<PAGE> 1
Sentinel Advantage Variable Annuity
P R O S P E C T U S
Dated October 21, 1999
National Life Insurance Company - Home 0ffice: National Life Drive,
Montpelier, Vermont 05604 -
1-800-537-7003
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.
J.P. MORGAN SERIES TRUST II
International Opportunities Portfolio J.P. Morgan Asset
Small Company Portfolio Management, Inc.
STRONG VARIABLE INSURANCE FUNDS, INC.
Strong Mid Cap Growth Fund 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 Mgmt.
Mid Cap Value Goldman Sachs Asset Mgmt.
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 above. 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.
It may not be a good decision to purchase a Contract as a replacement for
another type of variable annuity if you already own another flexible premium
deferred variable annuity.
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 51 of the Prospectus.
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
SUMMARY..............................................................................1
SUMMARY OF CONTRACT EXPENSES.........................................................4
UNDERLYING FUND ANNUAL EXPENSES......................................................5
ACCUMULATION UNIT VALUES.............................................................8
NATIONAL LIFE INSURANCE COMPANY, THE VARIABLE ACCOUNT, AND
THE FUNDS.......................................................................9
National Life Insurance Company...............................................9
The Variable Account..........................................................9
Underlying Fund Options.......................................................9
DETAILED DESCRIPTION OF CONTRACT PROVISIONS............................................14
Issuance of the Contract......................................................14
Premium Payments..............................................................15
The Initial Premium Payment...........................................15
Subsequent Premium Payments...........................................15
Allocation of Net Premium Payments....................................15
Transfers.....................................................................16
Value of a Variable Account Accumulation Unit.................................16
Net Investment Factor.................................................16
Determining the Contract Value................................................17
Annuitization.................................................................17
Maturity Date.........................................................17
Election of Payment Options...........................................17
Frequency and Amount of Annuity Payments..............................17
Annuitization - Variable Account..............................................18
Value of an Annuity Unit..............................................18
Assumed Investment Rate...............................................18
Annuitization - Fixed Account.................................................18
Annuity Payment Options.......................................................19
Death of Owner................................................................19
Death of Annuitant Prior to the Annuitization Date............................20
Generation-Skipping Transfers.................................................20
Ownership Provisions..........................................................20
CHARGES AND DEDUCTIONS.................................................................21
Deductions from the Variable Account..........................................22
Contingent Deferred Sales Charge..............................................22
Annual Contract Fee...........................................................23
Transfer Charge...............................................................23
Premium Taxes.................................................................24
Charge for Optional Enhanced Death Benefit Rider..............................24
Other Charges.................................................................24
CONTRACT RIGHTS AND PRIVILEGES.........................................................24
Free Look.....................................................................24
Loan Privilege -Tax Sheltered Annuities.......................................25
Surrender and Withdrawal......................................................26
Payments......................................................................27
Surrenders and Withdrawals Under a Tax-Sheltered Annuity Contract.............28
Telephone Transaction Privilege...............................................29
Available Automated Fund Management Features..................................29
Dollar Cost Averaging................................................29
Portfolio Rebalancing................................................29
Systematic Withdrawals...............................................30
Contract Rights Under Certain Plans...........................................31
</TABLE>
<PAGE> 3
<TABLE>
<CAPTION>
Page
<S> <C>
THE FIXED ACCOUNT......................................................................31
Minimum Guaranteed and Current Interest Rates.................................31
Enhanced Fixed Account........................................................32
OPTIONAL ENHANCED DEATH BENEFIT RIDER..................................................33
FEDERAL INCOME TAX CONSIDERATIONS......................................................33
Taxation of Non-Qualified Contracts...........................................34
Taxation of Qualified Contracts...............................................35
Possible Tax Law Changes......................................................36
GENDER NEUTRALITY......................................................................36
VOTING RIGHTS..........................................................................37
CHANGES TO VARIABLE ACCOUNT............................................................37
ADVERTISING............................................................................38
Yield.........................................................................38
Performance...................................................................38
DISTRIBUTION OF THE CONTRACTS..........................................................45
INSURANCE MARKETPLACE STANDARDS ASSOCIATION............................................46
FINANCIAL STATEMENTS...................................................................46
STATEMENTS AND REPORTS.................................................................46
PREPARING FOR YEAR 2000................................................................46
OWNER INQUIRIES........................................................................46
LEGAL PROCEEDINGS......................................................................47
GLOSSARY...............................................................................48
TABLE OF CONTENTS OF STATEMENT OF ADDITIONAL INFORMATION...............................51
</TABLE>
<PAGE> 4
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 14. The initial Premium Payment must be at least
$5,000 for Non-Qualified Contracts, and at least $1500 for Qualified Contracts.
We may at our discretion permit initial Premium Payments lower than these
minimums.
CAN I MAKE ADDITIONAL PREMIUM PAYMENTS?
You may make additional Premium Payments at any time (except for Contracts
purchased in Oregon - see page 15), 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 Owner (or Annuitant if the owner is not a natural
person) may not exceed $1,000,000 without our prior consent (see "Premium
Payments," page 15).
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.
Currently, 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 24). 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. However,
effective October 1, 1999, or the date the applicable state approves this
change, if later, we will no longer temporarily allocate all Contract Value in
the Variable Account to the Money Market Subaccount in these cases. During the
free look period, Net Premium Payments will be directly allocated to the
Subaccounts as you designated. When this change is effective, we will refund
only the Premium Payments.
WHAT IS THE PURPOSE OF THE VARIABLE ACCOUNT?
The Variable Account is a separate investment account that consists of 27
Subaccounts. 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 9-14).
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 your Contract may
be more or less than the premiums paid.
1
<PAGE> 5
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", page 31).
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 17).
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 less all outstanding loans and accrued
interest). The amount paid will be reduced by premium tax charges, if any. For
more information, see "Death of Owner," page 19.
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 20).
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 26). A
Withdrawal or a surrender may result in federal income tax, including a federal
penalty tax (see "Federal Income Tax Considerations," page 33).
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 22).
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 23).
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 22).
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 22).
2
<PAGE> 6
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
Optional Enhanced Death Benefit Rider," page 24).
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 24).
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 5, and the accompanying Fund
prospectuses).
ARE THERE ANY OTHER CONTRACT PROVISIONS?
For information concerning other important Contract provisions, see
"Contract Rights and Privileges," page 24, 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 33.
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.
3
<PAGE> 7
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 (DEDUCTED DAILY AS A PERCENTAGE OF VARIABLE ACCOUNT CONTRACT 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 24.
(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, New Jersey and Washington 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 22).
(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 33.
