee or by the Underwriter, except with the permission of the Fund or the
Underwriter or the designee of either.
-12-
<PAGE> 13
4.3. The Fund, Underwriter, or its designee shall furnish, or shall
cause to be furnished, to the Company or its designee, each piece of sales
literature or other promotional material in which the Company and/or its
separate account(s), is named at least fifteen Business Days prior to its use.
No such material shall be used if the Company or its designee object to such use
within fifteen Business Days after receipt of such material.
4.4. The Fund and the Underwriter shall not give any information or
make any representations on behalf of the Company or concerning the Company,
each Account, or the Contracts other than the information or representations
contained in a registration statement or prospectus for the Contracts, as such
registration statement and prospectus may be amended or supplemented from time
to time, or in published reports for each Account which are in the public domain
or approved by the Company for distribution to Contract owners, or in sales
literature or other promotional material approved by the Company or its
designee, except with the permission of the Company.
4.5. The Fund will provide to the Company at least one complete copy
of all registration statements, prospectuses, Statements of Additional
Information, reports, proxy statements, sales literature and other promotional
materials, applications for exemptions, requests for no-action letters, and all
amendments to any of the above, that relate to the Fund or its shares,
contemporaneously with the filing of such document with the Securities and
Exchange Commission or other regulatory authorities.
4.6. The Company will provide to the Fund at least one complete copy of
all registration statements, prospectuses, Statements of
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<PAGE> 14
Additional Information, reports, solicitations for voting instructions, sales
literature and other promotional materials, applications for exemptions,
requests for no action letters, and all amendments to any of the above, that
relate to the Contracts or each Account, contemporaneously with the filing of
such document with the Securities and Exchange Commission.
4.7. For purposes of this Article IV, the phrase "sales literature or
other promotional material" includes, but is not limited to, advertisements
(such as material published, or designed for use in, a newspaper, magazine, or
other periodical, radio, television, telephone or tape recording, videotape
display, signs or billboards, motion pictures, or other public media), sales
literature (i.e., any written communication distributed or made generally
available to customers or the public, including brochures, circulars, research
reports, market letters, form letters, seminar texts, reprints or excerpts of
any other advertisement, sales literature, or published article), educational or
training materials or other communications distributed or made generally
available to some or all agents or employees, and registration statements,
prospectuses, Statements of Additional Information, shareholder reports, and
proxy materials.
ARTICLE V. Fees and Expenses
5.1. The Fund and Underwriter shall pay no fee or other compensation
to the Company under this agreement, except that if the Fund or any Portfolio
adopts and implements a plan 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
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<PAGE> 15
agreed to by the Underwriter in writing and such payments will be made out of
existing fees otherwise payable to the Underwriter, past profits of the
Underwriter or other resources available to the Underwriter. No such payments
shall be made directly by the Fund. Currently, no such payments are
contemplated.
5.2. All expenses incident to performance by the Fund under this
Agreement shall be paid by the Fund. The Fund shall see to it that all its
shares are registered and authorized for issuance in accordance with applicable
federal law and, if and to the extent deemed advisable by the Fund, in
accordance with applicable state laws prior to their sale. The Fund shall bear
the expenses for the cost of registration and qualification of the Fund's
shares, preparation and filing of the Fund's prospectus and registration
statement, proxy materials and reports, setting the prospectus in type, setting
in type and printing the proxy materials and reports to shareholders (including
the costs of printing a prospectus that constitutes an annual report), the
preparation of all statements and notices required by any federal or state law,
all taxes on the issuance or transfer of the Fund's shares.
5.3. The Company shall bear the expenses of printing and distributing
the Fund's prospectus to owners of Contracts issued by the Company and of
distributing the Fund's proxy materials and reports to such Contract owners.
ARTICLE VI. Diversification
6.1. The Fund will at all times invest money from the Contracts in
such a manner as to ensure that the Contracts will be treated as variable
contracts under the Code and the regulations issued thereunder.
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<PAGE> 16
Without limiting the scope of the foregoing, the Fund will at all times comply
with Section 817(h) of the Code and Treasury Regulation Section 1.817-5
relating to the diversification requirements for variable annuity, endowment,
or life insurance contracts and any amendments or other modifications to such
Section or Regulations.
