<PAGE>
LINCOLN LIFE VARIABLE ANNUITY ACCOUNT Q
GROUP VARIABLE ANNUITY CONTRACTS
issued by:
Lincoln National Life Insurance Co.
1300 South Clinton Street
Fort Wayne, Indiana 46802
Account Q
This Prospectus describes group variable annuity contracts and individual
certificates issued thereunder (together, contracts) issued by Lincoln National
Life Insurance Co. (Lincoln Life). They are for use with the following
retirement plans (plans) qualified for special tax treatment (qualified
contracts) under the Internal Revenue Code of 1986, as amended (the code):
1. Public school systems and 501(c)(3) tax-exempt organizations (403(b));
2. Qualified corporate employee pension and profit-sharing trusts and qualified
annuity plans;
3. Qualified trusts forming part of an employer's stock bonus, pension or
profit-sharing plan (401(a));
4. Government and non-profit deferred compensation plans (457);
5. Simplified employee pension plans (SEP) (consult your representative as to
the availability of this contract for SEPs);
6. SIMPLE IRA (consult your representative as to the availability of this
contract for SIMPLE IRAs); and
7. Other retirement plans qualified under the code (consult your representative
as to the availability).
The contracts offer contractowners and participants the accumulation of account
value and payment of periodic annuity benefits. These benefits may be paid on a
variable or fixed basis or a combination of both. Benefits start at an annuity
commencement date which you select. If the annuitant dies before the annuity
commencement date, a death benefit may be paid to the beneficiary.
Allocated and unallocated versions of the group contracts are available. In an
allocated contract, an account value is maintained on behalf of each
participant and the employer if requested; each participant receives a
certificate. Under an unallocated contract, participant accounting is performed
by the contractowner or a designated administrator. As discussed herein, the
features of allocated and unallocated contracts differ.
All investments (purchase payments) for benefits on a variable basis will be
placed in Lincoln Life Variable Annuity Account Q (variable annuity account
[VAA]). The VAA is a segregated investment account of Lincoln Life, which is
the Depositor. Based upon contractowner (unallocated contracts) or participant
(allocated contracts) instructions, the VAA invests purchase payments (at net
asset value) in specified mutual funds (the fund or funds and series). Both the
value of a contract before the annuity commencement date and the amount of
payouts afterward will depend upon the investment performance of the fund(s) or
series selected. Investments in these funds and series are neither insured nor
guaranteed by the U.S. Government or by any other person or entity.
Purchase payments for benefits on a fixed basis will be placed in the fixed
account, which is part of our general account. This Prospectus deals only with
those elements of the contracts relating to the VAA, except where reference to
the fixed account is made. SPECIAL LIMITS APPLY TO WITHDRAWALS AND TRANSFERS
FROM THE FIXED ACCOUNT.
We may not offer a contract continuously or in every state.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION (SEC) NOR HAS THE SEC PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Prospectus details the information regarding the VAA that contractowners
and participants should know before investing. This Prospectus is printed in a
booklet that also includes a current Prospectus for each of the following
funds: Lincoln National Aggressive Growth Fund, Inc., Lincoln National Bond
Fund, Inc., Lincoln National Capital Appreciation Fund, Inc., Lincoln National
Equity-Income Fund, Inc., Lincoln National Global Asset Allocation Fund, Inc.,
Lincoln National Growth and Income Fund, Inc., Lincoln National International
Fund, Inc., Lincoln National Managed Fund, Inc., Lincoln National Money Market
Fund, Inc., Lincoln National Social Awareness Fund, Inc., and Lincoln National
Special Opportunities Fund, Inc. and a current Prospectus for the Delaware
Group Premium Fund, Inc., which contains information regarding the Decatur
Total Return Series, Global Bond Series and the Trend Series. All Prospectuses
should be read carefully and kept for future reference.
A statement of additional information (SAI), dated May 15, 1998, concerning
the VAA has been filed with the SEC and is incorporated by this reference into
this Prospectus. If you would like a free copy, write, Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801, or call 1-800-4LINCOLN
(454-6265). A table of contents for the SAI appears on the last page of this
Prospectus.
This Prospectus is dated May 15, 1998.
1
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Account Q
FOR YOUR INFORMATION:
IF A CONTRACTOWNER OR PARTICIPANT WITHDRAWS ACCOUNT VALUE, A CDSC OF UP TO 6%
MAY BE DEDUCTED. THE AMOUNT OF THE CDSC DEPENDS ON THE CONTRACT DURATION.
HOWEVER, NO CDSC IS ASSESSED WHEN ANNUITY PAYOUTS BEGIN OR AT THE PARTICIPANT'S
DEATH, OR UNDER CERTAIN OTHER BENEFIT-RESPONSIVE CIRCUMSTANCES. SEE CHARGES AND
OTHER DEDUCTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ----------------------------------------------------------------------
<S> <C>
Special terms 3
- ----------------------------------------------------------------------
Expense tables 4
- ----------------------------------------------------------------------
Condensed financial information for the variable annuity account 7
- ----------------------------------------------------------------------
Financial statements 7
- ----------------------------------------------------------------------
Lincoln National Life Insurance Co. 7
- ----------------------------------------------------------------------
Variable annuity account (VAA) 7
- ----------------------------------------------------------------------
Investments of the variable annuity account 7
- ----------------------------------------------------------------------
Charges and other deductions 10
- ----------------------------------------------------------------------
The contracts 12
- ----------------------------------------------------------------------
Annuity payouts 17
- ----------------------------------------------------------------------
Federal tax status 18
- ----------------------------------------------------------------------
</TABLE>
ALSO, WITHDRAWALS MAY BE SUBJECT TO A PENALTY TAX UNDER SECTION 72 (T) OF THE
CODE (SEE FEDERAL TAX STATUS) BEFORE THE ANNUITY COMMENCEMENT DATE.
INDIVIDUAL CERTIFICATES UNDER THE GROUP ALLOCATED CONTRACT CONTAIN A FREE-LOOK
PROVISION. SEE RETURN PRIVILEGE.
<TABLE>
<CAPTION>
Page
- --------------------------------------------------------------
<S> <C>
Voting rights 19
- --------------------------------------------------------------
Distribution of the contracts 19
- --------------------------------------------------------------
Return privilege 20
- --------------------------------------------------------------
State regulation 20
- --------------------------------------------------------------
Restrictions under the Texas Optional Retirement Program 20
- --------------------------------------------------------------
Records and reports 20
- --------------------------------------------------------------
Preparing for Year 2000 20
- --------------------------------------------------------------
Legal proceedings 21
- --------------------------------------------------------------
Other information 21
- --------------------------------------------------------------
Statement of additional information
table of contents for VAA 23
- --------------------------------------------------------------
</TABLE>
2
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Account Q
SPECIAL TERMS
(Throughout this Prospectus, in order to make the following documents more
understandable to you, we have italicized the special terms.)
Account or variable annuity account (VAA) -- The segregated investment account,
Account Q, into which Lincoln Life sets aside and invests the assets for the
variable annuity contracts offered in this Prospectus.
Account value -- Value held under this contract. The value may be maintained in
either the fixed account, the VAA or both, depending on allocations.
Accumulation unit -- A measure used to calculate account value for the
subaccounts before the annuity commencement date. See The contracts.
Advisor or investment advisor -- Lincoln Investment Management, Inc. (Lincoln
Investment), which provides investment management services to each of the
funds. See Investment advisor.
Annuitant -- The person upon whose life the annuity benefit payments made after
the annuity commencement date will be based.
Annuity commencement date -- The valuation date when the funds or series are
withdrawn or converted into annuity units or fixed dollar payout for payment of
annuity benefits under the annuity payout option selected. For purposes of
determining whether an event occurs before or after the annuity commencement
date, the annuity commencement date is deemed to begin at the close of business
on that valuation date.
Annuity option -- One of the optional forms of payout of the annuity available
within the contract. See Annuity payouts.
Annuity payout -- An amount paid after the annuity commencement date at regular
intervals under one of several options available to the annuitant and/or any
other payee. This amount may be paid on a variable or fixed basis, or a
combination of both.
Annuity unit -- A measure used to calculate the amount of annuity payouts after
the annuity commencement date. See Annuity payouts.
Beneficiary -- The person or entity designated by a participant under a 403(b)
plan that is not subject to ERISA or an annuitant to receive a death benefit,
if any, payable upon the death of the participant or the annuitant.
Code -- The Internal Revenue Code of 1986, as amended.
Contingent deferred sales charge (CDSC) -- A charge assessed on certain
premature withdrawals of account value, calculated according to the contract
provisions. See Charges and other deductions.
Contract (variable annuity contract) -- The agreement between a contractowner
and us providing a variable annuity and individual certificates issued
thereunder.
Contractowner (you, your owner) -- The party named as contractowner on the
contract. The contractowner may be an employer, a retirement plan trust, an
association or any other entity allowed under law. In this prospectus, "you"
may also be used to reference the participant.
Contract year -- Each twelve month period starting with the effective date of
the contract and starting with each contract anniversary after that.
Death benefit -- The amount payable to your designated beneficiary if the
participant in a 403(b) plan not subject to ERISA dies before the annuity
commencement date. See The contracts.
Delaware Management -- Delaware Management Company, Inc.
Employer -- The organization specified in the contract that makes the plan
available to its employees.
Fixed account -- An account established for the contract which is part of the
general assets of Lincoln Life.
Fund -- Any of the eleven individual Lincoln National underlying investment
options in which purchase payments are invested.
Home office -- The headquarters of Lincoln National Life Insurance Co., located
at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Lincoln Investment -- Lincoln Investment Management, Inc.
Lincoln Life (we, us, our) -- Lincoln National Life Insurance Co.
Participant -- A person defined as a participant in the plan, who has enrolled
under a contract and, under an allocated group contract, on whose behalf
Lincoln Life maintains an account value.
Participant year -- Each twelve month period starting with the date a
participant enrolls under a contract and starting with each participant
anniversary after that.
Plan -- The retirement plan or arrangement named in the contract offered by the
employer to its employees for which a contract is used.
Purchase payments -- Amounts paid into the contract to purchase an annuity.
Qualified plan -- A retirement plan qualified for special tax treatment under
the Code, as amended, including Sections 401, 403, 408, 414 and 457.
Series -- Any of the three underlying portfolios of the Delaware Group Premium
Fund, Inc., in which purchase payments are invested.
Statement of additional information (SAI) -- A document required by the SEC to
be provided upon request to a prospective purchaser of a contract. This free
document gives more information about Lincoln Life, the VAA, and the contract.
Subaccount -- That portion of the VAA that reflects investments in accumulation
and annuity units of a particular fund or series. There is a separate
subaccount which corresponds to each fund and series.
Valuation date -- Each day the New York Stock Exchange (NYSE) is open for
trading.
Valuation period -- The period starting at the close of trading (currently 4:00
p.m. New York time) on each day that the NYSE is open for trading and ending at
the close of such trading on the next valuation date.
Withdrawal -- A contract right that allows contractowners and participants to
obtain a portion or all of account value, subject to restrictions.
3
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Account Q
EXPENSE TABLES
CONTRACTOWNER AND/OR PARTICIPANT TRANSACTION EXPENSES:
CDSC (as a percentage of account value withdrawn):6%
(Note: Subject to the restrictions described under Withdrawals, up to 20% of
account value may be withdrawn free of this charge in any contract year (see
CDSC under Charges and other deductions for additional information)).
REDUCED CDSC OVER TIME:
The CDSC percentage listed above is the maximum percentage charged as a
percentage of account value withdrawn. The later a withdrawal occurs, the lower
the CDSC percentage applied, according to the following table:
<TABLE>
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract year 1 2 3 4 5 6 7 8 9 10+
CDSC 6% 6% 6% 6% 5% 4% 3% 2% 1% 0
</TABLE>
- --------------------------------------------------------------------------------
ACCOUNT CHARGE:
This $25 fee is a single charge assessed against account value maintained on
behalf of each participant and on behalf of the contractowner under an
allocated contract on the last valuation date of each contract year and upon
withdrawal of all account value; it is NOT a separate charge for each
subaccount.
VAA ANNUAL EXPENSES
(as a percentage of average account value for each subaccount)*:
<TABLE>
<CAPTION>
Mortality and expense risk charge
- -----------------------------------------------
<S> <C>
Standard 1.00%
"Breakpoint" .75%
</TABLE>
- --------------------------------------------------------------------------------
Contracts issued with respect to plans meeting specified eligibility
requirements will generally impose a lower "breakpoint" mortality and expense
risk charge, as shown above and described in detail under Charges and other
deductions--additional information.
*The VAA is divided into 14 separately-named subaccounts, each of which, in
turn, invests purchase payments in its respective fund or series.
4
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Account Q
ANNUAL EXPENSES OF THE FUNDS AND SERIES FOR THE YEAR ENDED 1997
(as a percentage of each fund's and series' average net assets):
<TABLE>
<CAPTION>
Management Other Total
fees + expenses = expenses
- ---------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1. Aggressive Growth (AG) 0.73% 0.08% 0.81%
- ---------------------------------------------------------------------------
2. Bond (B) 0.46 0.07 0.53
- ---------------------------------------------------------------------------
3. Capital Appreciation (CA)* 0.75 0.09 0.84
- ---------------------------------------------------------------------------
4. Equity-Income (EI)* 0.75 0.07 0.82
- ---------------------------------------------------------------------------
5. Global Asset Allocation (GAA) 0.72 0.17 0.89
- ---------------------------------------------------------------------------
6. Growth and Income (GI) 0.32 0.03 0.35
- ---------------------------------------------------------------------------
7. International (I) 0.79 0.14 0.93
- ---------------------------------------------------------------------------
8. Managed (M) 0.37 0.05 0.42
- ---------------------------------------------------------------------------
9. Money Market (MM) 0.48 0.11 0.59
- ---------------------------------------------------------------------------
10. Social Awareness (SA) 0.36 0.05 0.41
- ---------------------------------------------------------------------------
11. Special Opportunities (SO) 0.37 0.05 0.42
- ---------------------------------------------------------------------------
12. Trend Series (TS)** 0.67 0.13 0.80
- ---------------------------------------------------------------------------
13. Decatur Total Return Series
(DTRS)** 0.60 0.11 0.71
- ---------------------------------------------------------------------------
14. Global Bond Series (GBS)** 0.47 0.33 0.80
</TABLE>
- --------------------------------------------------------------------------------
*These fees have been restated to reflect that the management fee for the
Capital Appreciation Fund has been contractually decreased from .80% to .75%
effective May 1, 1998, and the Equity-Income Fund has been contractually
decreased from .95% to .75% effective January 1, 1998.
**The investment advisors for the series currently voluntarily waive the
management fee to the extent necessary to maintain the series total expense
ratio at a maximum of .80%. The management fee and total expense, absent the
waiver, would have been .75% and .88% for TS, and .75% and 1.08% for GBS.
Should they cease to waive those amounts in the future, these management fee
percentages and total expenses may be higher in future years.