4
<PAGE> 8
UNDERLYING FUND ANNUAL EXPENSES(5)(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 0.85% 0.04% 0.89%
Alger American Growth Portfolio 0.75% 0.04% 0.79%
Fidelity VIP Fund-Equity Income Portfolio 0.49% 0.08% 0.57%
Fidelity VIP Fund-Growth Portfolio 0.59% 0.07% 0.66%
Fidelity VIP Fund-High Income Portfolio 0.58% 0.12% 0.70%
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.15% 0.89%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.04% 0.28%
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.07% 0.66%
Market Street Growth Portfolio 0.32% 0.14% 0.46%
Market Street Sentinel Growth Portfolio 0.50% 0.32% 0.82%
Market Street Aggressive Growth Portfolio 0.41% 0.20% 0.61%
Market Street Managed Portfolio 0.40% 0.17% 0.57%
Market Street Bond Portfolio 0.35% 0.18% 0.53%
Market Street International Portfolio 0.75% 0.25% 1.00%
Market Street Money Market Portfolio 0.25% 0.15% 0.40%
Strong Opportunity Fund II, Inc. 1.00% 0.20% 1.20%
Strong Mid Cap Growth Fund 1.00% 0.20% 1.20%
Van Eck Worldwide Bond Fund 1.00% 0.15% 1.15%
American Century VP Value 1.00% 0.00% 1.00%
American Century VP Income & Growth 0.70% 0.00% 0.70%
Goldman Sachs International Equity 1.00% 0.25% 1.25%
Goldman Sachs Global Income 0.90% 0.15% 1.05%
Goldman Sachs CORE Small Cap Equity 0.75% 0.15% 0.90%
Goldman Sachs Mid Cap Value 0.80% 0.15% 0.95%
J.P. Morgan International Opportunities 0.60% 0.60% 1.20%
J.P. Morgan Small Company 0.60% 0.55% 1.15%
Neuberger Berman Partners 0.78% 0.06% 0.84%
</TABLE>
(5) 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-Equity Income Portfolio 0.49% 0.09% 0.58%
Fidelity VIP Fund-Growth Portfolio 0.59% 0.09% 0.68%
Fidelity VIP Fund-Overseas Portfolio 0.74% 0.17% 0.91%
Fidelity VIP Fund II-Index 500 Portfolio 0.24% 0.11% 0.35%
Fidelity VIP Fund II-Contrafund Portfolio 0.59% 0.11% 0.70%
Market Street Growth Portfolio 0.32% 0.15% 0.47%
Market Street Sentinel Growth Portfolio 0.50% 0.33% 0.83%
Market Street Aggressive Growth Portfolio 0.41% 0.21% 0.62%
Market Street Managed Portfolio 0.40% 0.18% 0.58%
Market Street Bond Portfolio 0.35% 0.20% 0.55%
Market Street Money Market Portfolio 0.25% 0.17% 0.42%
Strong Mid Cap Growth Fund 1.00% 0.60% 1.60%
Goldman Sachs International Equity 1.00% 1.97% 2.97%
Goldman Sachs Global Income 0.90% 2.40% 3.30%
Goldman Sachs CORE Small Cap Equity 0.75% 3.17% 3.92%
Goldman Sachs Mid Cap Value 0.80% 0.57% 1.37%
J.P. Morgan International Opportunities 0.60% 2.66% 3.26%
J.P. Morgan Small Company 0.60% 2.83% 3.43%
</TABLE>
5
<PAGE> 9
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.
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
Contract at the end of your Contract at the end of
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.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization 94 123 155 267 24 73 125 267
Alger American Growth 93 120 150 257 23 70 120 257
Fidelity VIP Fund-Equity Income 91 113 139 234 21 63 109 234
Fidelity VIP Fund-Growth 91 116 143 244 21 66 113 244
Fidelity VIP Fund-High Income 92 117 145 248 22 67 115 248
Fidelity VIP Fund-Overseas 94 123 155 267 24 73 125 267
Fidelity VIP Fund II-Index 500 88 105 124 204 18 55 94 204
Fidelity VIP Fund II-Contrafund 91 116 143 244 21 66 113 244
Market Street Growth 89 110 133 223 19 60 103 223
Market Street Sentinel Growth 93 121 151 260 23 71 121 260
Market Street Aggressive Growth 91 115 141 239 21 65 111 239
Market Street Managed 91 113 139 234 21 63 109 234
Market Street Bond 90 112 137 230 20 62 107 230
Market Street International 95 126 160 278 25 76 130 278
Market Street Money Market 89 108 130 217 19 58 100 217
Strong Opportunity Fund II, Inc. 97 132 170 298 27 82 140 298
Strong Mid Cap Growth Fund 97 132 170 298 27 82 140 298
Van Eck Worldwide Bond Fund 96 131 168 293 26 81 138 293
American Century VP Value 95 126 160 278 25 76 130 278
American Century VP Income & Growth 92 117 145 248 22 67 115 248
Goldman Sachs International Equity 97 134 173 303 27 84 143 303
Goldman Sachs Global Income 95 128 163 283 25 78 133 283
Goldman Sachs CORE Small Cap Equity 94 123 155 268 24 73 125 268
Goldman Sachs Mid Cap Value 94 125 158 273 24 75 128 273
J.P. Morgan International Opportunities 97 132 170 298 27 82 140 298
J.P. Morgan Small Company 96 131 168 293 26 81 138 293
Neuberger Berman Partners 93 121 152 262 23 71 122 262
</TABLE>
<TABLE>
<CAPTION>
If you annuitize your
Contract at the end of
the applicable time period.
Subaccount* 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C>
Alger American Small Capitalization 24 73 125 267
Alger American Growth 23 70 120 257
Fidelity VIP Fund-Equity Income 21 63 109 234
Fidelity VIP Fund-Growth 21 66 113 244
Fidelity VIP Fund-High Income 22 67 115 248
Fidelity VIP Fund-Overseas 24 73 125 267
Fidelity VIP Fund II-Index 500 18 55 94 204
Fidelity VIP Fund II-Contrafund 21 66 113 244
Market Street Growth 19 60 103 223
Market Street Sentinel Growth 23 71 121 260
Market Street Aggressive Growth 21 65 111 239
Market Street Managed 21 63 109 234
Market Street Bond 20 62 107 230
Market Street International 25 76 130 278
Market Street Money Market 19 58 100 217
Strong Opportunity Fund II, Inc. 27 82 140 298
Strong Mid Cap Growth Fund 27 82 140 298
Van Eck Worldwide Bond Fund 26 81 138 293
American Century VP Value 25 76 130 278
American Century VP Income & Growth 22 67 115 248
Goldman Sachs International Equity 27 84 143 303
Goldman Sachs Global Income 25 78 133 283
Goldman Sachs CORE Small Cap Equity 24 73 125 268
Goldman Sachs Mid Cap Value 24 75 128 273
J.P. Morgan International Opportunities 27 82 140 298
J.P. Morgan Small Company 26 81 138 293
Neuberger Berman Partners 23 71 122 262
</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 calculated by taking the total Annual Contract Fees received during
1998 and dividing by the average assets in the Variable Account. This works out
to 0.08% per annum. The Annual Contract Fee is waived for Contracts with
Contract Values of $50,000 or more.
**The Contract may not be annuitized in the first two years from the Date of
Issue.
6
<PAGE> 10
For an Owner who has elected the Enhanced Death Benefit Rider (see "Optional
Enhanced Death Benefit Rider", page 33), 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
Contract at the end of your Contract at the end of
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.
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Alger American Small Capitalization 96 129 165 287 26 79 135 287
Alger American Growth 95 126 160 277 25 76 130 277
Fidelity VIP Fund-Equity Income 93 119 149 255 23 69 119 255
Fidelity VIP Fund-Growth 93 122 153 264 23 72 123 264
Fidelity VIP Fund-High Income 94 123 155 268 24 73 125 268
Fidelity VIP Fund-Overseas 96 129 165 287 26 79 135 287
Fidelity VIP Fund II-Index 500 90 111 134 225 20 61 104 225
Fidelity VIP Fund II-Contrafund 93 122 153 264 23 72 123 264
Market Street Growth 91 116 143 244 21 66 113 244
Market Street Sentinel Growth 95 127 161 280 25 77 131 280
Market Street Aggressive Growth 93 121 151 259 23 71 121 259
Market Street Managed 93 119 149 255 23 69 119 255
Market Street Bond 92 118 147 251 22 68 117 251
Market Street International 97 132 170 298 27 82 140 298
Market Street Money Market 91 114 140 238 21 64 110 238
Strong Opportunity Fund II, Inc. 99 138 180 317 29 88 150 317
Strong Mid Cap Growth Fund 99 138 180 317 29 88 150 317
Van Eck Worldwide Bond Fund 98 137 178 312 28 87 148 312
American Century VP Value 97 132 170 298 27 82 140 298
American Century VP Income & Growth 94 123 155 268 24 73 125 268
Goldman Sachs International Equity 99 140 183 322 29 90 153 322
Goldman Sachs Global Income 97 134 173 303 27 84 143 303
Goldman Sachs CORE Small Cap Equity 96 129 165 288 26 79 135 288
Goldman Sachs Mid Cap Equity 96 131 168 293 26 81 138 293
J.P. Morgan International Opportunities 99 138 180 317 29 88 150 317
J.P. Morgan Small Company 98 137 178 312 28 87 148 312
Neuberger Berman Partners 95 127 162 282 25 77 132 282
</TABLE>
<TABLE>
<CAPTION>
If you annuitize your
Contract at the end of
the applicable time period.