ARTICLE VII. Potential Conflicts
7.1. The Board of Trustees of the Fund (the "Board") will monitor the
Fund for the existence of any material irreconcilable conflict between the
interests of the contract owners of all separate accounts investing in the Fund.
An irreconcilable material conflict may arise for a variety of reasons,
including: (a) an action by any state insurance regulatory authority; (b) a
change in applicable federal or state insurance, tax, or securities laws or
regulations, or a public ruling, private letter ruling, no-action or
interpretative letter, or any similar action by insurance, tax, or securities
regulatory authorities; (c) an administrative or judicial decision in any
relevant proceeding; (d) the manner in which the investments of any Portfolio
are being managed; (e) a difference in voting instructions given by variable
annuity contract and variable life insurance contract owners; or (f) a decision
by an insurer to disregard the voting instructions of contract owners. The Board
shall promptly inform the Company if it determines that an irreconcilable
material conflict exists and the implications thereof.
7.2. The Company will report any potential or existing conflicts of
which it is aware to the Board. The Company will assist the Board in carrying
out its responsibilities under the Shared Funding Exemptive
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<PAGE> 17
Order, by providing the Board with all information reasonably necessary for the
Board to consider any issues raised. This includes, but is not limited to, an
obligation by the Company to inform the Board whenever contract owner voting
instructions are disregarded.
7.3. If it is determined by a majority of the Board, or a majority of
its disinterested trustees, that a material irreconcilable conflict exists, the
Company and other Participating Insurance Companies shall, at their expense and
to the extent reasonably practicable (as determined by a majority of the
disinterested trustees), take whatever steps are necessary to remedy or
eliminate the irreconcilable material conflict, up to and including: (1),
withdrawing the assets allocable to some or all of the separate accounts from
the Fund or any Portfolio and reinvesting such assets in a different investment
medium, including (but not limited to) another Portfolio of the Fund, or
submitting the question whether such segregation should be implemented to a
vote of all affected contract owners and, as appropriate, segregating the
assets of any appropriate group (i.e., annuity contract owners, life insurance
contract owners, or variable contract owners of one or more Participating
Insurance Companies) that votes in favor of such segregation, or offering to
the affected contract owners the option of making such a change; and (2),
establishing a new registered management investment company or managed separate
account.
7.4. If a material irreconcilable conflict arises because of a decision
by the Company to disregard contract owner voting instructions and that decision
represents a minority position or would preclude a majority vote, the Company
may be required, at the Fund's election, to withdraw each Account's investment
in the Fund and terminate this
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<PAGE> 18
Agreement; provided, however that such withdrawal and termination shall be
limited to the extent required by the foregoing material irreconcilable conflict
as determined by a majority of the disinterested members of the Board. Any such
withdrawal and termination must take place within six (6) months after the Fund
gives written notice that this provision is being implemented, and until the end
of that six month period the Underwriter and Fund shall continue to accept and
implement orders by the Company for the purchase (and redemption) of shares of
the Fund.
7.5. If a material irreconcilable conflict arises because a
particular state insurance regulator's decision applicable to the Company
conflicts with the majority of other state regulators, then the Company will
withdraw each Account's investment in the Fund and terminate this Agreement
within six months after the Board informs the Company in writing that it has
determined that such decision has created an irreconcilable material conflict;
provided, however, that such withdrawal and termination shall be limited to the
extent required by the foregoing material irreconcilable conflict as determined
by a majority of the disinterested members of the Board. Until the end of the
foregoing six month period, the Underwriter and Fund shall continue to accept
and implement orders by the Company for the purchase (and redemption) of shares
of the Fund.
7.6. For purposes of Sections 7.3 through 7.6 of this Agreement, a
majority of the disinterested members of the Board shall determine whether any
proposed action adequately remedies any irreconcilable material conflict, but
in no event will the Fund be required to establish a new funding medium for the
Contracts. The Company shall not be required by Section 7.3 to establish a new
funding medium for the Contracts if an
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<PAGE> 19
offer to do so has been declined by vote of a majority of Contract owners
materially adversely affected by the irreconcilable material conflict. In the
event that the Board determines that any proposed action does not adequately
remedy any irreconcilable material conflict, then the Company will withdraw
each Account's investment in the Fund and terminate this Agreement within six
(6) months after the Board informs the Company in writing of the foregoing
determination, provided, however, that such withdrawal and termination shall be
limited to the extent required by any such material irreconcilable conflict as
determined by a majority of the disinterested members of the Board.