EXAMPLES
(reflecting expenses of the VAA, the funds and series):
If all account value under a contract is withdrawn at the end of the applicable
time period, the following expenses would apply on a $1,000 investment,
assuming a 5% annual return:
<TABLE>
<CAPTION>
1 year 3 years
Standard Breakpoint Standard Breakpoint
- -------------------------------------------------
<S> <C> <C> <C> <C>
1. AG $80 $78 $123 $116
- -------------------------------------------------
2. B 78 75 115 107
- -------------------------------------------------
3. CA 81 78 124 116
- -------------------------------------------------
4. EI 80 78 123 116
- -------------------------------------------------
5. GAA 81 79 125 118
- -------------------------------------------------
6. GI 76 74 110 102
- -------------------------------------------------
7. I 81 79 126 119
- -------------------------------------------------
8. M 77 74 112 104
- -------------------------------------------------
9. MM 78 76 116 109
- -------------------------------------------------
10. SA 77 74 111 104
- -------------------------------------------------
11. SO 77 74 112 104
- -------------------------------------------------
12. TS 80 78 123 115
- -------------------------------------------------
13. DTRS 79 77 120 113
- -------------------------------------------------
14. GBS 80 78 123 115
</TABLE>
- --------------------------------------------------------------------------------
5
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Account Q
If no account value is withdrawn, or all account value is annuitized, the
following expenses would apply on a $1,000 investment, assuming a 5% annual
return:
<TABLE>
<CAPTION>
1 year 3 years
Standard Breakpoint Standard Breakpoint
- -------------------------------------------------
<S> <C> <C> <C> <C>
1. AG $18 $16 $57 $49
- -------------------------------------------------
2. B 16 13 48 41
- -------------------------------------------------
3. CA 19 16 58 50
- -------------------------------------------------
4. EI 19 16 57 50
- -------------------------------------------------
5. GAA 19 17 59 52
- -------------------------------------------------
6. GI 14 11 43 35
- -------------------------------------------------
7. I 20 17 61 53
- -------------------------------------------------
8. M 14 12 45 37
- -------------------------------------------------
9. MM 16 14 50 42
- -------------------------------------------------
10. SA 14 12 45 37
- -------------------------------------------------
11. SO 14 12 45 37
- -------------------------------------------------
12. TS 18 16 57 49
- -------------------------------------------------
13. DTRS 17 15 54 46
- -------------------------------------------------
14. GBS 18 16 57 49
</TABLE>
- --------------------------------------------------------------------------------
This table is provided to assist you in understanding the various costs and
expenses that you will bear directly or indirectly. The table reflects expenses
of the VAA, the 11 funds and the three series for the year ended December 31,
1997. For more complete descriptions of the various costs and expenses
involved, see Charges and other deductions in this Prospectus, and Management
of the funds in the Appendix to the funds' Prospectuses and the Prospectus for
Delaware Group Premium Fund, Inc. Premium taxes may also be applicable,
although they do not appear in the table. In addition, we reserve the right to
impose a charge on transfers between subaccounts as well as to and from the
fixed account, although we do not currently do so. THE EXAMPLES SHOULD NOT BE
CONSIDERED A REPRESENTATION OF PAST OR FUTURE EXPENSES. ACTUAL EXPENSES MAY BE
MORE OR LESS THAN THOSE SHOWN. This table is unaudited.
6
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Account Q
CONDENSED FINANCIAL INFORMATION FOR THE VAA
Condensed financial information is not included in this prospectus because, as
of the date hereof, the VAA had no assets, had incurred no liabilities, and had
not yet commenced operations.
PERFORMANCE DATA
At times the VAA may advertise the Money Market subaccount's yield. The yield
refers to the income generated by an investment in the subaccount over a seven-
day period. This income is then annualized. The process of annualizing results
when the amount of income generated by the investment during that week is
assumed to be generated each week over a 52-week period and is shown as a
percentage of the investment. THE YIELD FIGURE IS BASED ON HISTORICAL EARNINGS
AND IS NOT INTENDED TO INDICATE FUTURE PERFORMANCE.
The VAA advertises the annual performance of the subaccounts for the funds and
series on both a standardized and nonstandardized basis.
The standardized calculation measures average annual total return. This is
based on a hypothetical $1,000 payment made at the beginning of a one-year, a
five-year, and a 10-year period. This calculation reflects all fees and charges
that are or could be imposed on all contractowner accounts.
The nonstandardized calculation compares changes in accumulation unit values
from the beginning of the most recently completed calendar year to the end of
that year. It may also compare changes in accumulation unit values over shorter
or longer time periods. This calculation reflects mortality and expense risk
charges. It also reflects management fees and other expenses of the fund. It
does not include the CDSC or the account charge; if included, they would
decrease the performance.
For additional information about performance calculations, please refer to the
SAI.
FINANCIAL STATEMENTS
The statutory-basis financial statements and schedules of Lincoln Life are
located in the SAI. You may obtain a free copy by writing Lincoln National Life
Insurance Co., P.O. Box 2340, Fort Wayne, Indiana 46801 or calling 1-800-
4LINCOLN (454-6265). Financial statements for the VAA are not included because,
as of the date hereof, the VAA had no assets, had incurred no liabilities, and
had not yet commenced operations.
LINCOLN NATIONAL LIFE INSURANCE CO.
Lincoln Life was founded in 1905 and is organized under Indiana law. We are one
of the largest stock life insurance companies in the United States. We are the
issuer of the variable annuity contracts. The obligations set forth in the
contracts, other than those of the contractowners or participant are our
obligations. We also serve as the principal underwriter for the contracts. We
are owned by Lincoln National Corp. (LNC) which is also organized under Indiana
law. LNC's primary businesses are insurance and financial services.
VARIABLE ANNUITY ACCOUNT (VAA)
On November 3, 1997, the VAA was established as an insurance company separate
account under Indiana law. It is registered with the SEC as a unit investment
trust under the provisions of the Investment Company Act of 1940 (1940 Act).
The SEC does not supervise the VAA or Lincoln Life. The VAA is a segregated
investment account, meaning that its assets may not be charged with liabilities
resulting from any other business that we may conduct. Income, gains and
losses, whether realized or not, from assets allocated to the VAA are, in
accordance with the applicable annuity contracts, credited to or charged
against the VAA. They are credited or charged without regard to any other
income, gains or losses of Lincoln Life. The VAA satisfies the definition of
separate account under the federal securities laws. We do not guarantee the
investment performance of the VAA. Any investment gain or loss depends on the
investment performance of the funds and series. CONTRACTOWNERS OR PARTICIPANTS,
AS APPLICABLE, ASSUME THE FULL INVESTMENT RISK FOR ALL AMOUNTS PLACED IN THE
VAA.
INVESTMENTS OF THE VARIABLE ANNUITY ACCOUNT
Contractowners of unallocated contracts and participants under allocated
contracts decide the subaccount(s) to which purchase payments are allocated.
There is a separate subaccount which corresponds to each fund and series.
Contractowners or participants, as applicable, may change allocations without
penalty or charges. Shares of the funds and series will be sold at net asset
value (See the Appendix to the Prospectuses for the funds or series for an
explanation of net asset value) to the VAA in order to fund the contracts. The
funds and series are required to redeem their shares at net asset value upon
our request. We reserve the right to add, delete or substitute funds and
series.
INVESTMENT ADVISOR
Lincoln Investment (owned by LNC) is the advisor for each of the funds and is
primarily responsible for the investment decisions affecting the funds. The
services it provides are explained in the Prospectuses of the funds. Under an
advisory agreement with each fund, Lincoln Investment provides portfolio
management and investment advice to that fund, subject to the supervision of
the fund's Board of Directors.
Additionally, Lincoln Investment currently has six sub-advisory agreements in
which the sub-advisor may
7
<PAGE>
Account Q
perform some or substantially all of the investment advisory services required
by those respective funds.
No additional compensation from the assets of those funds will be assessed as a
result of the sub-advisory agreements.
Following is a chart that shows the fund names and the six sub-advisors under
Lincoln Investment (the advisor):
<TABLE>
<CAPTION>
Sub-advisor Fund
- ------------------------------------------------------------------------------
<S> <C>
Delaware International Advisors Ltd. International
- ------------------------------------------------------------------------------
Fidelity Management Trust Co. Equity-Income
- ------------------------------------------------------------------------------
Janus Capital Corp. Capital Appreciation
- ------------------------------------------------------------------------------
Lynch & Mayer, Inc. Aggressive Growth
- ------------------------------------------------------------------------------
Putnam Investment
Management, Inc. Global Asset Allocation
- ------------------------------------------------------------------------------
Vantage Investment Growth and Income;
Advisors Managed (for stock
portfolio); Social Awareness;
and Special Opportunities
- ------------------------------------------------------------------------------
</TABLE>
The Bond and Money Market Funds do not have sub-advisors.
Delaware Management, an indirect subsidiary of LNC, is the advisor for the
series and is primarily responsible for the investment decisions affecting both
series. Delaware International Advisers Ltd. (Delaware International), an
affiliate of Delaware Management, furnishes investment management services to
the Global Bond series.
Additional information about Delaware Management and Delaware International may
be found in the Delaware Group Premium Fund, Inc. Prospectus enclosed in this
booklet under Management of the Fund.
FUNDS/SERIES
Following are brief summaries of the investment objectives and policies of the
funds. The year in which each fund commenced operations is in parentheses.
There is more detailed information in the current Prospectuses for the funds,
which are included in this booklet.
All of the funds with the exception of the Special Opportunities Fund are
diversified, open-end management investment companies. Diversified means not
owning too great a percentage of the securities of any one company. An open-end
company is one which, in this case, permits Lincoln Life to sell its shares
back to the fund or series when you make a withdrawal, surrender the contract
or transfer from one fund to another. Management investment company is the
legal term for a mutual fund. The Special Opportunities Fund is open-end, but
is non-diversified. Non-diversified means the fund may own a larger percentage
of the securities of particular companies than will a diversified company.
These definitions are very general. The precise legal definitions for these
terms are contained in the 1940 Act. PLEASE BE ADVISED THAT THERE IS NO
ASSURANCE THAT ANY OF THE FUNDS OR SERIES WILL ACHIEVE ITS STATED OBJECTIVES.
FUNDS
1. AGGRESSIVE GROWTH FUND (1994) -- The investment objective is to maximize
capital appreciation. The fund invests in stocks of smaller, lesser-known
companies which have a chance to grow significantly in a short time.
2. BOND FUND (1981) -- The investment objective is maximum current income
consistent with prudent investment strategy. The fund invests primarily in
medium-and long-term corporate and government bonds.
3. CAPITAL APPRECIATION FUND (1994) -- The investment objective is long-term
growth of capital in a manner consistent with preservation of capital. The
fund primarily buys stocks in a large number of companies of all sizes if
the companies are competing well and if their products or services are in
high demand. It may also buy some money market securities and bonds,
including junk (high-risk) bonds.
4. EQUITY-INCOME FUND (1994) -- The investment objective is to achieve
reasonable income by investing primarily in income-producing equity
securities. The fund invests mostly in high-income stocks and some high-
yielding bonds (including junk bonds).
5. GLOBAL ASSET ALLOCATION FUND (1987) -- The investment objective is long-
term total return consistent with preservation of capital. The fund
allocates its assets among several categories of equity and fixed-income
securities, both of U.S. and foreign issuers.
6. GROWTH AND INCOME FUND (1981) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies.
7. INTERNATIONAL FUND (1991) -- The investment objective is long-term capital
appreciation. The fund trades in securities issued outside the United
States--mostly stocks, with an occasional bond or money market security.
8. MANAGED FUND (1983) -- The investment objective is maximum long-term total
return (capital gains plus income) consistent with prudent investment
strategy. The fund invests in a mix of stocks, bonds, and money market
securities, as determined by an investment committee.
8
<PAGE>
Account Q
9. MONEY MARKET FUND (1981) -- The investment objective is maximum current
income consistent with the preservation of capital. The fund invests in
short-term obligations issued by U.S. corporations; the U.S. Government;
and federally-chartered banks and U.S. branches of foreign banks.
10. SOCIAL AWARENESS FUND (1988) -- The investment objective is long-term
capital appreciation. The fund buys stocks of established companies which
adhere to certain specific social criteria.
11. SPECIAL OPPORTUNITIES FUND (1981) -- The investment objective is maximum
capital appreciation. The fund primarily invests in mid-size companies
whose stocks have significant growth potential. Current income is a
secondary consideration.
SERIES
Following are brief summaries of the investment objectives and policies of the
three series being offered by Delaware Group Premium Fund, Inc. More detailed
information may be obtained from the current prospectus for those series, which
is included in this booklet. PLEASE BE ADVISED THAT THERE IS NO ASSURANCE THAT
ANY OF THE SERIES WILL ACHIEVE ITS STATED OBJECTIVES.
1. DECATUR TOTAL RETURN -- seeks the highest possible total rate of return by
selecting issues that exhibit the potential for capital appreciation while
providing higher than average dividend income. This series has the same
objective and investment disciplines as the Decatur Total Return Fund of
Delaware Group Decatur Fund, Inc., a separate Delaware Group fund, in that
it invests generally, but not exclusively, in common stocks and income-
producing securities convertible into common stocks, consistent with the
series' objective.
2. TREND -- seeks long-term capital appreciation by investing primarily in
small-cap common stocks and convertible securities of emerging and other
growth-oriented companies. These securities will have been judged to be
responsive to changes in the market place and to have fundamental
characteristics to support growth. Income is not an objective. This series
has the same objective and investment disciplines as Delaware Group Trend
Fund, Inc., a separate Delaware Group fund.
3. GLOBAL BOND -- seeks current income consistent with preservation of
principal by investing primarily in fixed income securities that may also
provide the potential for capital appreciation. This series is a global
fund. As such, at least 65% of the series' assets will be invested in fixed
income securities of issuers organized or having a majority of their assets
in or deriving a majority of their operating income in at least three
different countries, one of which may be the United States. This series has
the same objective and investment disciplines as the Global Bond Series of
Delaware Group Global & International Funds, Inc., a separate Delaware Group
fund.
Shares of the funds and series are sold to Lincoln Life for investment of the
assets of the VAA and of Lincoln National Variable Annuity Account C, for
variable annuity contracts, and of Lincoln Life Flexible Premium Variable Life
Account K, for variable life insurance contracts. Shares of some, but not all,
of the funds are also sold to Lincoln Life for investment of the assets of
Lincoln Life Flexible Premium Variable Life Accounts D and G, also to fund
variable life insurance contracts. In addition, shares of the Delaware Group
Premium Fund, Inc. are sold to separate accounts of life insurance companies
other than Lincoln Life. See Other information. Shares of the funds and series
are not sold directly to the general public.
We will purchase shares of the funds and series at net asset value and direct
them to the appropriate subaccounts of the VAA. We will redeem sufficient
shares of the appropriate funds and series to pay annuity payouts, death
benefits, withdrawal proceeds or for purposes described in the contract. If
contractowners or participants desire to transfer all or part of their
investment from one subaccount to another, we may redeem shares held in the
first and purchase shares for the other subaccount.
INVESTMENT OBJECTIVES, POLICIES AND RESTRICTIONS
All of the investment objectives of the funds and series are fundamental which
means that no changes may be made without the affirmative vote of a majority of
the outstanding voting securities of each respective fund or series. The extent
to which the particular investment policies, practices or restrictions for each
fund or series are fundamental or nonfundamental depends on the particular fund
or series. If they are nonfundamental, they may be changed by the Board of
Directors of the funds or series without shareholder approval.
Contractowners and participants are urged to consult the Prospectuses in this
booklet and SAIs for each individual fund or series for additional information
regarding the fundamental and non-fundamental policies, practices and
restrictions of each of the funds and series.
REINVESTMENT
All dividend and capital gain distributions of the funds and series are
automatically reinvested in shares of the distributing funds and series at
their net asset value on the date of distribution. Dividends are not paid out
to contractowners or participants as additional units, but are reflected in
changes in unit values.
9
<PAGE>
Account Q
ADDITION, DELETION OR SUBSTITUTION OF INVESTMENTS
We reserve the right, within the law, to make additions, deletions and
substitutions for the funds and series held by the VAA. (We may substitute
shares of another series or of other funds for shares already purchased, or to
be purchased in the future, under the contract. This substitution might occur
if shares of a fund and series should no longer be available, or if investment
in any fund's and series' shares should become inappropriate, in the judgment
of our management, for the purposes for the contract.) No substitution of the
shares attributable to your account may take place without notice to
contractowners and/or participants, as applicable, and prior approval of the
SEC, in accordance with the 1940 Act.
