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THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
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HOME OFFICE LOCATION: ADMINISTRATIVE OFFICE
1300 SOUTH CLINTON STREET PERSONAL SERVICE CENTER MVLI
P.O. BOX 1110 350 CHURCH STREET
FORT WAYNE, INDIANA 46802 HARTFORD, CT 06103-1106
(800) 454-6265 (800) 444-2363
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A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
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This Prospectus describes LVULDB, a flexible premium variable universal life
insurance contract (the "Policy"), offered by The Lincoln National Life
Insurance Company ("Lincoln Life", "Company", "we", "us", "our").
The Policy features flexible premium payments; a choice of one of two death
benefit options; and a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds, furnished with this Prospectus,
should be read carefully to understand the Policy being offered.
You may allocate net premiums to the subaccounts of our Flexible Premium
Variable Life Account M ("Separate Account"). Each subaccount invests in one of
the Funds listed below:
AIM VARIABLE INSURANCE FUNDS
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
AMERICAN FUNDS INSURANCE SERIES
(ALSO KNOWN AS AMERICAN VARIABLE INSURANCE SERIES)
Global Small Capitalization Fund -- Class 2
Growth Fund -- Class 2
Growth-Income Fund -- Class 2
BARON CAPITAL FUNDS TRUST
Baron Capital Asset Fund -- Insurance Shares
DELAWARE GROUP PREMIUM FUND
Devon Series -- Standard Class
Emerging Markets Series -- Standard Class
High Yield Series -- Standard Class
(formerly Delchester Series)
REIT Series -- Standard Class
Small Cap Value Series -- Standard Class
Trend Series -- Standard Class
DEUTSCHE ASSET MANAGEMENT VIT FUNDS TRUST
(FORMERLY BT INSURANCE FUNDS TRUST)
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Growth Portfolio -- Service Class
High Income Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Contrafund Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
Growth Opportunities Portfolio -- Service Class
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST
Templeton Growth Securities Fund -- Class 2
(formerly Templeton Stock Fund)
Templeton International Securities Fund -- Class 2
(formerly Templeton International Fund)
JANUS ASPEN SERIES
Janus Aspen Series Balanced Portfolio --
Institutional Shares
Janus Aspen Series Global Technology Portfolio --
Service Shares
Janus Aspen Series Worldwide Growth Portfolio --
Institutional Shares
LINCOLN NATIONAL (LN)
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS-Registered Trademark- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES. THIS PROSPECTUS ONLY OFFERS THE
POLICY FOR SALE IN JURISDICTIONS WHERE ITS OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 2000
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TABLE OF CONTENTS
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CONTENTS PAGE
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HIGHLIGHTS............................ 3
Initial Choices To Be Made.......... 3
Level or Varying Death Benefit...... 3
Amount of Premium Payments.......... 4
Selection of Funding Vehicles....... 4
No Lapse Provision.................. 5
Charges and Fees.................... 5
Fund Expenses....................... 6
Changes in Specified Amount......... 10
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT.................. 10
BUYING VARIABLE LIFE INSURANCE........ 11
Replacements........................ 12
APPLICATION........................... 12
OWNERSHIP............................. 13
BENEFICIARY........................... 13
THE POLICY............................ 14
Policy Specifications............... 14
PREMIUM FEATURES...................... 14
Planned Premiums Additional
Premiums........................... 14
Limits on Right to Make Payments of
Additional and Planned Premiums.... 15
Premium Load; Net Premium Payment... 15
RIGHT-TO-EXAMINE PERIOD............... 15
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS.............................. 15
Allocation of Net Premium
Payments........................... 15
Transfers........................... 15
Optional Sub-Account Allocation
Programs........................... 16
Dollar Cost Averaging............. 16
Automatic Rebalancing............. 17
POLICY VALUES......................... 17
Accumulation Value.................. 17
Separate Account Value.............. 17
Variable Accumulation Unit
Value............................ 18
Variable Accumulation Units....... 18
Fixed Account and Loan Account
Value.............................. 18
Net Accumulation Value.............. 18
FUNDS................................. 19
Substitution of Securities.......... 24
Voting Rights....................... 24
Fund Participation Agreements....... 24
CHARGES AND FEES...................... 24
Deduction from Premium Payments..... 24
Deductions Made Monthly............. 25
Administrative Expenses........... 25
Cost of Insurance Charge.......... 25
Mortality and Expense Risk Charge... 26
Surrender Charges................... 26
Reduction of Charges -- Purchases on
a Case Basis; Exchanges............ 27
Transaction Fee for Excess
Transfers.......................... 27
DEATH BENEFITS........................ 27
Death Benefit Options............... 27
Changes in Death Benefit Options and
Specified Amount................... 28
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Federal Income Tax Definition of
Life Insurance..................... 29
NOTICE OF DEATH OF INSURED............ 29