7.7. If and to the extent that Rule 6e-2 and Rule 6e-3(T) are
amended, or Rule 6e-3 is adopted, to provide exemptive relief from any provision
of the Act or the rules promulgated thereunder with respect to mixed or shared
funding (as defined in the Shared Funding Exemptive Order) on terms and
conditions materially different from those contained in the Shared Funding
Exemptive Order, then (a) the Fund and/or the Participating Insurance Companies,
as appropriate, shall take such steps as may be necessary to comply with Rules
6e-2 and 6e-3(T), as amended, and Rule 6e-3, as adopted, to the extent such
rules are applicable; and (b) Sections 3.4, 3.5, 7.1, 7.2, 7.3, 7.4, and 7.5 of
this Agreement shall continue in effect only to the extent that terms and
conditions substantially identical to such Sections are contained in such
Rule(s) as so amended or adopted.
ARTICLE VIII. Indemnification
8.1. Indemnification By The Company
8.1(a). The Company agrees to indemnify and hold harmless the
Fund and each of its Trustees and officers and each person, if any, who
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<PAGE> 20
controls the Fund within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.1)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Company) or litigation (including
legal and other expenses), to which the Indemnified Parties may become subject
under any statute, regulation, at common law or otherwise, insofar as such
losses, claims, damages, liabilities or expenses (or actions in respect thereof)
or settlements are related to the sale or acquisition of the Fund's shares or
the Contracts and:
(i) arise out of or are based upon any untrue statements or alleged
untrue statements of any material fact contained in the Registration
Statement or prospectus for the Contracts or contained in the Contracts
or sales literature for the Contracts (or any amendment or supplement to
any of the foregoing), or arise out of or are based upon the omission or
the alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein not
misleading, provided that this agreement to indemnify shall not apply as
to any Indemnified Party if such statement or omission or such alleged
statement or omission was made in reliance upon and in conformity with
information furnished to the Company by or on behalf of the Fund for use
in the Registration Statement or prospectus for the Contracts or in the
Contracts or sales literature (or any amendment or supplement) or
otherwise for use in connection with the sale of the Contracts or Fund
shares; or
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<PAGE> 21
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the Registration
Statement, prospectus or sales literature of the Fund not supplied by
the Company, or persons under its control) or wrongful conduct of the
Company or persons under its control, with respect to the sale or
distribution of the Contracts or Fund Shares; or
(iii) arise out of any untrue statement or alleged untrue statement of a
material fact contained in a Registration Statement, prospectus, or
sales literature of the Fund or any amendment thereof or supplement
thereto or the omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading if such a statement or omission was made in
reliance upon information furnished to the Fund by or on behalf of the
Company: or
(iv) arise as a result of any failure by the Company to provide the
services and furnish the materials under the terms of this Agreement; or
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Company in this Agreement or
arise out of or result from any other material breach of this Agreement
by the Company, as limited by and in accordance with the provisions of
Sections 8.1(b) and 8.1(c) hereof.
8.1(b). The Company shall not be liable under this indemnification
provision with respect to any losses, claims, damages,
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<PAGE> 22
liabilities or litigation to which an Indemnified Party would otherwise be
subject by reason of such Indemnified Party's willful misfeasance, bad faith, or
gross negligence in the performance of such Indemnified Party's duties or by
reason of such Indemnified Party's reckless disregard of obligations or duties
under this Agreement or to the Fund, whichever is applicable.
8.1(c). The Company shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Company in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Company of any
such claim shall not relieve the Company from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Company shall be entitled to participate,
at its own expense, in the defense of such action. The Company also shall be
entitled to assume the defense thereof, with counsel satisfactory to the party
named in the action. After notice from the Company to such party of the
Company's election to assume the defense thereof, the Indemnified Party shall
bear the fees and expenses of any additional counsel retained by it, and the
Company will not be liable to such party under this Agreement for any legal or
other expenses subsequently incurred by such party independently in connection
with the defense thereof other than reasonable costs of investigation.