FIXED ACCOUNT
Purchase payments allocated to the fixed account become part of Lincoln Life's
general account, and do not participate in the investment experience of the
VAA. The general account is subject to regulation and supervision by the
Indiana Insurance Department as well as the insurance laws and regulations of
the jurisdictions in which the contracts are distributed.
In reliance on certain exemptions, exclusions and rules, Lincoln Life has not
registered interests in the general account as a security under the Securities
Act of 1933 and has not registered the general account as an investment company
under the 1940 Act. Accordingly, neither the general account nor any interests
therein are subject to regulation under the 1933 Act or the 1940 Act. Lincoln
Life has been advised that the staff of the SEC has not made a review of the
disclosures which are included in this prospectus which relate to our general
account and to the fixed account under the contract. These disclosures,
however, may be subject to certain generally applicable provisions of the
federal securities laws relating to the accuracy and completeness of statements
made in prospectuses. This prospectus is generally intended to serve as a
disclosure document only for aspects of the contract involving the VAA, and
therefore contains only selected information regarding the fixed account.
Complete details regarding the fixed account are in the contract.
Purchase payments allocated to the fixed account are guaranteed to be credited
with a minimum annual effective interest rate, specified in the contract, of at
least 3.0%. A purchase payment allocated to the fixed account is credited with
interest beginning on the next calendar day following the date of receipt if
all data is complete. Lincoln Life may vary the way in which it credits
interest to the fixed account from time to time.
ANY INTEREST IN EXCESS OF 3.0% WILL BE DECLARED IN ADVANCE IN LINCOLN LIFE'S
SOLE DISCRETION. CONTRACTOWNERS AND PARTICIPANTS BEAR THE RISK THAT NO INTEREST
IN EXCESS OF 3.0% WILL BE DECLARED.
CHARGES AND OTHER DEDUCTIONS
DEDUCTIONS FROM PURCHASE PAYMENTS
There are no front-end deductions for sales charges made from purchase
payments. However, we will deduct premium taxes, when applicable.
ACCOUNT CHARGE
We will deduct $25 per account maintained on behalf of a participant or
contractowner from account value on the last valuation date of each participant
year to compensate us for the administrative services provided; this $25
account charge will also be deducted from account value upon withdrawal of all
account value by a contractowner or participant. Administrative services
include processing applications; issuing contracts and certificates; processing
purchase and redemptions of fund shares; maintaining records; administering
annuity payouts; providing accounting, valuation, regulatory and reporting
services.
CDSC
A CDSC is imposed in the event of a withdrawal of account value before the
annuity commencement date. The CDSC associated with withdrawals is paid to us
to compensate us for the loss we experience on contract distribution costs when
there is a withdrawal before distribution costs have been recovered. Charges
are the same for all withdrawals except that, partial withdrawals of up to a
cumulative percentage limit of 20% of (i) the account value attributable to an
unallocated group contract or (ii) the account value attributable to a
participant or the contractowner in an allocated group contract, as applicable,
may be made in each contract year without imposition of a CDSC. (To determine
the 20% limit, all partial withdrawals during the contract year, including the
withdrawal amount being requested, are added together, and the sum is divided
by the account value at the time of the requested withdrawal.) Partial
withdrawals in excess of the cumulative percentage limit in any contract year
are subject to the CDSC. In addition, if a complete withdrawal of all account
value in the VAA is requested, then the entire amount of such withdrawal is
subject to the CDSC. The CDSC is defined in the following table:
10
<PAGE>
Account Q
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Contract year 1 2 3 4 5 6 7 8 9 10+
CDSC 6% 6% 6% 6% 5% 4% 3% 2% 1% 0
</TABLE>
- --------------------------------------------------------------------------------
There will be no CDSC imposed on any withdrawal after a group contract has been
in force for 9 years.
Although the applicable CDSC is calculated based on group contract withdrawals,
and group contract years in force, any applicable charges in connection with a
participant's withdrawal are generally imposed on the participant. Depending on
various factors, the contractowner may elect to reimburse a participant for a
CDSC imposed in connection with a participant's withdrawal.
The CDSC will not apply in the event of a withdrawal for one of the following
reasons: (1) to make a payment due to the participant's death, disability,
retirement or termination of employment, excluding termination of employment
due to plan termination, plant shutdown, or any other program instituted by the
participant's employer which would reduce the work force by more than 20%; (2)
to make a payment for a participant hardship situation as allowed by the plan;
(3) to make a payment pursuant to a qualified domestic relations order; or (4)
to purchase an annuity option as permitted under the contract.
ADDITIONAL INFORMATION
Participants in the Texas Optional Retirement Program should refer to
Restrictions under the Texas Optional Retirement Program, later in this
Prospectus booklet.
The charges associated with withdrawal are paid to us to compensate us for the
cost of distributing the contracts. As required by the National Association of
Securities Dealers, Inc., in no event will the aggregate CDSC under a contract
exceed 8.5% of your total purchase payments.
DEDUCTIONS FROM THE VAA FOR ASSUMPTION OF MORTALITY AND EXPENSE RISKS
We deduct from the VAA an amount, computed daily, which is no higher than an
effective annual rate of 1.002% or .75% of the daily net asset value, to
compensate us for our assumption of certain risks described below. This equates
to a daily factor no higher than .000027590 or .000020625, respectively. This
maximum level of mortality and expense risk charge is guaranteed not to
increase.
Contracts eligible for the lower, or "breakpoint," mortality and expense risk
charge are those contracts which, at the time of issue, have account value
equal to or in excess of $5 million, or under which annual purchase payments
are anticipated to be equal to or in excess of $500,000, as determined in our
sole discretion. Certain contracts which are purchased with the surrender
proceeds of an existing group variable annuity contract are not eligible for
the breakpoint mortality and expense risk charge.
Contracts which, after issue and at the end of a calendar quarter, have account
value equal to or in excess of $5 million will be eligible for the lower
mortality and expense risk charge. The lower mortality and expense risk charge
will be implemented on the calendar quarter-end valuation date following the
end of the calendar quarter in which the contract became eligible for the lower
charge.
Our assumption of mortality risks guarantees that the annuity payouts made will
not be affected by the mortality experience (life span) either of persons
receiving those payouts or of the general population. We assume this mortality
risk through guaranteed annuity rates incorporated into the contract which
cannot be changed. We also assume the risk that the charges for administrative
expenses, which cannot be raised by us, will be insufficient to cover actual
administrative costs.
If the mortality and expense risk charge proves insufficient to cover
underwriting and administrative costs in excess of the charges made for
administrative expenses, we will absorb the loss. However, if the amount
deducted proves more than sufficient, we will keep the profit.
SPECIAL ARRANGEMENTS
The CDSC, annual mortality and expense risk charge, account charge, loan set-up
fee, and loan rate of interest may be reduced or eliminated for any particular
contract. In addition, the interest rate declared on the fixed account may be
enhanced for certain contracts. Such reductions, eliminations or enhancements
may be available where Lincoln Life's administrative and/or distribution costs
or expenses are anticipated to be lower due to, for example, the terms of the
contract, the duration or stability of the plan or contract; economies due to
the size of the plan, the number or certain characteristics of participants, or
the amount or frequency of purchase payments anticipated; or other support
provided by the contractowner or the plan. In addition, the group contractowner
or the plan may pay the account charge on behalf of the participants under a
contract. Lincoln Life will enhance the fixed interest crediting rate and
reduce or eliminate fees, charges, or rates in accordance with Lincoln Life's
eligibility criteria in effect at the time a contract is issued, or in certain
cases, after a contract has been held for a period of time. Lincoln Life may
from time to time modify both the amounts of reductions or
11
<PAGE>
Account Q
enhancements and the criteria for qualification. Reductions, enhancements, or
waivers will not be unfairly discriminatory against any person, including
participants under other contracts issued through the VAA.
Fees, charges and rates under the contracts, including charges for premium
taxes; loan rates of interest; and the availability of certain free
withdrawals, may be subject to variation based on state insurance regulation.
The contractowner and participant should read the contract carefully to
determine whether any variations apply in the state in which the contract is
issued. The exact amount for all fees, charges and rates applicable to a
particular contract will be stated in that contract.
DEDUCTIONS FOR PREMIUM TAXES
Any premium tax or other tax levied by any governmental entity as a result of
the existence of the contracts or the VAA will be deducted from account value
when incurred, or at another time of our choosing.
The applicable premium tax rates that states and other governmental entities
impose on the purchase of an annuity are subject to change by legislation, by
administrative interpretation, or by judicial action. These premium taxes will
generally depend upon the law of your state of residence. The tax ranges from
0.5% to 4.0%.
OTHER CHARGES AND DEDUCTIONS
There are deductions from and expenses paid out of the assets of the eleven
funds and the three series that are described later in this booklet in the
Appendix to the funds' Prospectuses and in the Prospectus for the series
respectively.
THE CONTRACTS
PURCHASE OF CONTRACTS
A prospective contractowner wishing to purchase a contract must apply for it
through one of our authorized sales representatives. The completed application
is sent to us and we decide whether to accept or reject it. If the application
is accepted, a contract is prepared and executed by our legally authorized
officers. The contract is then sent to the contractowner through its sales
representative. See Distribution of the contracts.
If a completed application and all other information necessary for processing a
purchase order are received, an initial purchase payment will be priced no
later than two business days after we receive the order.
If we receive purchase payment amounts without allocation instructions, we will
notify the contractowner and direct such purchase payment amounts to the
pending allocation account. The pending allocation account invests in the
Lincoln National Money Market Fund.
We will transfer account value in the pending allocation account in accordance
with allocation percentages elected on properly completed allocation
instructions within two valuation dates of receipt of such form, and allocate
all future purchase payments in accordance with these percentages until such
time as we are notified of a change. If we do not receive properly completed
instructions after we have sent three monthly notices, we will refund the
purchase payments in the pending allocation account, together with earnings
thereon (unless applicable ERISA requirements preclude return of earnings), for
which no properly completed instructions have been received within 105 days of
the date of receipt of the initial purchase payment.
The account charge will not apply to the pending allocation account.
Participants may not allocate purchase payments to, make transfers to or from,
take loans from, or make withdrawals from the pending allocation account,
except as set forth in the contract.
WHO CAN INVEST
In order to purchase a group contract, the plan on whose behalf the contract
will be held must be one of the qualified plans for which the contracts are
designed. Also, depending on state law requirements, a minimum of ten (10)
participants may be required to be participating in the plan. Lincoln Life may
impose additional eligibility requirements; any such additional eligibility
requirements will be applied in a nondiscriminatory manner.
PURCHASE PAYMENTS
Purchase payments are payable to us at a frequency and in an amount selected in
the application. Purchase payments in any one contract year which exceed twice
the amount of purchase payments made in the first contract year may be made
only with our permission. If purchase payments stop, the contract will remain
in force as a paid-up contract. Payments may be resumed at any time until the
group contract or certificate, as applicable, terminates.
VALUATION DATE
Accumulation and annuity units will be valued once daily as of the close of
trading (currently 4:00 p.m., New York time) on each day that the NYSE is open
for trading (valuation date). On any date other than a valuation date, the
accumulation unit value and the annuity unit value will not change.
ALLOCATION OF PURCHASE PAYMENTS
Purchase payments are placed into the VAA's subaccounts, each of which invests
in shares of its corresponding fund or series, according to contractowners or
participants instructions, as applicable.
Upon allocation to the appropriate subaccount, purchase payments are converted
into accumulation units. The number of accumulation units credited is
determined by
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<PAGE>
Account Q
dividing the amount of each purchase payment allocated to each subaccount by
the value of an accumulation unit for that subaccount on the valuation date on
which the purchase payment is received at the home office if received before
the end of the valuation date (usually 4:00 p.m. New York time). If the
purchase payment is received at or after that time, we will use the
accumulation unit value computed on the next valuation date. The number of
accumulation units determined in this way shall not be changed by any
subsequent change in the value of an accumulation unit. However, the dollar
value of an accumulation unit will vary depending not only upon how well the
investments perform, but also upon the related expenses of the VAA and the
underlying funds and series.
VALUATION OF ACCUMULATION UNITS
Purchase payments allocated to the variable account are converted into
accumulation units. This is done by dividing each purchase payment by the value
of an accumulation unit for the valuation period during which the purchase
payment is allocated to the VAA. The accumulation unit value for each
subaccount was or will be established at the inception of the subaccount. It
may increase or decrease from valuation period to valuation period. The
accumulation unit value for a subaccount for a later valuation period is
determined as follows:
1. The total value of fund or series shares held in the subaccount is
calculated by multiplying the number of fund or series shares owned by the
subaccount at the beginning of the valuation period by the net asset value
per share of the fund or series at the end of the valuation period, and
adding any dividend or other distribution of the fund or series if an ex-
dividend date occurs during the valuation period; minus
2. The liabilities of the subaccount at the end of the valuation period; these
such liabilities include daily charges imposed on the subaccount, and may
include a charge or credit with respect to any taxes paid or reserved for by
us that we determine result from the operations of the VAA; and
3. The result of 2. is divided by the number of subaccount units outstanding at
the beginning of the valuation period.
The daily charges imposed on a subaccount for any valuation period are equal to
the mortality and expense risk charge for the number of calendar days in the
valuation period.
TRANSFERS ON OR BEFORE THE ANNUITY COMMENCEMENT DATE
The contractowner (under an unallocated group contract) or participant or
contractowner (under an allocated group contract) may transfer all or a portion
of account value from one subaccount to another. A transfer involves the
redemption of accumulation units in one subaccount and the purchase of
accumulation units in the other subaccount. A transfer will be done using the
respective accumulation unit values as of the valuation date immediately
following receipt of the transfer request.
Transfers between subaccounts are restricted to once every 30 days. We reserve
the right to further limit the number of transfers.
A transfer may be made by writing to the home office or, if a Telephone
Exchange Authorization form (available from us) is on file with us, by a toll-
free telephone call. In order to prevent unauthorized or fraudulent telephone
transfers, we may require a contractowner or participant, as applicable, to
provide certain identifying information before we will act upon their
instructions. We may also assign the contractowner or participant, as
applicable, a Personal Identification Number (PIN) to serve as identification.
We will not be liable for following telephone instructions we reasonably
believe are genuine. Telephone transfer requests may be recorded and written
confirmation of all transfer requests will be mailed to the contractowner or
participant, as applicable, on the next valuation date.
Telephone transfers will be processed on the valuation date that they are
received when they are received at our customer service center before the end
of the valuation date (usually 4:00 p.m. New York time).
The contractowner (under an unallocated group contract) or participant or
contractowner (under an allocated group contract) may also transfer all or any
part of the account value from the subaccount(s) to the fixed account. Under an
allocated contract, a participant may transfer account value from the fixed
account to the various subaccount(s), provided that the sum of the transfers
and withdrawals of account value in the fixed account transferred is limited to
20% of the account value in the fixed account in any 365 day period. Under an
unallocated contract, a group contractowner may transfer account value from the
fixed account to the various subaccount(s), provided that the sum of the
transfers and withdrawals of account value in the fixed account transferred is
limited to 20% of account value in the fixed account in any 365 day period. In
the alternative, a scheduled transfer (or withdrawal) of value in the fixed
account may be requested over a five year period, according to the following
schedule:
<TABLE>
<C> <S>
Percentage eligible for transfer
Transaction dates (or withdrawal)
------------------ ---------------------------------------------------
Initial date 20% of the value in the fixed account on such date
First anniversary 20% of the value in the fixed account on such date
Second anniversary 20% of the value in the fixed account on such date
Third anniversary 20% of the value in the fixed account on such date
Fourth anniversary 50% of the value in the fixed account on such date
Fifth anniversary 100% of the value in the fixed account on such date
</TABLE>
13
<PAGE>
Account Q
The initial amount of the transfer or withdrawal will be reduced by the amount
of any transfer or withdrawal from the fixed account during the preceding 365
day period.