Subaccount* 1 Yr.** 3 Yrs. 5 Yrs. 10 Yrs.
<S> <C> <C> <C> <C>
Alger American Small Capitalization 26 79 135 287
Alger American Growth 25 76 130 277
Fidelity VIP Fund-Equity Income 23 69 119 255
Fidelity VIP Fund-Growth 23 72 123 264
Fidelity VIP Fund-High Income 24 73 125 268
Fidelity VIP Fund-Overseas 26 79 135 287
Fidelity VIP Fund II-Index 500 20 61 104 225
Fidelity VIP Fund II-Contrafund 23 72 123 264
Market Street Growth 21 66 113 244
Market Street Sentinel Growth 25 77 131 280
Market Street Aggressive Growth 23 71 121 259
Market Street Managed 23 69 119 255
Market Street Bond 22 68 117 251
Market Street International 27 82 140 298
Market Street Money Market 21 64 110 238
Strong Opportunity Fund II, Inc. 29 88 150 317
Strong Mid Cap Growth Fund 29 88 150 317
Van Eck Worldwide Bond Fund 28 87 148 312
American Century VP Value 27 82 140 298
American Century VP Income & Growth 24 73 125 268
Goldman Sachs International Equity 29 90 153 322
Goldman Sachs Global Income 27 84 143 303
Goldman Sachs CORE Small Cap Equity 26 79 135 288
Goldman Sachs Mid Cap Equity 26 81 138 293
J.P. Morgan International Opportunities 29 88 150 317
J.P. Morgan Small Company 28 87 148 312
Neuberger Berman Partners 25 77 132 282
</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 calculated by taking the total Annual Contract Fees received during
1998 and dividing by the average assets in the Variable Account. This works out
to 0.08% per annum. The Annual Contract Fee is waived for Contracts with
Contract Values of $50,000 or more.
**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 21. 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 24). Certain states impose
a premium tax, currently ranging up to 3.5%.
7
<PAGE> 11
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 December 31, 1998 December 31, 1998
<S> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------
Alger American Small Capitalization $10.00 11.00 12.53 180,967.55
- ---------------------------------------------------------------------------------------------------------------------------
Alger American Growth $10.00 10.65 15.55 174,624.86
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Equity Income $10.00 10.84 11.93 446,646.08
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Growth $10.00 10.71 14.74 128,908.47
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-High Income $10.00 10.83 10.22 316,357.63
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund-Overseas $10.00 9.45 10.51 137,169.62
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Index 500 $10.00 10.88 13.77 644,354.50
- ---------------------------------------------------------------------------------------------------------------------------
Fidelity VIP Fund II-Contrafund $10.00 10.95 14.04 220,659.55
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Growth $10.00 10.68 11.96 681,315.40
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Sentinel Growth $10.00 11.16 12.71 167,349.38
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Aggressive Growth $10.00 10.74 11.43 67,028.38
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Managed $10.00 10.64 11.80 321,764.26
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Bond $10.00 10.42 11.12 258,757.60
- ---------------------------------------------------------------------------------------------------------------------------
Market Street International $10.00 9.52 10.34 117,450.09
- ---------------------------------------------------------------------------------------------------------------------------
Market Street Money Market $10.00 10.20 10.59 464,682.04
- ---------------------------------------------------------------------------------------------------------------------------
Strong Opportunity Fund II, Inc. $10.00 11.16 12.50 125,380.26
- ---------------------------------------------------------------------------------------------------------------------------
Strong Mid Cap Growth Fund $10.00 11.26 14.29 79,046.28
- ---------------------------------------------------------------------------------------------------------------------------
Van Eck Worldwide Bond $10.00 10.25 11.39 8,968.55
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table sets forth, for each of the Subaccounts which began
operations on August 3, 1998, the accumulation unit value on August 3, 1998,
the accumulation unit value on December 31, 1998, and the number of
accumulation units outstanding on December 31, 1998
<TABLE>
<CAPTION>
Number of
Accumulation Accumulation Accumulation Units
Unit Value at Unit Value at Outstanding at
- -------------------------------------------------------------------------------------------------------------------------
Subaccount August 3, 1998 December 31, 1998 December 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
American Century VP Value 10.0 10.41 480.38
- -------------------------------------------------------------------------------------------------------------------------
American Century VP Income & Growth 10.0 10.96 2,561.63
- -------------------------------------------------------------------------------------------------------------------------
Goldman Sachs International Equity 10.0 10.11 4,779.45
- -------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Global Income 10.0 10.39 0
- -------------------------------------------------------------------------------------------------------------------------
Goldman Sachs CORE Small Cap Equity 10.0 9.45 0
- -------------------------------------------------------------------------------------------------------------------------
Goldman Sachs Mid Cap Value 10.0 9.88 1,009.46
- -------------------------------------------------------------------------------------------------------------------------
J.P. Morgan International Opportunities 10.0 9.69 0
- -------------------------------------------------------------------------------------------------------------------------
J.P. Morgan Small Company 10.0 9.98 10,554.25
- -------------------------------------------------------------------------------------------------------------------------
Neuberger Berman Partners 10.0 10.19 9,444.56
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 12
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 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.
9
<PAGE> 13
ALGER AMERICAN SMALL CAPITALIZATION PORTFOLIO
Investment Objective: To seek long-term capital appreciation by focusing
on small, fast-growing companies that offer innovative products,
services or technologies to a rapidly expanding marketplace. Under
normal circumstances, the portfolio invests primarily in the equity
securities of small capitalization companies. A small capitalization
company is one that has a market capitalization within the range of the
Russell(R) 2000 Growth Index or the S&P(R) SmallCap 600 Index.
ALGER AMERICAN GROWTH PORTFOLIO
Investment Objective: To seek long-term capital appreciation by focusing
on growing companies that generally have broad product lines, markets,
financial resources and depth of management. Under normal circumstances,
the portfolio invests primarily in the equity securities of large
companies. The portfolio considers a large company to have a market
capitalization of $1 billion or greater.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
The Fund is an open-end, diversified, management investment company. The
Equity-Income, Growth, High Income, and Overseas Portfolios of the VIP Fund and
the Index 500 and Contrafund Portfolios of the VIP Fund II are managed by
Fidelity Management and Research Company ("FMR"). FMR has entered into
sub-advisory agreements with FMR U.K., FMR Far East, and Fidelity International
Investment Advisors for the Overseas Portfolio.
-EQUITY-INCOME PORTFOLIO
Investment Objective: This Portfolio seeks reasonable income. The
Portfolio will also consider the potential for capital appreciation. The
Portfolio seeks a yield which exceeds the composite yield on the
securities comprising the Standard & Poor's 500 Composite Stock Price
Index ("S&P 500"). FMR normally invest at least 65% of the Portfolio's
assets in income-producing equity securities.
-GROWTH PORTFOLIO
Investment Objective: This Portfolio seeks capital appreciation. FMR
normally invests the Portfolio's assets primarily in common stocks. FMR
normally invests the Portfolio's assets in companies FMR believes have
above-average growth potential.
-HIGH INCOME PORTFOLIO
Investment Objective: This Portfolio seeks a high level of current
income while also considering growth of capital. FMR normally invests at
least 65% of the Portfolio's total assets in income producing debt
securities, preferred stocks, and convertible securities, with an
emphasis on lower-quality debt securities. 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: This Portfolio seeks long term growth of capital.
FMR normally invests at least 65% of the Portfolio's total assets in
foreign securities. FMR normally invests the Portfolio's assets
primarily in common stocks.
10
<PAGE> 14
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. Bankers Trust Company
currently serves as sub-advisor to the Index 500 Portfolio.
-INDEX 500 PORTFOLIO
Investment Objective: This Portfolio seeks investment results that
correspond to the total return of common stocks publicly traded in the
United States, as represented by the S&P 500. Bankers Trust Company
normally invests at least 80% of the Portfolio's assets in common
stocks included in the S&P 500.
-CONTRAFUND PORTFOLIO
Investment Objective: This Portfolio seeks capital appreciation. FMR
normally invest the Portfolio's assets primarily in common stocks. FMR
invest the Portfolio's assets in securities of companies whose value
FMR believes is not fully recognized by the public.