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<PAGE> 23
8.1(d). The Indemnified Parties will promptly notify the Company of the
commencement of any litigation or proceedings against them in connection with
the issuance or sale of the Fund Shares or the Contracts or the operation of
the Fund.
8.2. Indemnification by the Underwriter
8.2 (a). The Underwriter agrees to indemnify and hold harmless the
Company and each of its directors and officers and each person, if any, who
controls the Company within the meaning of Section 15 of the 1933 Act
(collectively, the "Indemnified Parties" for purposes of this Section 8.2)
against any and all losses, claims, damages, liabilities (including amounts paid
in settlement with the written consent of the Underwriter) or litigation
(including legal and other expenses) to which the Indemnified Parties may become
subject under any statute, at common law or otherwise, insofar as such losses,
claims, damages, liabilities or expenses (or actions in respect thereof) or
settlements are related to the sale or acquisition of the Fund's shares or the
Contracts and:
(i) arise out of or are based upon any untrue statement or alleged
untrue statement of any material fact contained in the Registration
Statement or prospectus or sales literature of the Fund (or any
amendment or supplement to any of the foregoing), or arise out of or
are based upon the omission or the alleged omission to state
therein a material fact required to be stated therein or necessary
to make the statements therein not misleading, provided that this
agreement to indemnify shall not apply as to any Indemnified Party
if such statement or omission or such alleged statement or omission
was made in reliance upon and in conformity with information
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<PAGE> 24
furnished to the Underwriter or Fund by or on behalf of the Company
for use in the Registration Statement or prospectus for the Fund or in
sales literature (or any amendment or supplement) or otherwise for use
in connection with the sale of the Contracts or Fund shares: or
(ii) arise out of or as a result of statements or representations
(other than statements or representations contained in the
Registration Statement, prospectus or sales literature for the
Contracts not supplied by the Underwriter or persons under its
control) or wrongful conduct of the Fund, Adviser or Underwriter or
persons under their control, with respect to the sale or distribution
of the Contracts or Fund shares; or
(iii) arise out of any untrue statement or alleged untrue statement of
a material fact contained in a Registration Statement, prospectus, or
sales literature covering the Contracts, or any amendment thereof or
supplement thereto, or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statement or statements therein not misleading, if such
statement or omission was made in reliance upon information furnished
to the Company by or on behalf of the Fund; or
(iv) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this Agreement
(including a failure, whether unintentional or in good faith or
otherwise, to comply with the diversification requirements specified
in Article VI of this Agreement); or
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<PAGE> 25
(v) arise out of or result from any material breach of any
representation and/or warranty made by the Underwriter in this
Agreement or arise out of or result from any other material breach of
this Agreement by the Underwriter;
as limited by and in accordance with the provisions of Sections 8.2(b) and
8.2(c) hereof.
8.2(b). The Underwriter shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
to which an Indemnified Party would otherwise be subject by reason of such
Indemnified Party's willful misfeasance, bad faith, or gross negligence in the
performance of such Indemnified Party's duties or by reason of such Indemnified
Party's reckless disregard of obligations and duties under this Agreement or to
the Company or each Account, whichever is applicable.
8.2(c). The Underwriter shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Underwriter in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Underwriter of
any such claim shall not relieve the Underwriter from any liability which it may
have to the Indemnified Party against whom such action is brought otherwise than
on account of this indemnification provision. In case any such action is brought
against the Indemnified Parties, the Underwriter will be entitled to
participate, at its own expense, in the defense thereof. The Underwriter
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<PAGE> 26
also shall be entitled to assume the defense thereof, with counsel satisfactory
to the party named in the action. After notice from the Underwriter to such
party of the Underwriter's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Underwriter will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.2(d). The Company agrees promptly to notify the Underwriter of the
commencement of any litigation or proceedings against it or any of its officers
or directors in connection with the issuance or sale of the Contracts or the
operation of each Account.