A contractowner or participant thinking about a transfer of account value
should consider the inherent risk involved. Frequent transfers based on short-
term expectations may increase the risk that a transfer will be made at an
inopportune time.
There is no charge for a transfer. However, we reserve the right to impose a
charge in the future for any transfers.
TRANSFERS AFTER THE ANNUITY COMMENCEMENT DATE
Contractowners or participants, as applicable, may transfer all or a portion of
the investment in one subaccount to another subaccount or to the fixed account
of the contract. Those transfers will be limited to three times per contract
year. HOWEVER, AFTER THE ANNUITY COMMENCEMENT DATE, NO TRANSFERS ARE ALLOWED
FROM THE FIXED ACCOUNT OF THE CONTRACT TO THE SUBACCOUNTS.
DEATH BENEFIT BEFORE THE ANNUITY COMMENCEMENT DATE
If a participant under an allocated contract issued in connection with a
Section 403(b) plan that is not subject to ERISA dies before the annuity
commencement date, a death benefit will be paid to the participant's designated
beneficiary equal to the participant's account value less any outstanding loan
balance. (No CDSC or account charge is deducted from the death benefit.) The
death benefit will be determined at the end of the valuation period during
which both due proof of death and election of a form of benefit have been
received by Lincoln Life.
The participant may designate a beneficiary during the life of the participant
and change the beneficiary by filing a written request with the home office.
Each change of beneficiary revokes any previous designation. Unless otherwise
provided in the beneficiary designation, if no beneficiary survives the
participant, the death benefit will be paid in one sum to the participant's
estate.
All death benefit payments will be subject to the laws and regulations
governing death benefits. In addition, no payment of death benefit provided
upon the death of the participant will be allowed that does not satisfy the
requirements of Section 401(a)(9) of the code.
The death benefit may be paid in a lump sum or under a settlement option then
available. If a lump sum settlement is elected, the proceeds will generally be
paid within seven days of approval by us of the claim. This payment may be
postponed as permitted by the 1940 Act.
An additional option is available if a lump sum settlement is requested and the
amount of the settlement is $10,000 or more. A SecureLine(C) account can be
established in the name of the beneficiary for that amount. SecureLine(C) is an
account established in the name of the beneficiary and maintained in Lincoln
Life's general account. State Street Bank and Trust Company of Boston, MA
administers check writing privileges for the SecureLine(C) account.
SECURELINE(C) ACCOUNTS, LIKE ALL AMOUNTS MAINTAINED IN LINCOLN LIFE'S GENERAL
ACCOUNT, ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY
BANK OR DEPOSITORY INSTITUTION, AND THE SECURELINE(C) ACCOUNT IS NOT FEDERALLY
INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE
BOARD, OR ANY OTHER INVESTMENT AGENCY. Once the account is established, only
the beneficiary can authorize checks drawn on the account.
DISCONTINUANCE AND WITHDRAWALS
DISCONTINUANCE. A group contractowner may discontinue a group contract at any
time by giving written notice to Lincoln Life. The contract will be deemed
discontinued on the later of the valuation date the contractowner specifies or
the valuation date on which we receive the written notice.
Lincoln Life may also give a group contractowner written notice that the group
contract will be discontinued by Lincoln Life if the plan does not qualify for
special tax treatment under Section 401, 403, 408, 414 or 457 of the code.
Lincoln Life will give the group contractowner at least fifteen (15) days
advance written notice in which to cure any remediable defaults before
discontinuing the group contract.
With respect to an allocated group contract, if the contract is discontinued
due to the contractowner's request, participants will be given written notice.
As of the date the contract is discontinued, no additional purchase payments
will be accepted. However, transfers, withdrawals, and loans will continue to
be permitted, in accordance with the terms of the contract.
Subject to applicable regulatory requirements, if an allocated group contract
is discontinued due to not qualifying for special tax treatment under Section
401, 403, 408, 414, or 457 of the code, the account value will be paid to the
contractowner or participant, subject to the charges and restrictions
applicable to a withdrawal of the entire account value. Participants will be
given written notice.
Subject to applicable regulatory requirements, if an unallocated group contract
is discontinued, the account value will be paid to the contractowner, subject
to the charges and restrictions applicable to a withdrawal of the entire
account value.
In the event that Lincoln Life ceases to offer the contracts to new purchasers,
we may also determine to deactivate a group contract by prohibiting additional
purchase payments and/or the addition of new participants under the contract.
Contractowners will be given at least ninety (90) days' notice of deactivation
of the contract.
14
<PAGE>
Account Q
WITHDRAWALS. Withdrawals of account value under the contract for any one of the
following reasons ("benefit responsive withdrawals") may be made at any time
and in any amount, and are not subject to a CDSC: (i) to make a payment due to
the participant's death, disability, retirement, or termination of employment,
excluding termination of employment due to plan termination, plant shutdown, or
any other program instituted by the participant's employer which would reduce
the work force by more than 20%; (ii) to make a payment for a participant
hardship situation as permitted by the plan; (iii) to make a payment pursuant
to a Qualified Domestic Relations Order (QDRO); or (iv) to purchase an annuity
option under the contract.
Withdrawals of account value THAT ARE NOT BENEFIT RESPONSIVE WITHDRAWALS are
generally subject to a CDSC in accordance with the terms of the contract. See
Charges and other deductions. Such withdrawals are also subject to certain
additional conditions, as follows:
. Partial withdrawals of up to a cumulative percentage limit of 20% of the
account value attributable to an unallocated group contract, or a participant
or contractowner under an allocated group contract, may be made in each
contract year without imposition of a CDSC. (To determine the 20% limit, all
partial withdrawals during the contract year, including the withdrawal amount
being requested, are added together, and the sum is divided by the account
value at the time of the requested withdrawal.) Partial withdrawals in excess
of the cumulative percentage limit in any contract year are subject to the
CDSC. IN ADDITION, IF A COMPLETE WITHDRAWAL OF ALL ACCOUNT VALUE IN THE VAA
IS REQUESTED, THEN THE ENTIRE AMOUNT OF SUCH WITHDRAWAL IS SUBJECT TO THE
CDSC. In the event that a withdrawal of the entire account value allocated to
both the VAA and the fixed account is requested, then the account charge will
also be deducted from account value prior to payment.
. Withdrawals of account value held in the fixed account may be requested as
either periodic elective withdrawals or systematic withdrawals.
In any 365 day period, a periodic elective withdrawal of up to 20% of
account value per contractowner or per participant, as applicable, held in
the fixed account may be made. The cumulative percentage limit of 20% is the
sum of all periodic elective TRANSFERS AND WITHDRAWALS from the fixed
account during the preceding 364-day period plus the amount of the requested
withdrawal, divided by the then-current account value in the fixed account.
PERIODIC ELECTIVE WITHDRAWALS (OR TRANSFERS) FROM THE FIXED ACCOUNT in
excess of this cumulative percentage limit will not be permitted.
In addition, a systematic withdrawal of the entire account value in the
fixed account over a five-year period may be elected as follows:
<TABLE>
<C> <S>
Transaction date Percentage eligible for payment
-------------------- ----------------------------------------------
Initial payment date 20% of value in fixed account as of such date
First anniversary 20% of value in fixed account as of such date
Second anniversary 20% of value in fixed account as of such date
Third anniversary 20% of value in fixed account as of such date
Fourth anniversary 50% of value in fixed account as of such date
Fifth anniversary 100% of value in fixed account as of such date
</TABLE>
The initial payment of a systematic withdrawal will be reduced by the amount of
any periodic elective withdrawals (or transfers) from the fixed account during
the immediately preceding 365 day period. Neither a contractowner nor a
participant can make periodic elective withdrawals (or transfers) from the
fixed account while a systematic withdrawal (or transfer) election is
effective, or for one calendar year after the systematic withdrawal (or
transfer) election has been rescinded. In addition, while the systematic
withdrawal (or transfer) election is in effect, a participant cannot allocate
purchase payments to the fixed account.
GENERAL. All withdrawal requests must be submitted to us in writing, and,
unless the contract has been issued in connection with a Section 403(b) plan
not subject to the Employee Retirement Income Security Act of 1974, as amended
(ERISA), must be authorized by the group contractowner. In a 403(b) plan that
is not subject to ERISA the participant may submit the withdrawal request.
Special restrictions on withdrawals apply if the contract is purchased as part
of a retirement plan of a public school system or Section 501(c)(3)
organization under Section 403(b) of the code. In order for a contract to
retain its tax-qualified status, Section 403(b) prohibits a withdrawal from a
Section 403(b) contract of post-1988 contributions (and earnings on those
contributions) pursuant to a salary reduction agreement. However, this
restriction does not apply if the annuitant attains age (a) 59 1/2, (b)
separates from service, (c) dies, (d) becomes totally and permanently disabled
and/or (e) experiences financial hardship (in which event the income
attributable to those contributions may not be withdrawn). Pre-1989
contributions and earnings through December 31, 1988, are not subject to the
previously stated restriction.
Any withdrawal after an annuity commencement date depends upon the annuity
option selected.
The account value available upon withdrawal is determined at the end of the
valuation period during which the written request for withdrawal is received at
the home office. Withdrawal payments from the VAA will be mailed within seven
days after we receive a valid written request at the home office. The payment
may be postponed as permitted by the 1940 Act.
15
<PAGE>
Account Q
Unless a request for withdrawal specifies otherwise, withdrawals will be made
from all subaccounts within the VAA and from the fixed account in the same
proportion that the amount withdrawn bears to the total account value.
AS DISCUSSED ABOVE, THERE ARE CHARGES ASSOCIATED WITH WITHDRAWAL OF ACCOUNT
VALUE DURING THE FIRST TEN CONTRACT YEARS. SEE CHARGES AND OTHER DEDUCTIONS.
You may specify that the charges be deducted from the amount you request
withdrawn or from the remaining account value. If you specify that the charges
be deducted from the remaining account value, the amount of the total
withdrawal will be increased according to a formula for calculating the impact
of the applicable CDSC percentage; consequently, the amount of the charge
associated with that withdrawal will also increase.
The tax consequences of withdrawals are discussed later in this booklet. See
Federal tax status.
The contract will terminate when there is no account value remaining. See the
contract for more information.
LOANS
With respect to an allocated group contract, a participant under a plan that
permits loans may apply for a loan under the contract prior to such
participant's annuity commencement date. A participant must complete a loan
application and assign account value in the fixed account equal to the loan
amount as security for the loan. If the account value in the fixed account is
less than the loan amount, we will transfer account value from the VAA to the
fixed account, from either the subaccounts specified by the participant or on a
pro rata basis from all subaccounts. The minimum loan amount is $1,000. Such a
participant may borrow up to the lesser of 50% of the account value or $50,000
on all outstanding loans to the participant under all plans. However, if 50% of
the participant account value is an amount less than $10,000, then the
participant can borrow the account value less any restricted dollars.
(Restricted dollars are a minimum of $300 plus any federal or state tax to be
withheld, one year's contract loan interest and CDSC on loan principal and loan
interest.) Also, if the participant has taken a loan during the preceding
twelve month period, the $50,000 maximum loan limit is reduced by the excess of
the highest outstanding balance of loans during the preceding twelve month
period over the outstanding current loan balance.
The loan interest rate is adjustable, which means it may change from time to
time. The initial annual loan rate of interest will be declared on a monthly
basis and will generally be the Moody's Corporate Bond Yield monthly average
for the calendar month two months prior to the date the loan rate is declared,
rounded down to the next .25%. Once each year, upon the anniversary of the
loan, we will compare each loan's interest rate to the then current declared
interest rate. If the then current declared interest rate differs from the
loan's interest rate by .50% or more, the loan's interest rate will be adjusted
to equal the then current declared interest rate. The loan's interest rate will
remain unchanged if the then current declared interest rate differs from the
loan's interest rate by less than .50%. The loan's interest rate may increase
or decrease, but the loan's interest rate will not be adjusted by less than
.50%. During the time that the loan is outstanding, the amount of the loan
principal pledged as security for the loan will earn interest at an annual rate
of at least 3.0%, as specified in the contract. Loan principal and interest
must be repaid in level payments made no less often than quarterly. The minimum
repayment amount is $80.
The amounts and terms of a participant loan may be subject to the restrictions
imposed under Section 72(p) of the code, Title I of ERISA, and any applicable
plan. Under certain contracts, a one-time fee of up to $35 may be charged to
set up a loan. Please see your contract for more information about loans,
including interest rates and applicable fees and charges. This provision is not
available in an unallocated group contract.
REINVESTMENT PRIVILEGE
Contractowners and participants may elect to make a reinvestment purchase with
any part of the proceeds of a withdrawal, and we will recredit the withdrawal
charges previously deducted. This election must be made within 30 days of the
date of the withdrawal, and the repurchase must be of a contract covered by
this Prospectus. In the case of a qualified contract, a representation must be
made that the proceeds being used to make the purchase have retained their tax-
favored status under an arrangement for which the contracts offered by this
Prospectus are designed. The number of accumulation units which will be
credited when the proceeds are reinvested will be based on the value of the
accumulation unit(s) on the next valuation date. This computation will occur
following receipt of the proceeds and request for reinvestment at the home
office. No one may utilize the reinvestment privilege more than once. For tax
reporting purposes, we will treat a withdrawal and a subsequent reinvestment
purchase as separate transactions. Consult a tax advisor before requesting a
withdrawal or subsequent reinvestment purchase.
AMENDMENT OF CONTRACT
We reserve the right to amend the contract to meet the requirements of the 1940
Act or other applicable federal or state laws or regulations. You will be
notified in writing of any changes, modifications or waivers.
COMMISSIONS
The maximum commission which could be paid to dealers is 9% on the total
purchase payments received during the first contract year and 5.25% on each
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purchase payment in renewal contract years (or an equivalent schedule).
OWNERSHIP
Contractowners, have all rights under the contract. According to Indiana law,
the assets of the VAA are held for the exclusive benefit of all contractowners,
participants and their designated beneficiaries. The assets of the VAA are not
chargeable with liabilities arising from any other business that we may
conduct. Contracts used for qualified plans may not be assigned or transferred
except as permitted by the Employee Retirement Income Security Act (ERISA) of
1974 and upon written notification to us. We assume no responsibility for the
validity or effect of any assignment. Consult a tax advisor about the tax
consequences of an assignment.
CONTRACTOWNER AND PARTICIPANT QUESTIONS
The obligations to purchasers under the contracts are those of Lincoln Life.
Your questions and concerns should be directed to us at 1-800-4LINCOLN
(454-6265).
ANNUITY PAYOUTS
The contract provides that all or part of the account value may be used to
purchase an annuity. Optional forms of payout of annuities (annuity options)
are available, each of which is payable on a variable basis, a fixed basis or a
combination of both. We may choose to make other annuity options available in
the future.
Depending on the terms of the plan, the group contractowner or the participant
may elect annuity payouts in monthly, quarterly, semiannual or annual
installments. If the payouts from any subaccount would be or become less than
$50, we have the right to reduce their frequency until the payouts are at least
$50 each. Following are explanations of the annuity options available.
ANNUITY OPTIONS
LIFE ANNUITY. This option offers a periodic payout during the lifetime of the
annuitant and ends with the last payout before the death of the annuitant. This
option offers the highest periodic payout since there is no guarantee of a
minimum number of payouts or provision for a death benefit for beneficiaries.