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.
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.
11
<PAGE> 15
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.
-MID CAP GROWTH FUND
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.
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.
12
<PAGE> 16
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 ("Goldman Sachs VIT") is
registered with the SEC as an open-end management investment company that
offers shares in several investment mutual funds ("Funds"). Each Fund, except
the Global Income Fund, is a diversified investment company. Goldman Sachs
Asset Management acts as investment adviser for the Goldman Sachs VIT CORE
Small Cap Equity and Mid Cap Equity Funds. Goldman Sachs Asset Management
International acts as investment adviser for the Goldman Sachs VIT
International Equity and Global Income Funds.
GOLDMAN SACHS VIT 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 VIT 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 VIT 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.
GOLDMAN SACHS VIT MID CAP VALUE 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 $400 million and $16
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
13
<PAGE> 17
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 ("AMT") is registered with the
SEC as a diversified open-end management investment company. AMT has nine
separate series, which are called Portfolios. Shares of each Portfolio
represent an interest in that Portfolio. Neuberger Berman Management Inc. acts
as the Fund's investment advisor. Neuberger Berman, LLC is the sub-adviser.
PARTNERS PORTFOLIO
Investment Objective: To seek capital growth. This Portfolio invests
mainly in common stock of mid-to large-capitalization companies. Its investment
co-managers seek securities believed to be undervalued based on fundamentals
such as low price-to-earnings ratios, consistent cash flows, and the company's
track record through all points of the market cycle. The Portfolio generally
considers selling a stock when it reaches the managers' target price, when it
fails to perform as expected, or when other opportunities appear more
attractive. The Portfolio has the ability to change its goal without
shareholder approval, although it does not currently intend to do so.
OTHER INFORMATION
Contractual Arrangements. 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.
Conflicts of Interest. 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 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. At our discretion, we may issue Contracts at ages higher than age
85.
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.
14
<PAGE> 18
PREMIUM PAYMENTS
The Initial Premium Payment. The initial Premium Payment must be at
least $5,000 for Non-Qualified Contracts, and 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. Subsequent Premium Payments to the Variable
Account will purchase Accumulation Units at the price next computed for the
appropriate Subaccount after we receive the additional Premium Payment. For
Contracts purchased in the States of Oregon and Massachusetts, 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 Owner (or Annuitant if the owner is not a natural person) 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 28).
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.
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 some jurisdictions we must refund
aggregate Premium Payments in the event you exercise the free look right. In
such jurisdictions, and for IRA's, we currently allocate any Net Premium
Payments which are to be allocated to the Variable Account, 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. However, effective October 1, 1999, or the date the applicable state
approves this change, if later, we will discontinue this practice, and allocate
Net Premium Payments directly to the subaccounts you designate.
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.
15
<PAGE> 19
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 28. 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 27.
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 unloaned 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 (25%
in New York). 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 23.
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 value of an
Accumulation Unit 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 value of an Accumulation
Unit 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.
16
<PAGE> 20
- 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, minus any
outstanding loans on the Contract and accrued interest on such loans.
When charges or deductions are made against the Contract Value, we
deduct an appropriate number of Accumulation Units from the Subaccounts and an
appropriate amount from the Fixed Account in the same proportion that the your
interest in the Subaccounts and the unloaned value in the Fixed Account bears to
the total Contract Value. Value held in the Fixed Account is not subject to
Variable Account charges (Mortality and Expense Risk and Administration
Charges), but may be subject to Contingent Deferred Sales Charges, the Annual
Contract Fee, optional Enhanced Death Benefit Rider charge, and premium taxes,
if applicable.
ANNUITIZATION
Maturity Date. The Maturity Date is the date on which annuity payments
are scheduled to begin. You select the Maturity Date on the application. The
earliest Maturity Date must be at least 2 years after the Date of Issue, unless
otherwise approved (10 years after the Date of Issue in the States of Oregon
and Massachusetts). 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. You may elect
a single payment equal to the cash Surrender Value on the Maturity Date, rather
than annuity payments.
If you request in writing (see "Ownership Provisions", page 20), 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 the Contract
Value in the Fixed Account (less any premium tax previously unpaid) to provide
a Fixed Annuity payment.
If an election of an Annuity Payment Option is not on file with
National Life on the Annuitization Date, 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 with 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.
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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 on his or her birthday nearest the Annuitization Date, 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 payment to payment; 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.
Once payments have begun, future payments will not reflect any changes
in mortality experience.
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 16).
Assumed Investment Rate. A 3.5% Assumed Investment Rate is built into
the Annuity Tables contained in the Contracts. We may make assumed investment
rates available at rates other than 3.5%. 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, as measured by the Net Investment Factor, is at a
constant 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 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 using the age of the Chosen
Human Being on his or her nearest birthday, and the sex of the Chosen Human
Being, if applicable. The applicable Annuity Table will be based on our
expectation of investment earnings, expenses and mortality (if payments depend
on whether the Chosen Human Being is alive) on the Annuitization Date. The
applicable Annuity Table will provide a periodic Fixed Annuity payment at least
as great as the guarantee described in your Contract.
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.
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<PAGE> 22
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 a Chosen Human Being (who may be named at the time of
election of the Payment Option), ceasing with the last payment due
prior to the death of the Chosen Human Being. It would be possible
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.
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. A surrender is
subject to any applicable Contingent Deferred Sales Charge at the time of the
surrender.
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, minus all
Withdrawals (including any CDSC deducted in connection with such Withdrawals),
and minus any outstanding loans on the Contract and accrued interest, and
in each case 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.
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
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<PAGE> 23
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, 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.
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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<PAGE> 24
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
33). 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 26. 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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<PAGE> 25
(3) the risk that more Owners than expected will qualify for and exercise
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. We may make a profit from these deductions. Any profit may be used
to finance distribution expenses.
CONTINGENT DEFERRED SALES CHARGE
We may pay a commission up to 6.5% (7.0% during certain promotional
periods) for the sale of a Contract; however, 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, and last from earnings on Net
Premium Payments. 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
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an amount not exceeding the annual CDSC-free Withdrawal amount (see "Available
Automated Fund Management Features-Systematic Withdrawals", page 30), or by
making a Withdrawal which is part of a series of substantially equal periodic
payments over the life of the Owner or the joint lives of the Owner and his or
her spouse, to which section 72(t)(2)(A)(iv) of the Code applies. You may be
subject to a tax penalty if you take Withdrawals prior to age 59 1/2 (see
"Federal Income Tax Considerations", page 33). In New Jersey and Washington,
the CDSC-free provision will apply to full surrenders and Withdrawals 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 and less any outstanding loan and accrued interest, as of
the last Contract Anniversary.
We will waive the CDSC if the Owner dies or if the Owner annuitizes.
However, if the Owner elects a settlement under Payment Option 1, and
subsequently surrenders the Contract prior to seven years after the date of the
last Premium Payment, the surrender will be subject to a CDSC.
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. This waiver is
not available in the States of New Jersey and New York.
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 unloaned portion of 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 16. 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 we impose a transfer charge, we will deduct it 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
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<PAGE> 27
Rebalancing features, transfers resulting from loans, 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.
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 33. 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 unloaned portion of the Fixed Account.
OTHER CHARGES
The Variable Account purchases shares of the Funds at net asset value.
The net asset value of those shares reflect management fees and expenses already
deducted from the assets of the Funds. Information on the fees and expenses for
the Funds is set forth in "Underlying Fund Annual Expenses" on page 5.
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 currently 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. However, effective October 1, 1999, or the date the
applicable state approves this change, if later, we will no longer temporarily
allocate Net Premium Payments to the Money Market Subaccount in these cases.
Net Premium Payments will be allocated to the Subaccounts directly as you
designate. When this change is effective, we will refund only the Premium
Payments.
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<PAGE> 28
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. In order to revoke the
Contract, if it has not been received, written notice must be mailed or
delivered to the Home Office.
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.