PAYMENT OF DEATH BENEFIT PROCEEDS..... 29
Settlement Options.................. 29
POLICY LIQUIDITY...................... 30
Policy Loans........................ 30
Partial Surrender................... 31
Surrender of the Policy............. 31
Surrender Value..................... 31
Deferral of Payment and Transfers... 31
ASSIGNMENT; CHANGE OF OWNERSHIP....... 32
LAPSE AND REINSTATEMENT............... 32
Lapse of a Policy................... 32
No Lapse Provision.................. 32
Reinstatement of a Lapsed Policy.... 33
COMMUNICATIONS WITH LINCOLN LIFE...... 33
Proper Written Form................. 33
Telephone Transaction Privileges.... 33
OTHER POLICY PROVISIONS............... 33
Issuance............................ 33
Date of Coverage.................... 34
Incontestability.................... 34
Misstatement of Age or Gender....... 34
Suicide............................. 34
Nonparticipating Policies........... 34
Riders.............................. 34
TAX ISSUES............................ 34
Taxation of Life Insurance Contracts
in General......................... 35
Policies Which Are MECs............. 36
Policies Which Are Not MECs......... 37
Other Considerations................ 37
Tax Status of Lincoln Life.......... 38
FAIR VALUE OF THE POLICY.............. 38
DIRECTORS AND OFFICERS OF LINCOLN
LIFE................................. 39
DISTRIBUTION OF POLICIES.............. 40
CHANGES OF INVESTMENT POLICY.......... 41
OTHER CONTRACTS ISSUED BY LINCOLN
LIFE................................. 41
STATE REGULATION...................... 41
REPORTS TO OWNERS..................... 41
ADVERTISING........................... 42
LEGAL PROCEEDINGS..................... 42
EXPERTS............................... 42
REGISTRATION STATEMENT................ 43
APPENDIX 1: MONTHLY CHARGE............ 44
APPENDIX 2: GUARANTEED MAXIMUM COST OF
INSURANCE RATES...................... 45
APPENDIX 3: ILLUSTRATION OF SURRENDER
CHARGES.............................. 46
APPENDIX 4: CORRIDOR PERCENTAGES...... 48
APPENDIX 5: ILLUSTRATION OF
ACCUMULATION VALUES, SURRENDER VALUES
AND DEATH BENEFIT PROCEEDS........... 49
FINANCIAL STATEMENTS
SEPARATE ACCOUNT.................... M-1
LINCOLN LIFE........................ S-1
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HIGHLIGHTS
This section is an overview of key Policy features.
(Regulations in your state may vary the provisions of your
own Policy.) Your Policy is a flexible premium variable life
insurance policy under which flexible premium payments are
permitted and the Death Benefit and Policy values may vary
with the investment performance of the funding option(s)
selected. Its value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
variable life insurance policy. This Policy may, or may not,
be appropriate for your individual financial goals. If you
are already entitled to favorable tax treatment, you should
satisfy yourself that this Policy meets your other financial
goals before you buy it. The value of the Policy and, under
one option, the death benefit amount depend on the
investment results of the funding options you select.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. Lincoln Life reserves the right to return your
premium payments if they result in your Policy failing to
meet Code requirements.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. If no Owner is named, the Insured (the
person whose life is insured under the Policy) will be the
Owner of the Policy. You, as the Owner, have four important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the two Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it.
4) whether to elect the No Lapse Provision.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the Insured dies. Before we pay the
Beneficiary(ies), any outstanding loan account balances or
outstanding amounts due are subtracted from the Death
Benefit. We calculate the Death Benefit payable as of the
date on which the Insured died.
When you purchase your Policy, you must choose one of two
Death Benefit Options:
1) a level death benefit; or
2) a varying death benefit.
If you choose the level Death Benefit Option, the Death
Benefit will be the greater of:
1) the "Specified Amount", which is the amount of the death
benefit in effect for the Policy when the Insured died, less
any indebtedness and partial surrenders (The Specified
Amount may be found on the Policy's Specification Page); or
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2) the "Corridor Death Benefit", which is the death benefit
calculated as a percentage of the Accumulation Value.
If you choose the varying Death Benefit Option, the Death
Benefit will be the greater of:
1) the Specified Amount plus the Net Accumulation Value,
less any loan interest accrued, but not yet charged, when
the Insured died; or
2) the Corridor Death Benefit.
(The "Net Accumulation Value" is the total of the balances
in the Fixed Account and the Separate Account. It does not
include any outstanding Loan Account amounts).
See page 27.
If you have borrowed against your Policy or surrendered a
portion of your Policy, your Death Benefit will be reduced
by the Loan Account balance, by any loan interest accrued,
but not yet charged, and any surrendered amount.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 15.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 25)
increase as the Insured gets older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. The Policy will not lapse if, on each Monthly
Anniversary while the No Lapse Provision is in effect, the
Owner has met the No Lapse Premium Requirement. See
page 32.