8.3. Indemnification By the Fund
8.3(a). The Fund agrees to indemnify and hold harmless the Company and
each of its directors and officers and each person, if any, who controls the
Company within the meaning of Section 15 of the 1933 Act (collectively, the
"Indemnified Parties" for purposes of this Section 8.3) against any and all
losses, claims, damages, liabilities (including amounts paid in settlement with
the written consent of the Fund) or litigation (including legal and other
expenses) to which the Indemnified Parties may become subject under any
statute, at common law or otherwise, insofar as such losses, claims, damages,
liabilities or expenses (or actions in respect thereof) or settlements result
from the gross negligence, bad faith or willful misconduct of the Trustees any
member thereof, are related to the operations of the Fund and:
(i) arise as a result of any failure by the Fund to provide the
services and furnish the materials under the terms of this
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<PAGE> 27
Agreement (including a failure to comply with the diversification
requirements specified in Article VI of this Agreement); or
(ii) arise out of or result from any material breach of any
representation and/or warranty made by the Fund in this Agreement or
arise out of or result from any other material breach of this
Agreement by the Fund;
as limited by and in accordance with the provisions of Sections 8.3(b) and
8.3(c) hereof.
8.3(b). The Fund shall not be liable under this indemnification
provision with respect to any losses, claims, damages, liabilities or litigation
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
the Company, the Fund, the Underwriter or each Account, whichever is applicable.
8.3(c). The Fund shall not be liable under this indemnification
provision with respect to any claim made against an Indemnified Party unless
such Indemnified Party shall have notified the Fund in writing within a
reasonable time after the summons or other first legal process giving
information of the nature of the claim shall have been served upon such
Indemnified Party (or after such Indemnified Party shall have received notice of
such service on any designated agent), but failure to notify the Fund of any
such claim shall not relieve the Fund from any liability which it may have to
the Indemnified Party against whom such action is brought otherwise than on
account of this indemnification
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<PAGE> 28
provision. In case any such action is brought against the Indemnified Parties,
the Fund will be entitled to participate, at its own expense, in the defense
thereof. The Fund also shall be entitled to assume the defense thereof, with
counsel satisfactory to the party named in the action. After notice from the
Fund to such party of the Fund's election to assume the defense thereof, the
Indemnified Party shall bear the fees and expenses of any additional counsel
retained by it, and the Fund will not be liable to such party under this
Agreement for any legal or other expenses subsequently incurred by such party
independently in connection with the defense thereof other than reasonable costs
of investigation.
8.3(d). The Company and the Underwriter agree promptly to notify the
Fund of the commencement of any litigation or proceedings against it or any of
its respective officers or directors in connection with this Agreement, the
issuance or sale of the Contracts, the operation of each Account, or the sale or
acquisition of shares of the Fund.
ARTICLE IX. Applicable Law
9.1. This Agreement shall be construed and the provisions hereof
interpreted under and in accordance with the laws of the Commonwealth of
Massachusetts.
9.2. This Agreement shall be subject to the provisions of the 1933,
1934 and 1940 acts, and the rules and regulations and rulings thereunder,
including such exemptions from those statutes, rules and regulations as the
Securities and Exchange Commission may grant (including, but not limited to, the
Shared Funding Exemptive Order) and the terms hereof shall be interpreted and
construed in accordance therewith.