LOAN PRIVILEGE - TAX SHELTERED ANNUITIES
We currently anticipate that beginning March 31, 2000, if you own a
section 403(b) Tax-Sheltered Annuity Contract, a loan provision will be
available on your Contract. Loans will be subject to the terms of the Contract
and the Code.
If a loan provision is included in your Tax-Sheltered Annuity
Contract, loans will be available beginning one year after a Contract's Date of
Issue, and prior to the Annuitization Date. You will be able to borrow a
minimum of $1500 (we may permit lower amounts). The maximum loan balance which
may be outstanding at any time will be 50% of the sum of Contract Value,
outstanding loans and accrued interest on loans, but not more than $50,000. The
$50,000 limit will be reduced by the highest loan balances owed during the
prior one-year period, which may be more than the amount outstanding at the
time of the loan, if an interest payment or principal repayment has been made.
Only one loan may be outstanding with respect to any one Contract at any time.
Loans may only be secured by the Contract Value.
All loans will be made from the Collateral Fixed Account. An amount
equal to the principal amount of the loan will be transferred to the Collateral
Fixed Account. Unless you otherwise instruct, we will transfer to the
Collateral Fixed Account an amount equaling the loan from the Subaccounts of
the Variable Account and unloaned portion of the Fixed Account in the same
proportion that such amounts bear to the total Contract Value. No CDSC is
deducted at the time of the loan or on any transfers to the Collateral Fixed
Account. If you provide specific instructions, loan amounts must be taken first
from the Variable Account, and may only be taken from the unloaned portion of
the Fixed Account to the extent that the Contract Value in the Variable Account
is insufficient to provide the loan. If we cannot process the loan in
accordance with your instructions, then the loan will not be processed until we
receive further instructions from you.
Until the loan has been repaid in full, that portion of the Collateral
Fixed Account equal to the outstanding loan balance shall be credited on each
Contract Anniversary with interest at an annual rate we declare from time to
time, but will never be less than an annual rate of 3.0%. Specific loan terms
are disclosed at the time of loan application or loan issuance.
Loans must be repaid in substantially level payments, not less
frequently than quarterly, within five years. Loans used to purchase your
principal residence must be repaid within 15 years. During the loan term, the
outstanding balance of the loan will continue to accrue interest at annual
rates specified in the loan agreement or an amendment to the loan agreement. We
will determine the loan interest rates at regular intervals at least once every
twelve months, and not more frequently than once in any three month period. The
maximum interest rate will be the greater of :
- the Moody's Corporate Bond Yield Average - Monthly Average
Corporates, as published by Moody's Investors Service, Inc., or its
successor, (or if that average is no longer published, a
substantially similar average), for the calendar month ending two
months before the date the rate is determined; or
- 4%.
The loan interest rate is subject to change on each Contract
Anniversary. If the loan interest rate changes, we will send you a new loan
agreement setting out a new schedule of payments. We must reduce the loan
interest if on a Contract Anniversary the maximum loan interest rate is lower
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<PAGE> 29
than the interest rate for the previous Contract Year by 0.50% or more. Any
increase to the loan interest rate must be at least 0.50%. The loan interest
rate we charge will be equal to or less than the maximum loan interest rate at
the time it is determined, and will never be higher than 15%.
Loan repayments will consist of principal and interest in amounts set
forth in the loan agreement or an amendment to the loan agreement. Loan
principal repayments will, on the date they are received, be allocated among
the Fixed Account and Subaccounts of the Variable Account in accordance with
the allocation of Net Premium Payments then in effect.
If you surrender your Contract while a loan is outstanding, you will
receive the Cash Surrender Value, which is reduced to reflect the loan
outstanding plus accrued interest. If the Owner/Annuitant dies while the loan
is outstanding, the Death Benefit will also be reduced to reflect the amount of
the loan outstanding plus accrued interest. If annuity payments start while the
loan is outstanding, the Contract Value will be reduced by the amount of the
outstanding loan plus accrued interest. Until the loan is repaid, we may
restrict any transfer of the Contract which would otherwise qualify as a
transfer as permitted in the Code.
If a loan payment is not made when due, interest will continue to
accrue. If a loan payment is not made within 31 days of when it was due, then
the entire balance of the loan will be considered in default. This amount may be
taxable to the borrower, and may be subject to the early withdrawal tax
penalty. If you are not eligible to take a distribution pursuant to the
Contract or plan provisions, the deemed distribution will be reportable for tax
purposes, but will not be offset against the Contract Value until such time as
a distribution may be made.
Loans may also be subject to additional limitations or restrictions
under the terms of the employer's plan. Loans permitted under this Contract may
still be taxable in whole or part if the participant has additional loans from
other plans or contracts. We will calculate the maximum nontaxable loan based on
the information provided by the participant or the employer. In addition, if
the section 403(b) Tax-Sheltered Annuity Contract is subject to the Employee
Retirement Income Security Act of 1974 ("ERISA"), a loan will be treated as a
"prohibited transaction" subject to certain penalties unless additional ERISA
requirements are satisfied. You should seek competent legal advice before
requesting a loan.
If a loan is outstanding, all payments received from you will be
considered loan repayments. Any payments received from your employer will be
considered premium payments, unless specifically identified as loan repayments.
We reserve the right to modify the terms or procedures associated with the loan
privilege in the event of a change in the laws or regulations relating to the
treatment of loans. We also reserve the right to assess a loan processing fee.
IRA's, Non-Qualified Contracts and Qualified Contracts other than section
403(b) Tax-Sheltered Annuity Contracts are not eligible for loans.
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. "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 22), any outstanding loan and accrued
interest, and, in certain states, a premium tax charge (see "Premium Taxes",
page 24). 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.
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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, except where the Withdrawal is part of
an automated process of paying investment advisory fees to the Owner's
investment advisor. 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 New Jersey and Washington) 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 22. However, see "Available
Automated Fund Management Features-Systematic Withdrawals" page 30, for
information on a limited means of making systematic Withdrawals in the first
year free of the CDSC. Another limited way to make a Withdrawal in the first
year without paying a CDSC is to make a Withdrawal which is part of a series of
substantially equal periodic payments made for the life of the Owner or the
joint lives of the Owner and his or her spouse, under section 72(t)(2)(a)(iv)
of the Code. 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. If you provide specific
instructions, amounts must be deducted first from the Variable Account and may
only be deducted from the unloaned portion of the Fixed Account to the extent
that the Contract Value in the Variable Account is insufficient to accomplish
the Withdrawal. If specific allocation instructions are not provided, the
Withdrawal will be deducted pro rata from the Subaccounts and from the unloaned
portion of 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 CDSC 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 unloaned
portion of 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 33.
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,
(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.
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, Withdrawal or loan
for up to six months after we receive a written request in a form satisfactory
to us.
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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 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, and in the case of section 403(b) Tax Sheltered
Annuities, take loans up to $10,000, 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
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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. 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.
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
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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 unloaned portion of 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 unloaned portion of 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 22. 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 10% CDSC-free Withdrawal provision applies in New
Jersey and Washington see "Contingent Deferred Sales Charge," page 22). 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.
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.
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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 which is not held in a
Collateral Fixed Account is guaranteed to accumulate at a minimum effective
annual interest rate of 3.0%. We may credit the Contract Value in the unloaned
portion of 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 unloaned portion of 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 unloaned portion of the Fixed Account for Withdrawals are accounted for on
a first in, first out basis for such purpose.
National Life reserves the right to change the method of crediting
interest from time to time, provided that such changes do not have the effect
of reducing the guaranteed rate of interest below 3.0% per annum or shorten the
period for which the interest rate applies to less than 12 months.
For Contracts purchased in the State of Washington, no Premium Payments
or Contract Value may be allocated to the Fixed Account.
ENHANCED FIXED ACCOUNT
During special promotional periods (the "offer period"), we may make
available to the Contracts a special Fixed Account Option, called the "Enhanced
Fixed Account". The Enhanced Fixed Account, when available, allows you to move
value into the Variable Account on a gradual and systematic basis,
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while earning interest at a higher fixed rate that that otherwise offered on
the Fixed Account on your value while it awaits transfer into the Variable
Account.