HOWEVER, THERE IS THE RISK UNDER THIS OPTION THAT THE ANNUITANT WOULD RECEIVE
NO PAYOUTS IF DEATH OCCURS BEFORE THE DATE SET FOR THE FIRST PAYOUT; ONLY ONE
PAYOUT IF DEATH OCCURS BEFORE THE SECOND SCHEDULED PAYOUT, AND SO ON.
LIFE INCOME WITH PAYOUTS GUARANTEED FOR DESIGNATED PERIOD. This option
guarantees periodic payouts during a designated period, usually 10 or 20 years,
and then continues throughout the lifetime of the annuitant. The designated
period is selected by the contractowner on behalf of participants in an
unallocated contract or the participant in an allocated contract.
JOINT LIFE ANNUITY. This option offers a periodic payout during the joint
lifetime of the annuitant and a designated joint annuitant. The payouts
continue during the lifetime of the survivor.
JOINT LIFE ANNUITY WITH GUARANTEED PERIOD. This option guarantees periodic
payouts during a designated period, usually 10 or 20 years, and continues
during the joint lifetime of the annuitant and a designated joint annuitant.
The payouts continue during the lifetime of the survivor. The designated period
is selected by the contractowner or the participant, as applicable.
UNIT REFUND LIFE ANNUITY. This option offers a periodic payout during the
lifetime of the annuitant with the guarantee that upon death a payout will be
made of the value of the number of annuity units (see Variable annuity payouts)
equal to the excess, if any, of: (a) the total amount applied under this option
divided by the annuity unit value for the date payouts begin, divided by (b)
the annuity units represented by each payout to the annuitant multiplied by the
number of payouts paid before death. The value of the number of annuity units
is computed on the date the death claim is approved for payment by the home
office.
None of the options listed above currently provides withdrawal features,
permitting the commuted values to be withdrawn as a lump sum payment. Other
options may be made available by us. Options are only available to the extent
they are consistent with the requirements of the contract and Section 401(a)(9)
of the code, if applicable. The mortality and expense risk charge will be
assessed on all variable annuity payouts, including options that do not have a
life contingency and therefore no mortality risk.
Under any option providing for guaranteed payouts, the number of payouts which
remain unpaid at the date of the annuitant's death (or surviving annuitant's
death in the case of a joint life annuity) will be paid to the beneficiary as
payouts become due.
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined using:
1. The account value on the annuity commencement date;
2. The annuity tables contained in the contract;
3. The annuity option selected; and
4. The investment performance of the fund(s) or series selected.
To determine the amount of payouts, we make this calculation:
1. Determine the dollar amount of the first periodic payout; then
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2. Credit the contract with a fixed number of annuity units equal to the first
periodic payout divided by the annuity unit value; and
3. Calculate the value of the annuity units each month thereafter.
We assume an investment return of 5% per year, as applied to the applicable
mortality table. The amount of each payout after the initial payout will depend
upon how the underlying fund(s) and series perform, relative to the 5% assumed
rate. There is a more complete explanation of this calculation in the SAI.
FEDERAL TAX STATUS
This section is a discussion of the Federal income tax rules applicable to the
contracts as of the date of this
Prospectus. More information is provided in the SAI. THESE DISCUSSIONS AND
THOSE IN THE SAI ARE NOT INTENDED AS TAX ADVICE. This section does not discuss
the Federal tax consequences resulting from every possible situation. No
attempt has been made to consider any applicable state, local or foreign tax
law, other than the imposition of any state premium taxes (See Charges and
other deductions). If you are concerned about the tax implications with respect
to the contracts, you should consult a tax advisor. The following discussion is
based upon our understanding of the present Federal income tax laws as they are
currently interpreted by the Internal Revenue Service (IRS). No representation
is made about the likelihood of continuation of the present Federal income tax
laws or their current interpretations by the IRS.
TAXATION OF QUALIFIED CONTRACTS
The contracts may be purchased in connection with the following types of tax-
favored retirement plans:
1 Contracts purchased for employees of public school systems and certain tax-
exempt organizations, qualified under Section 403(b) of the code;
2. Pension and profit-sharing plans of corporations, qualified under Section
401(a) or 403(a) of the code;
3. Deferred compensation plans of state or local governments, or nonprofit
organizations qualified under Section 457 of the code; and/or
4. SEPs, qualified under Section 408(k) of the code.
The tax rules applicable to these plans, including restrictions on
contributions and benefits, taxation of distributions and any tax penalties,
vary according to the type of plan and its terms and conditions. Participants
under such plans, as well as contractowners, annuitants and beneficiaries,
should be aware that the rights of any person to any benefits under such plans
may be subject to the terms and conditions of the plans themselves, regardless
of the terms and conditions of the contracts. Purchasers of contracts for use
with any qualified plan, as well as plan participants and beneficiaries, should
consult counsel and other advisors as to the suitability of the contracts to
their specific needs, and as to applicable code limitations and tax
consequences.
There may be imposed a penalty tax on distributions equal to 10% of the amount
treated as taxable income. The penalty tax is not imposed in certain
circumstances, which generally are distributions:
1. Received on or after age 59 1/2 of participant;
2. Made as a result of death or disability of participant;
3. Received in substantially equal periodic payments as a life annuity (subject
to special recapture rules if the series of payouts is subsequently
modified);
4. Made to a participant after separation from service after attainment of age
55;
5. Made to pay certain medical expenses;
6. To alternate participant under a qualified domestic relations order; and/or
7. Made to pay health insurance premiums of unemployed individuals.
Not all of the above exceptions apply to SEP's and SIMPLE IRA's. In addition,
further exceptions may be applicable.
INVESTOR CONTROL
The Treasury Department has indicated that guidelines may be issued under which
a variable annuity contract will not be treated as an annuity contract for tax
purposes if the contractowner has excessive control over the investments
underlying the contract. They may consider the number of investment options or
the number of transfer opportunities available between options as relevant when
determining excessive control. The issuance of those guidelines may require us
to impose limitations on your right to control the investment. We do not know
whether any such guidelines would have a retroactive effect.
Section 817(h) of the code and the related regulation that the Treasury
Department has adopted require that assets underlying a variable annuity
contract be adequately diversified. The regulations provide that a variable
annuity contract which does not satisfy the diversification standards will not
be treated as an annuity contract, unless the failure to satisfy the
regulations was inadvertent, the failure is corrected,
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and the contractowner or we pay an amount to the IRS. The amount will be based
on the tax that would have been paid by the contractowner if the income, for
the period the contract was not diversified, had been received by the
contractowner. If the failure to diversify is not corrected in this manner, the
contractowner of an annuity contract will be deemed the owner of the underlying
securities and will be taxed on the earnings of his or her account. We believe,
under our interpretation of the code and regulations thereunder, that the
investments underlying this contract meet these diversification standards.
WITHHOLDING
Generally, pension and annuity distributions are subject to withholding for the
recipient's Federal income tax liability at rates that vary according to the
type of distribution and the recipient's tax status. Recipients of
distributions from IRA's, however, generally are provided the opportunity to
elect not to have tax withheld from distributions. Under the code, 20% income
tax withholding may apply to eligible rollover distributions. All taxable
distributions from qualified plans and Section 403(b) annuities are eligible
rollover distributions, except (1) annuities paid out over life or life
expectancy, (2) installments paid for a period spanning 10 years or more, and
(3) required minimum distributions. The code imposes a mandatory 20% income tax
withholding on any eligible rollover distribution that the contractowner or
participant does not elect to have paid in a direct rollover to another
qualified plan, Section 403(b) annuity or individual retirement account.
Distributions from Section 457 plans are subject to the general wage
withholding rules.
VOTING RIGHTS
As required by law, we will vote the fund and series shares held in the VAA at
meetings of the shareholder of the various funds and series. The voting will be
done according to the instructions of contractowners, or participants, as
applicable, who have interests in any subaccounts which invest in a fund or
funds and series, to the extent required by law and as provided in the
applicable plan. If the 1940 Act or any regulation under it should be amended
or if present interpretations should change, and if as a result we determine
that we are permitted to vote fund or series shares in our own right, we may
elect to do so.
The number of votes which a contractowner or participant, as applicable, has
the right to cast will be determined by applying the voting party's percentage
interest in a subaccount to the total number of votes attributable to the
subaccount. In determining the number of votes, fractional shares will be
recognized. After the annuity commencement date, the votes attributable to a
contract will decrease.
Fund shares held in a subaccount for which no timely instructions are received
will be voted by us in proportion to the voting instructions which are received
for all contracts participating in that subaccount. Voting instructions to
abstain on any item to be voted on will be applied on a pro rata basis to
reduce the number of votes eligible to be cast.
Maryland law and the bylaws of each fund and series allow investment companies
registered under the 1940 Act to dispense with annual meetings of shareholders
in certain cases where the meetings are only a formality. The Board of
Directors of each fund and of Delaware Group Premium Fund, Inc. will decide
each year whether or not to hold the shareholder's annual meeting for that
year.
The dispensing with annual meetings of the shareholder in effect results in
retaining the existing Directors in office. Consequently, the SEC requires the
funds and series to assure contractowners that a majority of those Directors
have at some point been elected by the shareholder. The SEC also requires that
the funds and series comply with Section 16(c) of the 1940 Act, concerning
procedures by which shareholders may remove Directors. For a more detailed
explanation of this procedure, see Description of shares in the Appendix to the
Prospectuses for the funds; also see the Prospectus for the series.
Annual meetings of each fund and of the series normally will not be held,
unless the Board of Directors decides to hold them. Special meetings of the
shareholder may be called for any valid purpose. Whenever a shareholder's
meeting is called, each person having a voting interest in a subaccount will
receive proxy voting material, reports and other materials relating to the
fund, and series involved.
DISTRIBUTION OF THE CONTRACTS
We are the distributor of the contracts. They will be sold by our registered
representatives who have been licensed by state insurance departments. The
contracts will also be sold by independent broker-dealers who have been
licensed by state insurance departments to represent us and who have selling
agreements with us. We are registered with the SEC under the Securities
Exchange Act of 1934 as a broker-dealer and are a member of the National
Association of Securities Dealers (NASD). Lincoln Life will offer contracts in
all states where it is licensed to do business.
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RETURN PRIVILEGE
With respect to a participant under an allocated group contract, within the
free-look period after you first receive the certificate, you may cancel it for
any reason by delivering or mailing it postage prepaid, to the home office at
P.O. Box 2340, 1300 South Clinton Street, Fort Wayne, Indiana, 46801. A
certificate canceled under this provision will be void. With respect to the
fixed portion of a contract, we will return purchase payments. With respect to
the VAA, except as explained in the following paragraph, we will return the
account value as of the date of receipt of the cancellation, plus any account
charge and any premium taxes which had been deducted. No CDSC will be assessed.
A PARTICIPANT WHO ALLOCATES PURCHASE PAYMENTS TO THE VAA IS SUBJECT TO THE RISK
OF A MARKET LOSS DURING THE FREE-LOOK PERIOD.
For contracts written in those states whose laws require that we assume this
market risk during the free-look period, a contract may be canceled, subject to
the conditions explained before, except that we will return only the purchase
payment(s).
STATE REGULATION
As a life insurance company organized and operated under Indiana law, we are
subject to provisions governing life insurers and to regulation by the Indiana
Commissioner of Insurance.
Our books and accounts are subject to review and examination by the Indiana
Insurance Department at all times. A full examination of our operations is
conducted by that Department at least once every five years.
RESTRICTIONS UNDER THE TEXAS OPTIONAL RETIREMENT PROGRAM
Title 8, Section 830.105 of the Texas Government Code, consistent with prior
interpretations of the Attorney General of the State of Texas, permits
participants in the Texas Optional Retirement Program (ORP) to redeem their
interest in a variable annuity contract issued under the ORP only upon:
1. Termination of employment in all institutions of higher education as
defined in Texas law;
2. Retirement; or
3. Death.
Accordingly, participants in the ORP will be required to obtain a certificate
of termination from their employer(s) before accounts can be redeemed.
RECORDS AND REPORTS
As presently required by the 1940 Act and applicable regulations, we are
responsible for maintaining all records and accounts relating to the VAA. We
will mail to you, at your last known address of record at the home office, at
least semiannually after the first contract year, reports containing
information required by the 1940 Act or any other applicable law or regulation.
We have entered into an agreement with the Delaware Service Company, Inc. Co.,
2005 Market Street, Philadelphia, PA 19203, to provide accounting services to
the VAA.
PREPARING FOR YEAR 2000
Lincoln Life, as part of its year 2000 updating process, is responsible for the
updating of the VAA related computer systems. Many existing computer programs
use only two digits to identify a year in the date field. These programs were
designed and developed without considering the impact of the upcoming change in
the century. If not corrected, many computer applications could fail or create
erroneous results by or at the year 2000. The year 2000 issue affects virtually
all companies and organizations. An affiliate of Lincoln Life, Delaware Service
Company (Delaware), provides substantially all of the necessary accounting and
valuation services for the VAA. Delaware, for its part, is responsible for
updating all of its computer systems, including those which service VAA, to
accommodate the year 2000. Lincoln Life and Delaware have begun formal
discussions with each other to assess the requirements for their respective
systems to interface properly in order to facilitate the accurate and orderly
operation of the VAA beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects virtually every aspect
of the businesses of both Lincoln Life and Delaware (the Companies). The
computer systems of the Companies and their interfaces with the computer
systems of vendors, suppliers, customers and other business partners are
particularly vulnerable. The inability to properly recognize date-sensitive
electronic information and to transfer data between systems could cause errors
or even complete failure of systems, which would result in a temporary
inability to process transactions correctly and engage in normal business
activities for the VAA. The Companies respectively are redirecting significant
portions of their internal information technology efforts and are contracting,
as needed, with outside consultants to help update their systems to accommodate
the year 2000. Also, in addition to the
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discussions with each other noted above, the Companies have respectively
initiated formal discussions with other critical parties that interface with
their systems to gain an understanding of the progress by those parties in
addressing year 2000 issues. While the Companies are making substantial efforts
to address their own systems and the systems with which they interface, it is
not possible to provide assurance that operational problems will not occur. The
Companies presently believe that, assuming the modification of existing
computer systems, updates by vendors and conversion to new software and
hardware, the year 2000 issue will not pose significant operations problems for
their respective computer systems. In addition, the Companies are incorporating
potential issues surrounding year 2000 into their contingency planning process,
in the event that, despite these substantial efforts, there are unresolved year
2000 problems. If the remediation efforts noted above are not completed timely
or properly, the year 2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life or Delaware, or both.
The cost of addressing year 2000 issues and the timeliness of completion will
be closely monitored by management of the respective Companies. Nevertheless,
there can be no guarantee either by Lincoln Life or by Delaware that estimated
costs will be achieved, and actual results could differ significantly from
those anticipated. Specific factors that might cause such differences include,
but are not limited to, the availability and cost of personnel trained in this
area, the ability to locate and correct all relevant computer problems, and
other uncertainties.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened legal proceedings
arising from the conduct of its business. Most of these proceedings are routine
and in the ordinary course of business. In some instances these proceedings
include claims for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for alleged contractual liability or
requests for equitable relief. After consultation with legal counsel and a
review of available facts, it is management's opinion that the ultimate
liability, if any, under these suits will not have a material adverse effect on
the financial position of Lincoln Life.
During the 1990's class action lawsuits alleging sales practices fraud have
been filed against many life insurance companies, and Lincoln Life has not been
immune. Three lawsuits alleging fraud in the sale of interest-sensitive
universal and whole life insurance policies have been filed against Lincoln
Life. These three suits have been filed as class actions, although as of the
date of this Prospectus the court had not certified a class in either case.
Plaintiffs seek unspecified damages and penalties for themselves and on behalf
of the putative class. Although the relief sought in these cases is
substantial, the cases are in the early stages of litigation, and it is
premature to make assessments about potential loss, if any. Management denies
the allegations and intends to defend these suits vigorously. The amount of
liability, if any, which may arise as a result of these suits (exclusive of any
indemnification from professional liability insurers) cannot be reasonably
estimated at this time.