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<PAGE> 29
ARTICLE X. Termination
10.1. This Agreement shall terminate:
(a) at the option of any party upon one year advance written
notice to the other parties; provided, however such notice
shall not be given earlier than one year following the date of
this Agreement; or
(b) at the option of the Company to the extent that shares of
Portfolios are not reasonably available to meet the requirements of
the Contracts as determined by the Company, provided however, that
such termination shall apply only to the Portfolio(s) not reasonably
available. Prompt notice of the election to terminate for such cause
shall be furnished by the Company; or
(c) at the option of the Fund in the event that formal administrative
proceedings are instituted against the Company by the National
Association of Securities Dealers, Inc. ("NASD"), the Securities and
Exchange Commission, the Insurance Commissioner or any other
regulatory body regarding the Company's duties under this Agreement or
related to the sale of the Contracts, the operation of any Account, or
the purchase of the Fund shares, provided, however, that the Fund
determines in its sole judgment exercised in good faith, that any such
administrative proceedings will have a material adverse effect upon
the ability of the Company to perform its obligations under this
Agreement; or
(d) at the option of the Company in the event that formal
administrative proceedings are instituted against the Fund or
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<PAGE> 30
Underwriter by the NASD, the Securities and Exchange Commission, or
any state securities or insurance department or any other regulatory
body, provided, however, that the Company determines in its sole
judgment exercised in good faith, that any such administrative
proceedings will have a material adverse effect upon the ability of
the Fund or Underwriter to perform its obligations under this
Agreement; or
(e) with respect to any Account, upon requisite vote of the Contract
owners having an interest in such Account (or any subaccount) to
substitute the shares of another investment company for the
corresponding Portfolio shares of the Fund in accordance with the
terms of the Contracts for which those Portfolio shares had been
selected to serve as the underlying investment media. The Company will
give 30 days' prior written notice to the Fund of the date of any
proposed vote to replace the Fund's shares; or
(f) at the option of the Company, in the event 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; or
(g) at the option of the Company, if the Fund ceases to qualify as a
Regulated Investment Company under Subchapter M of the Code or under
any successor or similar provision, or if the Company reasonably
believes that the Fund may fail to so qualify; or
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<PAGE> 31
(h) at the option of the Company, if the Fund fails to meet the
diversification requirements specified in Article VI hereof; or
(i) at the option of either the Fund or the Underwriter, if (1) the
Fund or the Underwriter, respectively, shall determine, in their sole
judgment reasonably exercised in good faith, that the Company has
suffered a material adverse change in its business or financial
condition or is the subject of material adverse publicity and such
material adverse change or material adverse publicity will have a
material adverse impact upon the business and operations of either the
Fund or the Underwriter, (2) the Fund or the Underwriter shall notify
the Company in writing of such determination and its intent to
terminate this Agreement, and (3) after considering the actions taken
by the Company and any other changes in circumstances since the giving
of such notice, such determination of the Fund or the Underwriter
shall continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth day shall be the effective date
of termination; or
(j) at the option of the Company, if (1) the Company shall determine,
in its sole judgment reasonably exercised in good faith, that either
the Fund or the Underwriter has suffered a material adverse change in
its business or financial condition or is the subject of material
adverse publicity and such material adverse change or material adverse
publicity will have a material adverse impact upon the business and
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<PAGE> 32
operations of the Company, (2) the Company shall notify the Fund and
the Underwriter in writing of such determination and its intent to
terminate the Agreement, and (3) after considering the actions taken
by the Fund and/or the Underwriter and any other changes in
circumstances since the giving of such notice, such determination
shall continue to apply on the sixtieth (60th) day following the
giving of such notice, which sixtieth day shall be the effective date
of termination; or
(k) at the option of either the Fund or the Underwriter, if the
Company gives the Fund and the Underwriter the written notice
specified in Section 1.6(b) hereof and at the time such notice was
given there was no notice of termination outstanding under any other
provision of this Agreement; provided, however any termination under
this Section 10.1(k) shall be effective forty five (45) days after the
notice specified in Section 1.6(b) was given.
10.2. It is understood and agreed that the right of any party hereto
to terminate this Agreement pursuant to Section 10.1(a) may be exercised for any
reason or for no reason.
10.3. Notice Requirement. No termination of this Agreement shall be
effective unless and until the party terminating this Agreement gives prior
written notice to all other parties to this Agreement of its intent to terminate
which notice shall set forth the basis for such termination. Furthermore,
(a) In the event that any termination is based upon the provisions of
Article VII, or the provision of Section
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<PAGE> 33
10.1(a), 10.1(i) 10.1(j) or 10.1(k) of this Agreement, such prior
written notice shall be given in advance of the effective date of
termination as required by such provisions; and
(b) in the event that any termination is based upon the provisions of
Section 10.1(c) or 10.1(d) of this Agreement, such prior written
notice shall be given at least ninety (90) days before the effective
date of termination.
10.4. Effect of Termination. Notwithstanding any termination of this
Agreement, the Fund and the Underwriter shall at the option of the Company,
continue to make available additional shares of the Fund pursuant to the terms
and conditions of this Agreement, for all Contracts in effect on the effective
date of termination of this Agreement (hereinafter referred to as "Existing
Contracts"). Specifically, without limitation, the owners of the Existing
Contracts shall be permitted to reallocate investments in the Fund, redeem
investments in the Fund and/or invest in the Fund upon the making of additional
purchase payments under the Existing Contracts. The parties agree that this
Section 10.4 shall not apply to any terminations under Article VII and the
effect of such Article VII terminations shall be governed by Article VII of this
Agreement.