During an offer period (which will be from time to time at our
discretion), the Enhanced Fixed Account will be available to new and existing
Contract Owners who make a one-time new Premium Payment of at least a minimum
dollar amount we specify at the time of the offer. Contract Value in the
Enhanced Fixed Account will accumulate at an effective annual interest rate in
excess of the current rates then being credited to Contract Value in the Fixed
Account. We will declare the interest rate for the Enhanced Fixed Account at
the time of the offer in our discretion, and this interest rate will apply for
the entire offer period. When we set an offer period, we will announce all the
terms of the Enhanced Fixed Account, and post this information on our web site
at www.nlv.com.
We will require that the Contract Value in the Enhanced Fixed Account be
systematically transferred on a monthly basis from the Enhanced Fixed Account
to the Subaccounts. The required monthly transfer amount will be a percentage
of the Premium Payment allocated to the Enhanced Fixed Account. We will declare
this percentage at the time of the offer, in our discretion. Each month on the
Monthly Contract Date, the monthly transfer amount will be transferred from the
Enhanced Fixed Account to the Subaccounts and in the percentage amounts
selected by the Owner (other than the Money Market Subaccount), until the
Contract Value in the Enhanced Fixed Account is exhausted.
The Enhanced Fixed Account will be part of the Fixed Account described
above.
Transfers into the Enhanced Fixed Account will not be allowed. The Owner
may transfer Contract Value out of the Enhanced Fixed Account at any time, by
making a transfer request. If the entire Contract Value in the Enhanced Fixed
Account is transferred out, the program ends. If less than the entire Contract
Value in the Enhanced Fixed Account is transferred out, the scheduled monthly
transfers will continue until the Enhanced Fixed Account is exhausted.
Withdrawals from the Enhanced Fixed Account will be allowed, in the same
manner as for other Withdrawals, but will be subject to any applicable CDSC.
For Contracts utilizing the Enhanced Fixed Account, National Life
reserves the right to reduce the number of different Subaccounts, other than
the Money Market Subaccount, that may be used by the Contract over its entire
lifetime from 16 to 15. There is no charge for participating in an offer
period.
This program is not available simultaneously with Dollar Cost Averaging,
Portfolio Rebalancing or Systematic Withdrawals. If you elect Systematic
Withdrawals while you have Contract Value in the Enhanced Fixed Account, your
Contract Value in the Enhanced Fixed Account will immediately be transferred to
your selected Subaccounts.
During the offer period we may permit, in our discretion, additional
Premium Payments on the same Contract to be allocated to the Enhanced Fixed
Account. If we do so, we will add a declared percentage of the new Premium
Payment to the original monthly transfer amount, the same instructions for
allocating to the Subaccounts will apply, and the program will continue to
operate until the Contract Value in the Enhanced Fixed Account is exhausted.
We may need to refund Premium Payments intended for the Enhanced Fixed
Account if they are less than the minimum required, if they are received after
the end of the offer period, or if, for any other reason, the written
instructions of the Owner cannot be carried out. We may hold these Premium
Payments for up to 20 days before refunding them. Any amounts refunded will be
credited with interest at 5%.
This program will not be available in the State of Washington.
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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
is not available in Texas. 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, or the Annuitant if the Owner is not a
natural person) 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
(including any CDSC deducted in connection with such Withdrawals)
and less any outstanding loan and accrued interest, and
(c) the largest Contract Value as of any prior Contract Anniversary
after the Enhanced Death Benefit Rider was applicable to the Contract,
plus Net Premium Payments,minus any Withdrawals (including any CDSC
deducted in connection with such Withdrawals), and minus any loan taken
and accrued interest thereon, in each case 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
24).
If you (or the first of Joint Owners, or the Annuitant if the Owner is
not a natural person) 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, and any outstanding loan on the Contract and accrued interest on
such loan.
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 24.
We distribute the Enhanced Death Benefit in the same manner as the
normal Death Benefit. See "Death of Owner", page 19.
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
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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.
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.
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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 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.
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
35
<PAGE> 39
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.
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.
36
<PAGE> 40
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 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 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
37
<PAGE> 41
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.
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
38
<PAGE> 42
0.15%, the Annual Contract Fee of $30.00, the applicable CDSC, the
optional Enhanced Death Benefit Rider charge of 0.20% were deducted.
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 converted based on the actual average
Accumulated Value of the Contracts as of December 31, 1998. The charge
works out to 0.05% per annum. The returns shown in the "Life of
Subaccount to 12/31/98" column, where the life of the Subaccount is
less than 1 year, are not annualized.
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 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.70% N/A N/A 12.20% 7/2/97
Alger American Growth 38.70% N/A N/A 31.30% 7/2/97
Fidelity VIP Fund-Equity Income 2.80% N/A N/A 9.10% 7/2/97
Fidelity VIP Fund-Growth 30.20% N/A N/A 26.20% 7/2/97
Fidelity VIP Fund-High Income -12.90% N/A N/A -2.70% 7/2/97
Fidelity VIP Fund-Overseas 3.90% N/A N/A -0.40% 7/2/97
Fidelity VIP Fund II-Index 500 19.20% N/A N/A 20.50% 7/2/97
Fidelity VIP Fund II-Contrafund 20.90% N/A N/A 22.20% 7/2/97
Market Street Growth 4.70% N/A N/A 10.10% 7/2/97
Market Street Sentinel Growth 6.60% N/A N/A 14.20% 7/2/97
Market Street Aggressive Growth -0.90% N/A N/A 5.50% 7/2/97
Market Street Managed 3.70% N/A N/A 8.80% 7/2/97
Market Street Bond -0.50% N/A N/A 4.50% 7/2/97
Market Street International 1.40% N/A N/A -1.70% 7/2/97
Market Street Money Market -3.40% N/A N/A -0.30% 7/2/97
Strong Opportunity Fund II, Inc. 4.70% N/A N/A 12.50% 7/2/97
Strong Mid Cap Growth Fund 19.60% N/A N/A 23.60% 7/2/97
Van Eck Worldwide Bond 3.90% N/A N/A 5.00% 7/2/97
American Century VP Value N/A N/A N/A -4.00% 8/3/98
American Century VP Income & Growth N/A N/A N/A 1.80% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -7.50% 8/3/98
Goldman Sachs Global Income N/A N/A N/A -3.00% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -13.70% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -9.00% 8/3/98
J.P. Morgan International
Opportunities N/A N/A N/A -11.90% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -8.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A -5.90% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
The chart below shows Standardized Average Annual Total Returns
for a Contract which does not elect the optional Enhanced Death Benefit:
<TABLE>
<CAPTION>
Standardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Not Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.90% N/A N/A 12.40% 7/2/97
Alger American Growth 39.00% N/A N/A 31.50% 7/2/97
Fidelity VIP Fund-Equity Income 3.00% N/A N/A 9.30% 7/2/97
</TABLE>
39
<PAGE> 43
<TABLE>
<S> <C> <C> <C> <C> <C>
Fidelity VIP Fund-Growth 30.50% N/A N/A 26.40% 7/2/97
Fidelity VIP Fund-High Income -12.70% N/A N/A -2.50% 7/2/97
Fidelity VIP Fund-Overseas 4.10% N/A N/A -0.20% 7/2/97
Fidelity VIP Fund II-Index 500 19.50% N/A N/A 20.80% 7/2/97
Fidelity VIP Fund II-Contrafund 21.10% N/A N/A 22.50% 7/2/97
Market Street Growth 4.90% N/A N/A 10.40% 7/2/97
Market Street Sentinel Growth 6.80% N/A N/A 14.40% 7/2/97
Market Street Aggressive Growth -0.70% N/A N/A 5.70% 7/2/97
Market Street Managed 3.90% N/A N/A 9.00% 7/2/97
Market Street Bond -0.30% N/A N/A 4.70% 7/2/97
Market Street International 1.60% N/A N/A -1.40% 7/2/97
Market Street Money Market -3.20% N/A N/A -0.10% 7/2/97
Strong Opportunity Fund II, Inc. 4.90% N/A N/A 12.80% 7/2/97
Strong Mid Cap Growth Fund 19.80% N/A N/A 23.80% 7/2/97
Van Eck Worldwide Bond 4.10% N/A N/A 5.30% 7/2/97
American Century VP Value N/A N/A N/A -3.90% 8/3/98
American Century VP Income & Growth N/A N/A N/A 1.90% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -7.40% 8/3/98
Goldman Sachs Global Income N/A N/A N/A -2.90% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -13.60% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -8.90% 8/3/98
J.P. Morgan International
Opportunities N/A N/A N/A -11.80% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -8.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A -5.80% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
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 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. 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. 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 converted based on the actual average Accumulated Value
of the Contracts as of December 31, 1998. The charge works out to 0.05%
per annum.