OTHER INFORMATION
A Registration Statement has been filed with the SEC, under the Securities Act
of 1933, as amended, for the contracts being offered by this Prospectus. This
Prospectus does not contain all the information in the Registration Statement,
its amendments and exhibits. Please refer to the Registration Statement for
further information about the VAA, Lincoln Life and the contracts offered.
Statements in this Prospectus about the content of contracts and other legal
instruments are summaries. For the complete text of those contracts and
instruments, please refer to those documents as filed with the SEC.
Other segregated investment accounts of ours registered under the 1940 Act are
authorized to invest assets in the funds and series. We are not the sole
shareholder of the funds or series. Collectively, the VAA and the Variable Life
Accounts may be referred to in this booklet and in the SAI as the variable
accounts.
Due to differences in redemption rates, tax treatment or other considerations,
the interests of contractowners under the Variable Life Accounts could conflict
with those of contractowners under the VAA. In those cases where assets from
variable life and variable annuity separate accounts are invested in the same
fund or funds or series (i.e., where mixed funding occurs), the Boards of
Directors of the funds or series involved will monitor for any material
conflicts and determine what action, if any, should be taken. If it becomes
necessary for any separate account to replace shares of any fund or series with
another investment, that fund or series may have to liquidate securities on a
disadvantageous basis. Refer to the Prospectus for each fund and for the series
for more information about mixed funding.
In the future, we may purchase shares in the funds and series for one or more
unregistered segregated investment accounts.
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ADVERTISEMENTS/SALES LITERATURE
In marketing the contracts, we and our various sales representatives may refer
to certain ratings assigned to us under the Rating System of the A.M. Best Co.,
Oldwick, New Jersey. The objective of Best's Rating System is to evaluate the
various factors affecting the overall performance of an insurance company in
order to provide Best's opinion about that company's relative financial
strength and ability to meet its contractual obligations. The procedure
includes both a quantitative and qualitative review of the insurance company.
In marketing the contracts and the underlying funds and series, we may at times
use data published by other nationally-known independent statistical services.
These service organizations provide relative measures of such factors as an
insurer's claim-paying ability, the features of particular contracts, and the
comparative investment performance of the funds and series with other
portfolios having similar objectives. A few such services are: Duff & Phelps,
the Lipper Group, Moody's, Morningstar, Standard and Poor's and VARDS. There is
more information about each of these services under Advertising and sales
literature in the SAI. Marketing materials may employ illustrations of compound
interest and dollar-cost averaging; discuss automatic withdrawal services;
describe our customer base, assets, and our relative size in the industry. They
may also discuss other features of Lincoln Life, the VAA, the funds, the series
and their investment management.
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STATEMENT OF ADDITIONAL INFORMATION TABLE OF CONTENTS FOR VAA
<TABLE>
<CAPTION>
Item
- ----------------------------------------------------
<S> <C>
General information and history of Lincoln Life
Special terms
Services
Purchase of securities being offered
Calculation of performance data
</TABLE>
For a free copy of the SAI please see page one of this booklet.
<TABLE>
<CAPTION>
Item
- ---------------------------------------------------------
<S> <C>
Annuity payouts
Federal tax status
Determination of accumulation and annuity unit value
Advertising and sales literature/graphics
Financial statements
Performance data
</TABLE>
23
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LINCOLN LIFE
VARIABLE ANNUITY ACCOUNT Q (VAA) (REGISTRANT)
LINCOLN NATIONAL
LIFE INSURANCE COMPANY (DEPOSITOR)
STATEMENT OF ADDITIONAL INFORMATION (SAI)
This SAI should be read in conjunction with the Prospectus of the VAA dated May
15, 1998.
You may obtain a copy of the VAA Prospectus on request and without charge.
Please
write Lincoln National Life Insurance Co., P.O. Box 2340, Fort Wayne, Indiana
46801
or call 1-800-4LINCOLN (454-6265).
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
- ------------------------------------------
<S> <C>
GENERAL INFORMATION AND HISTORY
OF LINCOLN LIFE B-2
- ------------------------------------------
SPECIAL TERMS B-2
- ------------------------------------------
SERVICES B-2
- ------------------------------------------
PURCHASE OF SECURITIES BEING OFFERED B-2
- ------------------------------------------
CALCULATION OF PERFORMANCE DATA B-2
- ------------------------------------------
ANNUITY PAYOUTS B-3
</TABLE>
- ----------------------------
THIS SAI IS NOT A PROSPECTUS.
The date of this SAI is May 15, 1998.
<TABLE>
<CAPTION>
Page
--------------------------------------------
<S> <C>
FEDERAL TAX STATUS B-4
--------------------------------------------
DETERMINATION OF ACCUMULATION AND ANNUITY UNIT VALUE B-6
--------------------------------------------
ADVERTISING AND SALES LITERATURE/GRAPHICS B-6
--------------------------------------------
FINANCIAL STATEMENTS B-9
</TABLE>
------------------------------------------------
<TABLE>
--------------------------
<S> <C>
PERFORMANCE DATA Appendix A
</TABLE>
B-1
<PAGE>
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GENERAL INFORMATION
AND HISTORY OF LINCOLN NATIONAL LIFE
INSURANCE CO. (LINCOLN LIFE)
Lincoln Life, organized in 1905, is an Indiana stock insurance corporation,
engaged primarily in insurance and financial services. Lincoln Life is owned by
Lincoln National Corp., a publicly held insurance holding company domiciled in
Indiana.
SPECIAL TERMS
The special terms used in this SAI are the ones defined in the Prospectus. They
are italicized to make this document more understandable.
SERVICES
INDEPENDENT AUDITORS
The statutory-basis financial statements and schedules of Lincoln Life
appearing in this SAI and Registration Statement have been audited by Ernst &
Young LLP, independent auditors, as set forth in their report which also
appears elsewhere in this document and in the Registration Statement. The
statutory-basis financial statements and schedules audited by Ernst & Young LLP
have been included in this document in reliance on their report given on their
authority as experts in accounting and auditing.
KEEPER OF RECORDS
All accounts, books, records and other documents which are required to be
maintained for the VAA are maintained by Lincoln Life. No separate charge
against the assets of the VAA is made by Lincoln Life for this service. We have
entered into an agreement with Delaware Management Co., 2005 Market Street,
Philadelphia, PA 19203, to provide accounting services to the VAA.
PRINCIPAL UNDERWRITER
Lincoln Life is the principal underwriter for the group variable annuity
contracts.
PURCHASE OF SECURITIES BEING OFFERED
The variable annuity contracts are offered to the public through licensed
insurance agents who specialize in selling Lincoln Life products; through
independent insurance brokers; and through certain securities broker/dealers
selected by Lincoln Life whose personnel are legally authorized to sell annuity
products. There are no special purchase plans for any class of prospective
buyers. However, under certain limited circumstances described in the
Prospectus under the section Charges and other deductions, the contract and/or
the surrender charges may be waived.
There are exchange privileges between subaccounts, and between the VAA and
Lincoln Life's General Account (See Transfers of accumulation units between
subaccounts in the Prospectus.) No exchanges are
permitted between the VAA and other separate accounts.
Lincoln Life has contracted with some broker/dealers, and may contract with
others, to sell the group variable annuity contracts through certain legally
authorized persons and organizations. These dealers are compensated under a
standard Compensation Schedule.
Lincoln Life is the principal underwriter for the group variable annuity
contracts. We may not offer a contract continuously or in every state. Lincoln
Life retains no underwriting commissions from the sale of the group variable
annuity contracts.
CALCULATION OF PERFORMANCE DATA
Standard performance data is not included because, as of the date hereof, the
VAA had not yet commenced operations. Nonstandardized performance data will be
accompanied by standard performance data once available.
A. MONEY MARKET FUNDED SUBACCOUNTS:
The yield that will be reported in this SAI and in the table of condensed
financial information in the Prospectus will be determined by calculating
the change in unit value for the base period (the 7-day period ended
December 31); then dividing this figure by the account value at the
beginning of the period; then annualizing this result by the factor of
365/7. This yield includes all deductions charged to the participants, and
excludes any realized gains and losses from the sale of securities.
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B. OTHER SUBACCOUNTS:
1. TOTAL RETURN -- Total return will show, for the various subaccounts of
the VAA, an average annual total return as of the stated periods, based
upon a hypothetical initial purchase payment of $1,000, calculated
according to the formula set forth below.
The Average annual total return for each period is determined by finding the
average annual compounded rate of return over each period that would equate the
initial amount invested to the ending redeemable value for that period,
according to the following formula --
n
P (1 + T) = ERV
Where: P = a hypothetical initial purchase payment of $1,000
T = average annual total return for the period in question
n = number of years
ERV = redeemable value (as of the end of the period in question) of a
hypothetical $1,000 purchase payment made at the beginning of the 1-year,
5-year, or 10-year period in question (or fractional portion thereof)
The formula assumes that: 1) all recurring fees have been charged to
participant accounts; 2) all applicable nonrecurring charges are deducted at
the end of the period in question; and 3) there will be a complete redemption
at the end of the period in question. The performance figures shown relate to
the contract form containing the highest level of charges.
2. NONSTANDARDIZED PERFORMANCE DATA
The VAA advertises the performance of its various subaccounts by observing how
they perform over various time periods--monthly, year-to-date, yearly (fiscal
year); and over periods of three years and more. Monthly, year-to-date and
yearly performance are computed on a cumulative basis; performance for a three-
year period and for greater periods is computed both on a cumulative and on an
annualized basis.
Cumulative quotations are arrived at by calculating the change in the
accumulation unit value between the first and last day of the base period being
measured, and expressing the difference as a percentage of the unit value at
the beginning of the base period. The calculation reflects the mortality and
expense risk fees under the contracts and the management fees and other
expenses of the fund and series. The calculation does not include the CDSC or
the account charge, which, if included, would decrease the performance.
Annualized quotations are arrived at by applying a formula which determines the
level rate of return which, if earned over the entire base period, would
produce the cumulative return.
For information regarding the historical performance of the funds and series
adjusted for the contract and VAA fees and expenses, see Appendix A.
ANNUITY PAYOUTS
VARIABLE ANNUITY PAYOUTS
Variable annuity payouts will be determined on the basis of: (1) the value of
the contract on the annuity commencement date; (2) the annuity tables contained
in the contract; (3) the type of annuity option selected; and (4) the
investment performance of the eligible fund(s) selected. In order to determine
the amount of variable annuity payouts, Lincoln Life makes the following
calculation: first, it determines the dollar amount of the first payout;
second, it credits the annuitant with a fixed number of annuity units based on
the amount of the first payout; and third, it calculates the value of the
annuity units each period thereafter. These steps are explained below.
The dollar amount of the first variable annuity payout is determined by
applying the total value of the accumulation units credited under the contract
valued as of the annuity commencement date (less any premium taxes) to the
annuity tables contained in the contract. The first variable annuity payout
will be paid 14 days after the annuity commencement date. This date will become
the date on which all future annuity payouts will be paid. Amounts shown in the
tables are based on the 1983 "a' Individual Annuity Mortality Tables, with an
assumed investment return at the rate of 5% per annum. The first annuity payout
is determined by multiplying the benefit per $1,000 of value shown in the
contract tables by the number of thousands of dollars of contract value under
the contract. These annuity tables vary according to the form of annuity
selected and the age of the annuitant at the annuity commencement date. The 5%
interest rate stated above is the measuring point for subsequent annuity
payouts. If the actual Net Investment Rate (annualized) exceeds 5%, the payment
will increase at a rate equal to the amount of such excess. Conversely, if the
actual rate is less than 5%, annuity payouts will decrease. If the assumed rate
of interest were to be increased, annuity payouts would start at a higher level
but would decrease more rapidly or increase more slowly.
Lincoln Life may use sex distinct annuity tables in contracts that are not
associated with employer sponsored plans where not prohibited by law.
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At an annuity commencement date, the annuitant is credited with annuity units
for each subaccount on which variable annuity payouts are based. The number of
annuity units to be credited is determined by dividing the amount of the first
payout by the value of an annuity unit in each subaccount selected. Although
the number of annuity units is fixed by this process, the value of such units
will vary with the value of the underlying eligible funds. The amount of the
second and subsequent annuity payouts is determined by multiplying the
contractowner's fixed number of annuity units in each subaccount by the
appropriate annuity unit value for the valuation date ending 14 days before the
date that payment is due.
The value of each subaccount annuity unit was arbitrarily established. The
annuity unit value for each subaccount at the end of any valuation date is
determined as follows:
1. The total value of fund or series shares held in the subaccount is
calculated by multiplying the number of shares by the net asset value at end
of valuation period plus any dividend or other distribution.
2. The liabilities of the subaccount, including daily charges and taxes, are
subtracted.
3. The result is divided by the number of annuity units in the subaccount at
beginning of valuation period, and adjusted by a factor to neutralize the
assumed investment return in the annuity table.
The value of the annuity units is determined as of a valuation date 14 days
before the payout date in order to permit calculation of amounts of annuity
payouts and mailing of checks in advance of their due dates. Such checks will
normally be issued and mailed at least three days before the due date.
PROOF OF AGE, SEX AND SURVIVAL
Lincoln Life may require proof of age, sex or survival of any payee upon whose
age, sex or survival payouts depend.
FEDERAL TAX STATUS
GENERAL
The operations of the VAA form a part of, and are taxed with, the operations of
Lincoln Life under the Internal Revenue Code of 1986, as amended (the code).
Investment income and realized net capital gains on the assets of the VAA are
reinvested and taken into account in determining the accumulation and annuity
unit values. As a result, such investment income and realized net capital gains
are automatically retained as part of the reserves under the contract. Under
existing federal income tax law, Lincoln Life believes that VAA investment
income and realized net capital gains are not taxed to the extent they are
retained as part of the reserves under the contracts. Accordingly, Lincoln Life
does not anticipate that it will incur any federal income tax liability
attributable to the VAA, and therefore it does not intend to make any provision
for such taxes. However, if changes in the federal tax laws or interpretations
thereof result in Lincoln Life's being taxed on income or gains attributable to
the VAA, then Lincoln Life may impose a charge against the VAA in order to make
provision for payment of such taxes.
QUALIFIED PLANS
The rules governing the tax treatment of contributions and distributions under
qualified plans, as set forth in the code and applicable rulings and
regulations, are complex and subject to change. These rules also vary according
to the type of plan and the terms and conditions of the plan itself. Therefore,
no attempt is made herein to provide more than general information about the
use of contracts with the various types of plans, based on Lincoln Life's
understanding of the current federal tax laws as interpreted by the Internal
Revenue Service (IRS). Purchasers of contracts for use with such a plan and
plan participants and beneficiaries should consult counsel and other competent
advisors as to the suitability of the plan and the contract to their specific
needs, and as to applicable code limitations and tax consequences. Participants
under such plans, as well as contractowners, annuitants and beneficiaries,
should also be aware that the rights of any person to any benefits under such
plans may be subject to the terms and conditions of the plans themselves
regardless of the terms and conditions of the contract.
Following are brief descriptions of the various types of
plans and of the use of contracts in connection therewith.
PUBLIC SCHOOL SYSTEMS AND SECTION 501(C)(3) ORGANIZATIONS (403(B))
Payments made to purchase annuity contracts by public school systems or certain
Section 501(c)(3) organizations for their employees are excludable from the
gross income of the employee to the extent that aggregate payments for the
employee do not exceed the exclusion allowance provided by Section 403(b) of
the code, the over-all limits for excludable contributions of Section 415 of
the code or the limit on elective contributions. Furthermore, the investment
results of the fund or series credited to the account are not taxable until
benefits are received either in the form of annuity payouts or in a single sum.