10.5. The Company shall not redeem Fund shares attributable to the
Contracts (as opposed to Fund shares attributable to the Company's assets held
in each Amount) except (i) as necessary to implement Contract Owner initiated
transactions, or (ii) as required by state and/or federal laws or regulations or
judicial or other legal precedent of general application (hereinafter referred
to as a "Legally Required Redemption").
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<PAGE> 34
Upon request, the Company will promptly furnish to the Fund and the Underwriter
the opinion of counsel for the Company (which counsel shall be reasonably
satisfactory to the Fund and the Underwriter) to the effect that any redemption
pursuant to clause (ii) above is a Legally Required Redemption. Furthermore,
except in cases where permitted under the terms of the Contracts, the Company
shall not prevent Contract Owners from allocating payments to a Portfolio that
was otherwise available under the Contracts without first giving the Fund or the
Underwriter 90 days notice of its intention to do so.
ARTICLE XI. Notices
Any notice shall be sufficiently given when sent by registered or
certified mail to the other party at the address of such party set forth below
or at such other address as such party may from time to time specify in writing
to the other party.
If to the Fund:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
If to the Company:
Vermont Life Insurance Company
National Life Drive
Montpelier, VT 05604
Attention: Registered Insurance Contracts
If to the Underwriter:
82 Devonshire Street
Boston, Massachusetts 02109
Attention: Treasurer
ARTICLE XII. Miscellaneous
12.1 All persons dealing with the Fund must look solely to the
property of the Fund for the enforcement of any claims against the Fund as
neither the Trustees, officers, agents or shareholders assume any personal
liability for obligations entered into on behalf of the Fund.
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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.
12.6 Each party hereto shall cooperate with each other party and all
appropriate governmental authorities (including without limitation the
Securities and Exchange Commission, the NASD and state insurance regulators)
and shall permit such authorities reasonable access to its books and records in
connection with any investigation or inquiry relating to this Agreement or the
transactions contemplated hereby. Notwithstanding the generality of the
foregoing, each party hereto further agrees to furnish the California Insurance
Commissioner with any information or reports in connection with services
provided under this Agreement which such Commissioner may request in order to
ascertain
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whether the variable life insurance operations of the Company are being
conducted in a manner consistent with the California Variable Life Insurance
Regulations and any other applicable law or regulations.
12.7 The Fund and Underwriter agree that to the extent any advisory
or other fees received by the Fund, the Underwriter or the Adviser are
determined to be unlawful in legal or administrative proceedings under the 1973
NAIC model variable life insurance regulation in the states of California,
Colorado, Maryland or Michigan, the Underwriter shall indemnify and reimburse
the Company for any out of pocket expenses and actual damages the Company has
incurred as a result of any such proceeding; provided however that the
provisions of Section 8.2(b) of this and 8.2(c) shall apply to such
indemnification and reimbursement obligation. Such indemnification and
reimbursement obligation shall be in addition to any other indemnification and
reimbursement obligations of the Fund and/or the Underwriter under this
Agreement.
12.8. 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.
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.
Company:
VERMONT LIFE INSURANCE COMPANY
By its authorized officer,
SEAL By:
--------------------------------------
Title:
--------------------------------------
Date:
--------------------------------------
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By its authorized officer,
SEAL By:
--------------------------------------
Title:
--------------------------------------
Date:
--------------------------------------
Underwriter:
FIDELITY DISTRIBUTORS CORPORATION
By its authorized officer,
SEAL By:
--------------------------------------
Title:
--------------------------------------
Date:
--------------------------------------
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Schedule A
Contracts
Contract Form VL-8-86, VL-6-87
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Schedule C
Accounts
Name of Account Date of Resolution of Company's Board
which Established the Account
Vermont Variable Life Insurance Account February 5, 1985
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Exhibit (b)(9)
February 25, 1999
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 Post-Effective Amendment No. 2 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
Post-Effective Amendment No. 2 to the Form N-4 Registration Statement and to
the use of my name under the caption "Legal Matters" in the Registration
Statement.
Sincerely,
Michele S. Gatto
Senior Vice President
& General Counsel