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:
40
<PAGE> 44
<TABLE>
<CAPTION>
Nonstandardized Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider Is Elected)
1 Year to 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.70% N/A N/A 15.90% 7/2/97
Alger American Growth 45.70% N/A N/A 34.70% 7/2/97
Fidelity VIP Fund-Equity Income 9.80% N/A N/A 12.90% 7/2/97
Fidelity VIP Fund-Growth 37.20% N/A N/A 29.70% 7/2/97
Fidelity VIP Fund-High Income -5.90% N/A N/A 1.30% 7/2/97
Fidelity VIP Fund-Overseas 10.90% N/A N/A 3.60% 7/2/97
Fidelity VIP Fund II-Index 500 26.20% N/A N/A 24.10% 7/2/97
Fidelity VIP Fund II-Contrafund 27.90% N/A N/A 25.80% 7/2/97
Market Street Growth 11.70% N/A N/A 13.90% 7/2/97
Market Street Sentinel Growth 13.60% N/A N/A 17.90% 7/2/97
Market Street Aggressive Growth 6.10% N/A N/A 9.40% 7/2/97
Market Street Managed 10.70% N/A N/A 12.60% 7/2/97
Market Street Bond 6.50% N/A N/A 8.40% 7/2/97
Market Street International 8.40% N/A N/A 2.30% 7/2/97
Market Street Money Market 3.60% N/A N/A 3.70% 7/2/97
Strong Opportunity Fund II, Inc. 11.70% N/A N/A 16.30% 7/2/97
Strong Mid Cap Growth Fund 26.60% N/A N/A 27.10% 7/2/97
Van Eck Worldwide Bond 10.90% N/A N/A 8.90% 7/2/97
American Century VP Value N/A N/A N/A 3.00% 8/3/98
American Century VP Income & Growth N/A N/A N/A 8.80% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -0.50% 8/3/98
Goldman Sachs Global Income N/A N/A N/A 4.00% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -6.70% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -2.00% 8/3/98
J.P. Morgan International
Opportunities N/A N/A N/A -4.90% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -1.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A 1.10% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
41
<PAGE> 45
The chart below shows 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 5 Years to 10 Years to Life of Subaccount Date Subaccount
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.90% N/A N/A 16.20% 7/2/97
Alger American Growth 46.00% N/A N/A 35.00% 7/2/97
Fidelity VIP Fund-Equity Income 10.00% N/A N/A 13.10% 7/2/97
Fidelity VIP Fund-Growth 37.50% N/A N/A 30.00% 7/2/97
Fidelity VIP Fund-High Income -5.70% N/A N/A 1.50% 7/2/97
Fidelity VIP Fund-Overseas 11.10% N/A N/A 3.80% 7/2/97
Fidelity VIP Fund II-Index 500 26.50% N/A N/A 24.40% 7/2/97
Fidelity VIP Fund II-Contrafund 28.10% N/A N/A 26.10% 7/2/97
Market Street Growth 11.90% N/A N/A 14.10% 7/2/97
Market Street Sentinel Growth 13.80% N/A N/A 18.10% 7/2/97
Market Street Aggressive Growth 6.30% N/A N/A 9.60% 7/2/97
Market Street Managed 10.90% N/A N/A 12.80% 7/2/97
Market Street Bond 6.70% N/A N/A 8.60% 7/2/97
Market Street International 8.60% N/A N/A 2.50% 7/2/97
Market Street Money Market 3.80% N/A N/A 3.90% 7/2/97
Strong Opportunity Fund II, Inc. 11.90% N/A N/A 16.50% 7/2/97
Strong Mid Cap Growth Fund 26.80% N/A N/A 27.40% 7/2/97
Van Eck Worldwide Bond 11.10% N/A N/A 9.10% 7/2/97
American Century VP Value N/A N/A N/A 3.10% 8/3/98
American Century VP Income & Growth N/A N/A N/A 8.90% 8/3/98
Goldman Sachs International Equity N/A N/A N/A -0.40% 8/3/98
Goldman Sachs Global Income N/A N/A N/A 4.10% 8/3/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -6.60% 8/3/98
Goldman Sachs Mid Cap Value N/A N/A N/A -1.90% 8/3/98
J.P. Morgan International
Opportunities N/A N/A N/A -4.80% 8/3/98
J.P. Morgan Small Company N/A N/A N/A -1.90% 8/3/98
Neuberger Berman Partners N/A N/A N/A 1.20% 8/3/98
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
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 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 average annual 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. For purposes of computing the Annual Contract
Fee, the Annual Contract Fee has been converted into a per-
42
<PAGE> 46
dollar per-day charge. The per-dollar per-day charge has been converted
based on the actual average Accumulated Value of the Contracts as of
December 31, 1998. The charge works out to 0.05% per annum.
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:
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Not Elected and
the Contingent Deferred Sales Charge Is Not Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.90% 11.50% 18.10% 17.20% 9/21/88
Alger American Growth 46.00% 22.10% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 10.00% 17.10% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 37.50% 20.00% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -5.70% 7.20% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 11.10% 8.10% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 26.50% 22.00% N/A 19.50% 8/27/92
Fidelity VIP Fund II-Contrafund 28.10% N/A N/A 26.80% 1/3/95
Market Street Growth 11.90% 16.00% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 13.80% N/A N/A 19.10% 3/18/96
Market Street Aggressive Growth 6.30% 10.80% N/A 12.10% 5/1/89
Market Street Managed 10.90% 11.50% 9.70% 8.70% 12/12/85
Market Street Bond 6.70% 4.90% 6.50% 7.20% 2/24/84
Market Street International 8.60% 7.40% N/A 7.80% 11/1/91
Market Street Money Market 3.80% 3.50% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 11.90% 15.30% N/A 17.40% 5/8/92
Strong Mid Cap Growth Fund 26.80% N/A N/A 27.40% 12/31/96
Van Eck Worldwide Bond 11.10% 5.00% N/A 5.30% 9/1/89
American Century VP Value 3.30% N/A N/A 14.30% 5/1/96
American Century VP Income & Growth 25.00% N/A N/A 28.80% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 18.40% 1/12/98
Goldman Sachs Global Income N/A N/A N/A 6.80% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -10.50% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -14.40% 5/1/98
J.P. Morgan International
Opportunities 3.20% N/A N/A 7.30% 1/3/95
J.P. Morgan Small Company -6.90% N/A N/A 15.30% 1/3/95
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Not Elected and
the Contingent Deferred Sales Charge Is Not Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.90% 11.10% 18.10% 17.20% 9/21/88
Alger American Growth 39.00% 21.90% N/A 20.30% 1/9/89
Fidelity VIP Fund-Equity Income 3.00% 16.80% 14.00% 12.80% 10/9/86
Fidelity VIP Fund-Growth 30.50% 19.70% 17.70% 15.70% 10/9/86
Fidelity VIP Fund-High Income -12.70% 6.80% 9.50% 9.50% 9/19/85
Fidelity VIP Fund-Overseas 4.10% 7.70% 8.50% 7.00% 1/28/87
Fidelity VIP Fund II-Index 500 19.50% 21.70% N/A 19.40% 8/27/92
Fidelity VIP Fund II-Contrafund 21.10% N/A N/A 26.30% 1/3/95
Market Street Growth 4.90% 15.60% 13.60% 12.70% 2/24/84
Market Street Sentinel Growth 6.80% N/A N/A 17.70% 3/18/96
</TABLE>
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<PAGE> 47
<TABLE>
<S> <C> <C> <C> <C> <C>
Market Street Aggressive Growth -0.70% 10.40% N/A 12.10% 5/1/89
Market Street Managed 3.90% 11.10% 9.70% 8.70% 12/12/85
Market Street Bond -0.30% 4.40% 6.50% 7.20% 2/24/84
Market Street International 1.60% 6.90% N/A 7.80% 11/1/91
Market Street Money Market -3.20% 3.00% 3.90% 4.50% 2/24/84
Strong Opportunity Fund II, Inc. 4.90% 15.00% N/A 17.30% 5/8/92
Strong Mid Cap Growth Fund 19.80% N/A N/A 25.40% 12/31/96
Van Eck Worldwide Bond 4.10% 4.50% N/A 5.30% 9/1/89
American Century VP Value -3.70% N/A N/A 12.80% 5/1/96
American Century VP Income & Growth 18.00% N/A N/A 23.90% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 11.40% 1/12/98
Goldman Sachs Global Income N/A N/A N/A -0.20% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -17.50% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -21.40% 5/1/98