If an employee's individual account is surrendered, usually the full amount
received would be includable in income for that year at ordinary rates.
QUALIFIED CORPORATE EMPLOYEE'S PENSION AND PROFIT-SHARING TRUSTS AND QUALIFIED
ANNUITY PLANS
Payments made by a corporate employer and the increments on all payments for
qualified corporate plans are not taxable as income to the employee until
distributed. However, the employee may be required to
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include these amounts in gross income before distribution if the qualified plan
or trust loses its qualification. Corporate plans qualified under Sections
401(a) or 403(a) of the code are subject to extensive rules, including
limitations on maximum contributions or benefits.
Distributions of amounts in excess of nondeductible employee contributions
allocated to such distributions are generally taxable as ordinary income. If an
employee or beneficiary receives a lump sum distribution, that is, if the
employee or beneficiary receives in a single tax year the total amounts payable
with respect to that employee and the benefits are paid as a result of the
employee's death or separation from service or after the employee attains
59 1/2, taxable gain may be either eligible for special lump sum averaging
treatment or, if the recipient was age 50 before January 1, 1986, eligible for
taxation at a 20% rate to the extent the distribution reflects payouts made
before January 1, 1974. For plan years beginning after December 31, 1996, tax
exempt organizations (except state or local governments) may have 401(k) plans.
These special tax rules are not available in all cases.
DEFERRED COMPENSATION PLANS (457 PLANS)
Under the code provisions, employees and independent contractors (participants)
performing services for state and local governments and tax-exempt
organizations may establish deferred compensation plans. Plans of state or
local governments established on August 20, 1996, or later, must hold all
assets and income in trust (or custodial accounts or an annuity contract) for
the exclusive benefit of participants and their beneficiaries. Governmental
Section 457 plans that were in existence before August 20, 1996 are allowed
until January 1, 1999 to meet this requirement. While participants in such
plans may be permitted to specify the form of investment in which their plan
accounts will participate, all such investments are owned by the sponsoring
employer and are subject to the claims of its creditors. The amounts deferred
under a plan which meet the requirements of Section 457 of the code are not
taxable as income to the participant until paid or otherwise made available to
the participant or beneficiary. Deferrals are taxed as compensation from the
employer when they are actually or constructively received by the employee. As
a general rule, the maximum amount which can be deferred in any one year is the
lesser of $7,500 (as indexed) or 33 1/3% of the participant's includable
compensation. However, in the limited circumstances, up to $15,000 may be
deferred in each of the last three years before retirement.
SIMPLIFIED EMPLOYEE PENSION PLANS (SEP)
An employer may make contributions on behalf of employees to a SEP as provided
by Section 408(k) of the code. The contributions and distribution dates are
limited by the code provisions. All distributions from the plan will be taxed
as ordinary income. For tax years after 1996, salary reduction SEP's (SAR/SEP)
may no longer be established. However, SAR/SEPs in existence prior to January
1, 1997 may continue to receive contributions.
Any distribution before the employee attains age 59 1/2 (except in the event of
death or disability) or the failure to satisfy certain other code requirements
may result in adverse tax consequences.
SAVINGS INCENTIVE MATCHED PLAN FOR EMPLOYEES (SIMPLE)
Employers with 100 or fewer employees who earned $5,000 during the proceeding
year, may establish SIMPLEs. For tax years beginning after December 31, 1996,
SIMPLE plans are available and may be in the form of an IRA or part of a 401(k)
plan. Under a SIMPLE IRA, employees are permitted to make elective
contributions to an IRA, stated as a percentage of the employees compensation,
but not to exceed $6,000 annually as indexed. Such deferrals are not subject to
income tax until withdrawn. Withdrawals made by an employee in the first two
years of the employees participation are subject to a 25% penalty. Later
withdrawals are subject to penalties applicable to IRAs. Under a SIMPLE 401(k),
employee deferrals are limited to no more than $6,000 annually. Employer
contributions are usually required for each type of SIMPLE.
TAX ON DISTRIBUTIONS FROM QUALIFIED CONTRACTS
The following rules generally apply to distributions from contracts purchased
in connection with the plans discussed previously, other than deferred
compensation plans.
The portion, if any, of any contribution under a contract made by or on behalf
of an individual which is not excluded from the employee's gross income
(generally, the employee's own nondeductible contributions) constitutes the
investment in the contract. If a distribution is made in the form of annuity
payouts, the employee's investment in the contract (adjusted for certain refund
provisions) divided by the life expectancy (or other period for which annuity
payouts are expected to be made) constitutes a tax-free return of capital each
year. The dollar amount of annuity payouts received in any year in excess of
such return is taxable as ordinary income. All distributions will be fully
taxable once the employee is deemed to have recovered the dollar amount of the
investment in the contract.
If a surrender of or withdrawal from the contract is effected and distribution
is made from the plan in a single payout, the proceeds may qualify for special
lump sum distribution treatment under certain qualified plans, as discussed
above. Otherwise, the amount by
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which the payment exceeds the investment in the contract (adjusted for any
prior withdrawal) allocated to that payment, if any, will be taxed as ordinary
income in the year of receipt. Rules generally provide that all distributions
which are not received as an annuity will be taxed as a pro rata distribution
of taxable and nontaxable amounts (rather than as a distribution first of
nontaxable amounts).
Distributions from qualified plans, Keoghs, SEPs, 403(b) plans and IRAs will be
subject to (1) a 10% penalty tax if made before age 59 1/2 unless certain other
exceptions apply. Failure to meet certain minimum distribution requirements for
the above plans, as well as for Section 457 plans, will result in a 50% excise
tax. Various other adverse tax consequences may also be potentially applicable
in certain circumstances to these types of plans.
Upon an employee's death, the taxation of benefits payable to the beneficiary
generally follows these same principles, subject to a variety of special rules.
OTHER CONSIDERATIONS
It should be understood that the foregoing comments about the federal tax
consequences under these contracts are not exhaustive and that special rules
are provided with respect to other tax situations not discussed herein.
Further, the foregoing discussion does not address any applicable state, local
or foreign tax laws. Finally, in recent years numerous changes have been made
in the federal income tax treatment of contracts and retirement plans, which
are not fully discussed above. Before an investment is made in any of the
contracts, a competent tax advisor should be consulted.
DETERMINATION OF ACCUMULATION AND ANNUITY UNIT VALUE
A description of the days on which accumulation and
annuity units will be valued is given in the Prospectus. The New York Stock
Exchange's (NYSE) most recent announcement (which is subject to change) states
that in 1997 it will be closed on New Year's Day, President's Day, Good Friday,
Memorial Day, Independence Day, Labor Day, Thanksgiving Day, and Christmas Day.
It may also be closed on other days.
Since the portfolios of some of the funds and series will consist of securities
primarily listed on foreign exchanges or otherwise traded outside the United
States, those securities may be traded (and the net asset value of those funds
and series and of the variable account could therefore be significantly
affected) on days when the investor has no access to those funds and series.
ADVERTISING AND SALES LITERATURE
As set forth in the Prospectus, Lincoln Life may refer to the following
organizations (and others) in its marketing materials:
A.M. BEST'S RATING SYSTEM evaluates the various factors affecting the overall
performance of an insurance company in order to provide an opinion as to an
insurance company's relative financial strength and ability to meet its
contractual obligations. The procedure includes both a quantitative and
qualitative review of each company.
DUFF & PHELPS insurance company claims paying ability (CPA) service provides
purchasers of insurance company policies and contracts with analytical and
statistical information on the solvency and liquidity of major U.S licensed
insurance companies, both mutual and stock.
EAFE Index is prepared by Morgan Stanley Capital International (MSCI). It
measures performance of securities in Europe, Australia and the Far East. The
index reflects the movements of world stock markets by representing the
evolution of an unmanaged portfolio. The EAFE Index offers international
diversification with over 1000 companies across 20 different countries.
LIPPER VARIABLE INSURANCE PRODUCTS PERFORMANCE ANALYSIS SERVICE is a publisher
of statistical data covering the investment company industry in the United
States and overseas. Lipper is recognized as the leading source of data on
open-end and closed-end funds. Lipper currently tracks the performance of over
5,000 investment companies and publishes numerous specialized reports,
including reports on performance and portfolio analysis, fee and expense
analysis.
MOODY'S insurance claims-paying rating is a system of rating insurance
company's financial strength, market leadership and ability to meet financial
obligations. The purpose of Moody's ratings is to provide investors with a
simple system of gradation by which the relative quality of insurance companies
may be noted.
MORNINGSTAR is an independent financial publisher offering comprehensive
statistical and analytical coverage of open-end and closed-end funds and
variable annuity contracts.
STANDARD & POOR's CORP. insurance claims-paying ability rating is an assessment
of an operating insurance company's financial capacity to meet obligations
under an insurance policy in accordance with the terms. The likelihood of a
timely flow of funds from the insurer to the trustee for the bondholders is a
key element in the rating determination for such debt issues.
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VARDS (Variable Annuity Research Data Service) provides a comprehensive guide
to variable annuity contract features and historical fund performance. The
service also provides a readily understandable analysis of the comparative
characteristics and market performance of funds inclusive in variable
contracts.
STANDARD & POOR'S 500 INDEX (S&P 500) -- broad-based measurement of changes in
stock-market conditions based on the average performance of 500 widely held
common stocks; commonly known as the S&P 500. The selection of stocks, their
relative weightings to reflect differences in the number of outstanding shares
and publication of the index itself are services of Standard & Poor's Corp., a
financial advisory, securities rating and publishing firm.
NASDAQ-OTC Price Index -- this index is based on the National Association of
Securities Dealers Automated Quotations (NASDAQ) and represents all domestic
over-the-counter stocks except those traded on exchanges and those having only
one market maker, a total of some 3,500 stocks. It is market value-weighted and
was introduced with a base of 100.00 on February 5, 1971.
DOW JONES INDUSTRIAL AVERAGE (DJIA) -- price-weighted average of 30 actively
traded blue chip stocks, primarily industrials but including American Express
Co. and American Telephone and Telegraph Co. Prepared and published by Dow
Jones & Co., it is the oldest and most widely quoted of all the market
indicators. The average is quoted in points, not dollars.
INTERNET -- As an electronic communications network may be used to provide
information regarding Lincoln Life performance of the subaccounts and
advertisement literature.
In its advertisements and other sales literature for the VAA and the eligible
funds, Lincoln Life intends to illustrate the advantages of the contracts in a
number of ways:
COMPOUND INTEREST ILLUSTRATIONS. These will emphasize several advantages of the
variable annuity contract. For example, but not by way of limitation, the
literature may emphasize the potential savings through tax deferral; the
potential advantage of the variable account over the fixed side; and the
compounding effect when a client makes regular contributions to his or her
account.
DOLLAR-COST AVERAGING ILLUSTRATIONS. These illustrations will generally discuss
the price-leveling effect of making regular purchases in the same subaccounts
over a period of time, to take advantage of the trends in market prices of the
portfolio securities purchased for those subaccounts.
AUTOMATIC WITHDRAWAL SERVICE. A service provided by Lincoln Life, through which
a contractowner may take any distribution allowed by code Section 401(a)(9) in
the case of qualified contracts, or permitted under code Section 72 in the case
of nonqualified contracts, by way of an automatically generated payment.
EARNINGS SWEEP. A service provided by Lincoln Life which allows a client to
designate one of the variable subaccounts or the fixed side as a holding
account, and to transfer earnings from that side to any other variable
subaccount. The contractowner chooses a specific fund as the holding account.
At specific intervals, account value in the holding account fund that exceeds a
certain designated baseline amount is automatically transferred to another
specified fund(s). The minimum account value required for the Earnings Sweep
feature is $10,000.
LINCOLN LIFE'S CUSTOMERS. Sales literature for the VAA, the funds and series
may refer to the number of employers and the number of individual annuity
clients which Lincoln Life serves. As of February 28, 1997, Lincoln Life was
serving over 13,000 organizations and had more than 940,000 annuity clients.
LINCOLN LIFE'S ASSETS, SIZE. Lincoln Life may discuss its general financial
condition (see, for example, the reference to A.M. Best Co., above); it may
refer to its assets; it may also discuss its relative size and/or ranking among
companies in the industry or among any subclassification of those companies,
based upon recognized evaluation criteria. For example, at year-end 1995,
Lincoln Life was the 12th largest U.S. life insurance company based upon
overall assets.
Sales literature may reference the Multi Fund newsletter which is a newsletter
distributed quarterly to clients of the VAA. The contents of the newsletter
will be a commentary on general economic conditions and, on some occasions,
referencing matters in connection with the Multi Fund annuity.
Sales literature and advertisements may reference these and other similar
reports from Best's or other similar publications which report on the insurance
and financial services industries.
The graphs below compare accumulations attributable to contributions to
conventional savings vehicles such as savings accounts at a bank or credit
union, nonqualified contracts purchased with after tax contributions, and
qualified contracts purchased with pre-tax contributions under tax-favored
retirement programs.
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THE POWER OF TAX DEFERRED GROWTH
The hypothetical chart below compares the results of contributing $1,200 per
year ($100 per month) during the time periods illustrated. Each graph assumes a
28% tax rate and an 8% fixed rate of return (before fees
[BAR CHART APPEARS HERE]
and charges). For tax deferred annuities (TDA), the results are based on
contributing $1,666.66 ($138.88 per month) during the time periods illustrated.
The additional $38.88 per month is the amount of federal taxes paid by those
contributing to the conventional savings accounts or nonqualified contracts. In
this example, it has been invested by the contributors to the qualified
contracts. The deduction of fees and charges is also indicated in the graph.
The dotted lines represent the amount remaining after deducting any taxes due
and all fees (including CDSC). See Charges and other deductions in the
Prospectus for discussion of charges. Additionally, a 10% tax penalty (not
included here) may apply to withdrawals before age 59 1/2.
The contributions and interest earnings on conventional savings accounts are
usually taxed currently. For nonqualified contracts contributions are usually
taxed currently, while earnings are not usually subject to income tax until
withdrawn. However, contributions to and earnings on qualified plans are
ordinarily not subject to income tax until withdrawn. Therefore, having greater
amounts re-invested in a qualified or nonqualified plan increases the
accumulation power of savings over time.
As you can see, a tax deferred plan can provide a much higher account value
over a long period of time. Therefore, tax deferral is an important component
of a retirement plan or other long-term financial goals. (The above chart is
for illustrative purposes and should not be construed as representative of
actual results, which may be more or less.)
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TAX BENEFITS TODAY
When you put a portion of your salary in a tax deferred retirement plan, your
contributions don't appear as taxable income on your W-2 form at the end of the
calendar year. So while you are contributing, you can reduce your taxes and
increase your take-home pay.
Here's an example: Let's assume you are single, your taxable income is $50,000,
and you are in the 28% tax bracket.
<TABLE>
<CAPTION>
Traditional Savings of
savings plan pre-tax dollars
- ----------------------------------------------------------------------
<S> <C> <C>
Your income $50,000 $50,000
Tax-deferred savings -0- 2,400
Taxable income 50,000 47,600
*Estimated federal income taxes 10,481 9,809
Income after taxes 39,519 37,791
After-tax savings 2,400 -0-
Remaining income after savings and taxes 37,119 37,791
</TABLE>
With a tax-deferred plan, you have $672 more spendable income each year because
you are paying less taxes currently.
*The above chart assumes a 28% marginal federal tax rate on conventional
contributions. TDA contributions are generally taxed as ordinary income when
withdrawn. Federal tax penalties generally apply to distributions before age 59
1/2. For illustrative purposes only.
FINANCIAL STATEMENTS
The statutory-basis financial statements and schedules of Lincoln Life appear on
the following pages. Financial statements of the VAA are not included because,
as of the date hereof, the VAA had no assets, had incurred no liabilities, and
had not yet commenced operations.
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Appendix A
APPENDIX A
HISTORICAL FUND/SERIES Tables 1A and 1B below
PERFORMANCE ADJUSTED FOR assume a hypothetical
CONTRACT AND VAA FEES AND investment of $1,000 at the
CHARGES. Returns are beginning of the period via
provided for years before the subaccount investing in
the fund and series were the applicable fund or
available investment series and withdrawal of
options under the contract. the investment on 12/31/97.
Returns for those periods The adjusted returns shown
reflect an adjusted return thus reflect the mortality
as if those funds and and expense risk charge,
series were available under the CDSC and a pro rata
the contract, and reflect portion of the account
the deduction of the two charge. THIS INFORMATION
levels of mortality and DOES NOT INDICATE OR
expense risk charge. REPRESENT FUTURE
PERFORMANCE.
TABLE 1A
SUBACCOUNT "ADJUSTED" AVERAGE ANNUAL RETURN
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 14.49% 14.78% N/A% N/A% N/A% N/A% 12.17% 12.45%
Bond 1.61 1.87 5.46 5.73 7.82 8.10
Capital Appreciation 16.49 16.79 N/A N/A N/A N/A 15.32 15.61
Trend Series 12.90 13.19 N/A N/A N/A N/A 6.93 7.20
Decatur Total Return
Series 21.88 22.19 N/A N/A N/A N/A 20.83 21.14
Global Bond Series (6.17) (5.93) N/A N/A N/A N/A 2.46 2.72
Equity-Income 21.47 21.78 N/A N/A N/A N/A 19.18 19.49
Global Asset Allocation 11.02 11.30 12.37 12.65 11.42 11.71
Growth and Income 21.65 21.96 17.73 18.03 14.66 14.96
International (1.41) (1.16) 10.65 10.93 N/A N/A 6.35 6.62
Managed 13.18 13.46 12.02 12.30 11.26 11.54
Money Market (2.24) (1.99) 2.51 2.77 4.44 4.71
Social Awareness 27.84 28.17 21.41 21.72 N/A N/A 17.89 18.19
Special Opportunities 19.14 19.45 16.11 16.41 15.14 15.44
</TABLE>
TABLE 1B
SUBACCOUNT "ADJUSTED" CUMULATIVE TOTAL RETURN
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 14.49% 14.78% N/A% N/A% N/A% N/A% 158.20% 159.81%
Bond 1.61 1.87 130.44 132.11 212.41 217.89
Capital Appreciation 16.49 16.79 N/A N/A N/A N/A 176.70 178.50
Trend Series 12.90 13.19 N/A N/A N/A N/A 111.85 112.33
Decatur Total Return
Series 21.88 22.19 N/A N/A N/A N/A 137.19 137.77
Global Bond Series (6.17) (5.93) N/A N/A N/A N/A 104.14 104.58
Equity-Income 21.47 21.78 N/A N/A N/A N/A 201.59 203.65
Global Asset Allocation 11.02 11.30 179.15 181.44 294.94 302.54
Growth and Income 21.65 21.96 226.16 229.06 392.86 402.98
International (1.41) (1.16) 165.84 167.96 N/A N/A 150.77 153.35
Managed 13.18 13.46 176.35 178.61 290.59 298.08
Money Market (2.24) (1.99) 113.22 114.66 154.42 158.40
Social Awareness 27.84 28.17 263.81 267.19 N/A N/A 490.90 503.12
Special Opportunities 19.14% 19.45 211.06 213.76 409.65 420.20
</TABLE>
B-10
<PAGE>
Appendix A
Table 2A below shows annual average total return on the same assumptions as
Table 1A except that the value in the subaccount is not withdrawn at the end of
the period or is withdrawn to effect an annuity. Table 2B shows the cumulative
total return on the same basis. The adjusted returns shown below thus reflect
the mortality and expense risk charge and a pro rata portion of the account
charge, but no CDSC.
TABLE 2A
SUBACCOUNT "ADJUSTED" AVERAGE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 21.80% 22.11% N/A% N/A% N/A% N/A% 13.92% 14.21%
Bond 8.10 8.37 6.32 6.59 7.82 8.10
Capital Appreciation 23.93 24.24 N/A N/A N/A N/A 17.12 17.41
Trend Series 20.11 20.41 N/A N/A N/A N/A 10.96 11.25
Decatur Total Return
Series 29.66 29.99 N/A N/A N/A N/A 25.39 25.70
Global Bond Series (.18) 0.07 N/A N/A N/A N/A 6.32 6.59
Equity-Income 29.22 29.55 N/A N/A N/A N/A 21.05 21.35
Global Asset Allocation 18.10 18.40 13.29 13.58 11.42 11.71
Growth and Income 29.41 29.74 18.69 19.00 14.66 14.96
International 4.88 5.15 11.55 11.84 N/A N/A 6.83 7.11
Managed 20.40 20.71 12.93 13.22 11.26 11.54
Money Market 4.01 4.27 3.35 3.62 4.44 4.71
Social Awareness 36.00 36.35 22.41 22.72 N/A N/A 17.89 18.19
Special Opportunities 26.75 27.07 17.07 17.36 15.14 15.44
</TABLE>
TABLE 2B
SUBACCOUNT "ADJUSTED" CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 21.80% 22.11% N/A% N/A% N/A% N/A% 168.30% 170.01%
Bond 8.10 8.37 135.88 137.61 212.41 217.89
Capital Appreciation 23.93 24.24 N/A N/A N/A N/A 187.97 189.89
Trend Series 20.11 20.41 N/A N/A N/A N/A 118.99 119.49
Decatur Total Return
Series 29.66 29.99 N/A N/A N/A N/A 145.95 146.57
Global Bond Series (.18) 0.07 N/A N/A N/A N/A 110.79 111.26
Equity-Income 29.22 29.55 N/A N/A N/A N/A 214.45 216.64
Global Asset Allocation 18.10 18.40 186.61 189.00 294.94 302.54
Growth and Income 29.41 29.74 235.58 238.60 392.86 402.98
International 4.88 5.15 172.75 174.96 N/A N/A 155.43 158.09
Managed 20.40 20.71 183.70 186.05 290.59 298.08
Money Market 4.01 4.27 117.93 119.44 154.42 158.40
Social Awareness 36.00 36.35 274.80 278.32 N/A N/A 490.90 503.12
Special Opportunities 26.75 27.07 219.85 222.67 409.65 420.20
</TABLE>
B-11
<PAGE>
Appendix A
Tables 3A and 3B show adjusted performance information on the same assumptions
as Tables 2A and 2B except that Tables 3A and 3B do not reflect deductions of
the pro rata portion of the account charge.
TABLE 3A
SUBACCOUNT "ADJUSTED" AVERAGE ANNUAL TOTAL RETURN ASSUMING NO WITHDRAWAL AND NO
ACCOUNT CHARGE
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 21.86% 22.17% N/A% N/A% N/A% N/A% 13.99% 14.28%
Bond 8.15 8.43 6.39 6.66 7.92 8.19
Capital Appreciation 23.99 24.30 N/A N/A N/A N/A 17.19 17.49
Trend Series 20.17 20.47 N/A N/A N/A N/A 11.04 11.32
Decatur Total Return
Series 29.72 30.05 N/A N/A N/A N/A 25.46 25.78
Global Bond Series (.13) 0.13 N/A N/A N/A N/A 6.39 6.66
Equity-Income 29.29 29.62 N/A N/A N/A N/A 21.12 21.43
Global Asset Allocation 18.16 18.46 13.36 13.65 11.52 11.80
Growth and Income 29.48 29.81 18.77 19.07 14.76 15.05
International 4.94 5.21 11.62 11.91 N/A N/A 6.91 7.19
Managed 20.46 20.77 13.00 13.29 11.35 11.63
Money Market 4.06 4.33 3.42 3.69 4.53 4.80
Social Awareness 36.06 36.41 22.48 22.79 N/A N/A 17.99 18.29
Special Opportunities 26.81 27.13 17.14 17.44 15.24 15.53
</TABLE>
TABLE 3B
SUBACCOUNT "ADJUSTED" CUMULATIVE TOTAL RETURN ASSUMING NO WITHDRAWAL AND NO
ACCOUNT CHARGE
<TABLE>
<CAPTION>
1 Year Ending 5 Years Ending 10 Years Ending Life of Fund Ending
12/31/97 12/31/97 12/31/97 12/31/97
-------------------------------------------------------------------------------
standard breakpoint standard breakpoint standard breakpoint standard breakpoint
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth 21.86% 22.17% N/A% N/A% N/A% N/A% 168.71% 170.43%
Bond 8.15 8.43 136.32 138.06 214.24 219.75
Capital Appreciation 23.99 24.30 N/A N/A N/A N/A 188.43 190.35
Trend Series 20.17 20.47 N/A N/A N/A N/A 119.12 119.63
Decatur Total Return
Series 29.72 30.05 N/A N/A N/A N/A 146.10 146.72
Global Bond Series (.13) 0.13 N/A N/A N/A N/A 110.91 111.38
Equity-Income 29.29 29.62 N/A N/A N/A N/A 214.96 217.16
Global Asset Allocation 18.16 18.46 187.20 189.60 297.45 305.11
Growth and Income 29.48 29.81 236.32 239.34 396.17 406.37
International 4.94 5.21 173.30 175.52 N/A N/A 156.20 158.87
Managed 20.46 20.77 184.28 186.64 293.06 300.61
Money Market 4.06 4.33 118.32 119.84 155.76 159.77
Social Awareness 36.06 36.41 275.65 279.17 N/A N/A 494.97 507.28
Special Opportunities 26.81 27.13 220.54 223.36 413.11 423.74
</TABLE>
B-12
<PAGE>
Appendix A
Tables 4A and 4B below assume a hypothetical investment of $1,000 at the
beginning of the period via each subaccount and show total return information
on a calendar year basis assuming no withdrawal within the first ten contract
years. The rates of return shown reflect the two levels of mortality and
expense risk charge, but do not reflect the CDSC or the pro rata deduction of
the account charge.
TABLE 4A
"ADJUSTED" CALENDAR YEAR ANNUAL RETURN ASSUMING NO WITHDRAWAL AND NO ACCOUNT
CHARGE--STANDARD MORTALITY AND EXPENSE RISK CHARGE*
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth N/A% N/A% N/A% N/A% N/A% N/A% N/A% 33.42% 15.78% 21.86%
Bond 6.93 12.07 5.63 16.21 6.84 11.25 (5.18) 17.96 1.29 8.15
Capital Appreciation N/A N/A N/A N/A N/A N/A N/A 27.20 17.47 23.99
Trend Series N/A N/A N/A N/A N/A N/A N/A N/A N/A 20.17
Decatur Total Return Series N/A N/A N/A N/A N/A N/A N/A N/A N/A 29.72
Global Bond Series N/A N/A N/A N/A N/A N/A N/A N/A N/A (.13)
Equity-Income N/A N/A N/A N/A N/A N/A N/A 32.87 19.57 29.29
Global Asset Allocation 9.86 16.91 (.08) 17.43 5.43 16.28 (2.82) 22.59 14.37 18.16
Growth and Income 7.18 19.75 (.05) 29.61 0.84 12.12 0.31 37.00 18.46 29.48
International N/A N/A N/A N/A (8.93) 37.90 2.28 7.60 8.81 4.94
Managed 8.00 15.97 2.50 20.66 2.66 10.53 (2.84) 27.97 11.32 20.46
Money Market 6.31 8.01 6.94 4.68 2.42 1.71 2.78 4.59 3.99 4.06
Social Awareness N/A 30.18 (5.30) 36.22 2.59 12.56 (.81) 41.82 27.96 36.06
Special Opportunities 2.88 31.90 (8.42) 41.83 6.28 17.42 (2.01) 30.54 15.79 26.81
</TABLE>
*The above calendar-year returns assume a hypothetical investment of $1,000 on
January 1 of the first full calendar year that the underlying fund or series
was in existence. The returns assume that the $1,000 will remain in the
contract for ten contract years; thus, the standard mortality and expense risk
charge is reflected, but the account charge and the CDSC have not been
deducted.
TABLE 4B
"ADJUSTED" CALENDAR YEAR ANNUAL RETURN ASSUMING NO WITHDRAWAL AND NO ACCOUNT
CHARGE--"BREAKPOINT" MORTALITY AND EXPENSE RISK CHARGE**
<TABLE>
<CAPTION>
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Aggressive Growth N/A% N/A% N/A% N/A% N/A% N/A% N/A% 33.76% 16.08% 22.17%
Bond 7.20 12.36 5.90 16.51 7.11 11.54 (4.94) 18.26 1.55 8.43
Capital Appreciation N/A N/A N/A N/A N/A N/A N/A 27.52 17.77 24.30
Trend Series N/A N/A N/A N/A N/A N/A N/A N/A N/A 20.47
Decatur Total Return Series N/A N/A N/A N/A N/A N/A N/A N/A N/A 30.05
Global Bond Series N/A N/A N/A N/A N/A N/A N/A N/A N/A 0.13
Equity-Income N/A N/A N/A N/A N/A N/A N/A 33.21 19.88 29.62
Global Asset Allocation 10.14 17.20 0.18 17.73 5.70 16.57 (2.57) 22.90 14.66 18.46
Growth and Income 7.45 20.05 0.20 29.94 1.09 12.41 0.57 37.34 18.76 29.81
International N/A N/A N/A N/A (8.70) 38.25 2.54 7.87 9.09 5.21
Managed 8.27 16.27 2.76 20.97 2.92 10.81 (2.60) 28.29 11.61 20.77
Money Market 6.58 8.28 7.21 4.94 2.68 1.97 3.05 4.86 4.25 4.33
Social Awareness N/A 30.51 (5.06) 36.57 2.86 12.84 (.56) 42.18 28.28 36.41
Special Opportunities 3.14 32.23 (8.19) 42.19 6.55 17.71 (1.76) 30.88 16.08 27.13
</TABLE>
**The above calendar-year returns assume a hypothetical investment of $1,000 on
January 1 of the first full calendar year that the underlying fund or series
was in existence. The returns assume that the $1,000 will remain in the
contract for ten contract years; thus, the "breakpoint" mortality and expense
risk charge is reflected, but the account charge and CDSC have not been
deducted.
B-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Paid-in surplus 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged
to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
------------------------------------------------
State and municipal 40.4 .1 -- 40.5
------------------------------------------------ --------- ----------- ----------- ---------
$19,389.6 $ 918.2 $ 113.4 $20,194.4
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
At December 31, 1996:
Preferred stocks $239.7 $10.5 $ 1.7 $248.5
- ----------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to tax-exempt investment income,
dividends-received tax deductions, differences in policy
acquisition costs and policy and contract liabilities for
tax return and financial statement purposes.
Federal income taxes incurred of $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the
"policyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which
income taxes have been paid will continue to be accumulated
in a memorandum account designated as "shareholder's
surplus," and is available for dividends to the shareholder
without additional payment of tax by the Company. The
December 31, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $ 1.9 $ 2.0
- ------------------------------------------------------------------------
Ordinary renewal 35.1 3.0 32.1
- ------------------------------------------------------------------------
Group life 9.4 (.1) 9.5
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. Accordingly, this liability may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company. The Company reviews reserve levels on an ongoing basis.
During 1995, the Company completed an in-depth review of the experience of
its disability income business. As a result of this study, and based on the
assumption that recent experience will continue in the future, net income
decreased by $15,200,000 as a result of strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate the Company to buy
or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial
futures contracts are made daily.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
1) terminated and expired spread-lock agreements and; 2) financial futures
contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which is to be
amortized on a straight-line basis over 10 years. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have no
claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds. The detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
February 5, 1998
S-36