J.P. Morgan International
Opportunities -3.80% N/A N/A 6.50% 1/3/95
J.P. Morgan Small Company -13.90% N/A N/A 14.70% 1/3/95
Neuberger Berman Partners -4.30% N/A N/A 17.70% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the Enhanced Death Benefit Rider is Elected and
the Contingent Deferred Sales Charge Is Not Deducted)
1 Year to 5 Years to 10 Years to Life of Fund Date Fund
12/31/98 12/31/98 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 13.70% 11.30% 17.90% 16.90% 9/21/88
Alger American Growth 45.70% 21.90% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 9.80% 16.90% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 37.20% 19.80% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -5.90% 7.00% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 10.90% 7.90% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 26.20% 21.70% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 27.90% N/A N/A 26.60% 1/3/95
Market Street Growth 11.70% 15.70% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 13.60% N/A N/A 18.80% 3/18/96
Market Street Aggressive Growth 6.10% 10.60% N/A 11.90% 5/1/89
Market Street Managed 10.70% 11.20% 9.50% 8.50% 12/12/85
Market Street Bond 6.50% 4.70% 6.30% 7.00% 2/24/84
Market Street International 8.40% 7.20% N/A 7.60% 11/1/91
Market Street Money Market 3.60% 3.30% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 11.70% 15.10% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 26.60% N/A N/A 27.10% 12/31/96
Van Eck Worldwide Bond 10.90% 4.80% N/A 5.10% 9/1/89
American Century VP Value 3.10% N/A N/A 14.10% 5/1/96
American Century VP Income & Growth 24.80% N/A N/A 28.60% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 18.20% 1/12/98
Goldman Sachs Global Income N/A N/A N/A 6.60% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -10.60% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -14.50% 5/1/98
J.P. Morgan International
Opportunities 3.00% N/A N/A 7.10% 1/3/95
J.P. Morgan Small Company -7.10% N/A N/A 15.10% 1/3/95
Neuberger Berman Partners 2.50% N/A N/A 17.80% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
44
<PAGE> 48
<TABLE>
<CAPTION>
Adjusted Historic Average Annual Total Return
(Assuming the 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 12/31/98 to 12/31/98* Effective
-------- -------- -------- ------------ ---------
<S> <C> <C> <C> <C> <C>
Alger American Small Capitalization 6.70% 10.90% 17.90% 16.90% 9/21/88
Alger American Growth 38.70% 21.60% N/A 20.10% 1/9/89
Fidelity VIP Fund-Equity Income 2.80% 16.50% 13.70% 12.60% 10/9/86
Fidelity VIP Fund-Growth 30.20% 19.50% 17.50% 15.50% 10/9/86
Fidelity VIP Fund-High Income -12.90% 6.60% 9.30% 9.30% 9/19/85
Fidelity VIP Fund-Overseas 3.90% 7.50% 8.30% 6.80% 1/28/87
Fidelity VIP Fund II-Index 500 19.20% 21.50% N/A 19.20% 8/27/92
Fidelity VIP Fund II-Contrafund 20.90% N/A N/A 26.10% 1/3/95
Market Street Growth 4.70% 15.40% 13.30% 12.50% 2/24/84
Market Street Sentinel Growth 6.60% N/A N/A 17.50% 3/18/96
Market Street Aggressive Growth -0.90% 10.20% N/A 11.90% 5/1/89
Market Street Managed 3.70% 10.80% 9.50% 8.50% 12/12/85
Market Street Bond -0.50% 4.20% 6.30% 7.00% 2/24/84
Market Street International 1.40% 6.70% N/A 7.60% 11/1/91
Market Street Money Market -3.40% 2.80% 3.60% 4.30% 2/24/84
Strong Opportunity Fund II, Inc. 4.70% 14.80% N/A 17.10% 5/8/92
Strong Mid Cap Growth Fund 19.60% N/A N/A 25.20% 12/31/96
Van Eck Worldwide Bond 3.90% 4.30% N/A 5.10% 9/1/89
American Century VP Value -3.90% N/A N/A 12.50% 5/1/96
American Century VP Income & Growth 17.80% N/A N/A 23.60% 10/30/97
Goldman Sachs International Equity N/A N/A N/A 11.20% 1/12/98
Goldman Sachs Global Income N/A N/A N/A -0.40% 1/12/98
Goldman Sachs CORE Small Cap Equity N/A N/A N/A -17.60% 2/13/98
Goldman Sachs Mid Cap Value N/A N/A N/A -21.50% 5/1/98
J.P. Morgan International
Opportunities -4.00% N/A N/A 6.30% 1/3/95
J.P. Morgan Small Company -14.10% N/A N/A 14.50% 1/3/95
Neuberger Berman Partners -4.50% N/A N/A 17.40% 3/22/94
</TABLE>
*The returns shown in the "Life of Subaccount to 12/31/98" column, where the
life of the Subaccount is less than 1 year, are not annualized.
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 generally be 6.5%; however, during certain promotional periods
the commission may vary. These promotional periods will be determined by
National Life and the maximum commission paid during these periods will not
exceed 7.0%.
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<PAGE> 49
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 services for individually sold life insurance and
annuities.
FINANCIAL STATEMENTS
National Life's financial statements as of and for the years ended
December 31, 1998 and 1997, which are included in the 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.
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.
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 implemented a Year 2000 transition plan, and is
confirming that its service providers are also so engaged. The resources
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 believes that its computer systems are Year 2000 compliant, but
there can be no assurance that National Life has been successful, or that
interaction with other service providers will not impair National Life's
services at that time.
46
<PAGE> 50
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.
47
<PAGE> 51
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 received.
ANNUITIZATION DATE - The date on which annuity payments 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.
COLLATERAL FIXED ACCOUNT - The portion of the Fixed Account which holds value
that secures a loan on the Contract.
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, and minus any outstanding loan and accrued interest on such
loans.
CONTRACT YEAR - Each year the Contract remains in force commencing with the
Date of Issue.
DATE OF ISSUE - The date shown as the Date of Issue on the Data Page of the
Contract.
DEATH BENEFIT - The benefit payable to the Beneficiary upon the death of the
Owner or the Annuitant.
DISTRIBUTION - Any payment of part or all of the Contract Value.
FIXED ACCOUNT - The Fixed Account is made up of all assets of National Life
other than those in the Variable Account or any other segregated asset account
of National Life.
FIXED ANNUITY - An annuity providing for payments which are guaranteed by
National Life as to dollar amount during Annuitization.
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<PAGE> 52
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.
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
(IRA's) or 403(b) (Tax-Sheltered Annuities) of 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 (IRA's),
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. Separate Accumulation Units and Annuity
Units are maintained for each Subaccount.
TAX-SHELTERED ANNUITY - An annuity which qualifies for favorable tax treatment
under section 403(b) of the Code.
VALUATION DAY - Each day the New York Stock Exchange is open for business other
than the day after Thanksgiving and any day on which trading is restricted.
Unless otherwise indicated, 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.
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<PAGE> 53
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.
50