When you first receive your Policy you will have 10 days to
look it over, unless state law requires a greater time. This
is called the "Right-to-Examine" period. Use this time to
review your Policy and make sure it meets your needs. During
this period, your Initial Premium Payment will be deposited
in the Money Market Sub-Account. If you then decide you do
not want your Policy, we will return all Premium Payments to
you with no interest paid. See page 15.
SELECTION OF FUNDING VEHICLES
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the
contract. If you put money into the variable funding
options, you assume all the investment risk on that money.
This means that if the funds you select go up in value, the
value of your Policy, net of charges and expenses, also goes
up. If those funds lose value, so does your Policy. Each
fund has its own investment objective. You should review
each fund's Prospectus before making your decision.
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You must choose the Sub-Accounts in which you want to place
each Net Premium Payment. The Sub-Accounts make up the
Separate Account. Each Sub-Account invests in shares of a
certain Fund. A Sub-Account is not guaranteed and will
increase or decrease in value according to the particular
Fund's investment performance. See page 19.
You may also use our Fixed Account to fund your Policy. Net
Premium payments put into the Fixed Account:
- become part of our General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at our discretion. For
additional information on the Fixed Account. See page 11.
NO LAPSE PROVISION
If elected on the application, this policy contains a
ten-year "No Lapse Provision". This means that the Policy
will not lapse during its first ten years regardless of the
gains or losses of the Funds you select as long as you pay
the specified No Lapse Premium. Therefore, the Initial Death
Benefit under your Policy will be guaranteed for ten years
even though your Net Accumulation Value is insufficient to
pay your current Monthly Deductions. Loans or Partial
Surrenders may jeopardize the No Lapse Provision. See
page 32. Availability of the No Lapse Provision may vary in
some states.
CHARGES AND FEES (Fees Charged by the Company)
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales-related expenses we incur.
DEDUCTION FROM PREMIUM PAYMENTS. We deduct a premium charge
of 5% from each Premium Payment.
MONTHLY DEDUCTION. There is a Monthly Deduction which
includes administrative expenses, a cost of insurance charge
and charges for riders that are placed on your policy.
ADMINISTRATIVE EXPENSES. We deduct a flat dollar Monthly
Deduction of $10 for administrative expenses.
In addition, for the first two Policy Years, we deduct a
monthly charge per $1,000 of Specified Amount. This
monthly charge will vary with the insured's age as
described on page 25 and as shown in Appendix 1. This
monthly charge also applies, for 24 months, to any
increase in Specified Amount.
The maximum for this additional monthly charge would be
$0.4242 per $1,000 of Specified Amount. This would apply
only if the insured's age as of the birth date nearest
the Policy's issue date (or increase in specified
amount) is 81 or older.
COST OF INSURANCE CHARGE. A monthly deduction is made
for the Cost of Insurance charge. This charge varies by
policy duration and insured's age, gender and premium
class. The maximum monthly deductions are listed in
Appendix 2.
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Mortality and Expense Risk Charge. We make daily charges
against the Separate Account for mortality and expense risk.
This charge is guaranteed at an annual rate of 0.90% for
Policy Years 1-19 and 0.20% for Policy Years 20 and beyond.
Transfer Charge. Each Policy Year you may make 12 transfers
between funding options without charge. Beyond 12, a $25 fee
may apply.
SURRENDER CHARGES. FULL SURRENDER. If you totally surrender
your Policy within the first 15 Policy Years, the Surrender
Charge is the amount retained by us. Calculation of the
Surrender Charge is described in Appendix 3. This charge is
based on age, gender and policy duration. The maximum
Surrender Charge will never exceed $46.82 per $1,000 of
Specified Amount. PARTIAL SURRENDER. Each time you request a
partial surrender of your Policy, we charge you $25, but not
more than 2% of the amount withdrawn. See page 26.
Loans. You may borrow within described limits against the
Policy. If you borrow against your Policy, interest will be
charged on the Loan Account Value at an annual interest rate
of 8%. As a benefit to you Lincoln Life will credit interest
of 7% per year on the Loan Account Value. See page 30.
REDUCTION OF CHARGES. Charges and fees may be reduced in
some circumstances. See page 24. See page 27.
FUND EXPENSES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. The charge reflects asset
management fees of the investment advisor (Management Fees),
and other expenses incurred by the funds (including 12b-1
fees for Class 2 shares and Other Expenses). The charge has
the effect of reducing the investment results credited to
the Sub-Accounts. Future Fund expenses will vary.
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PORTFOLIO EXPENSE TABLE
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TOTAL
ANNUAL TOTAL FUND
FUND OPERATING
OPERATING EXPENSES
EXPENSES TOTAL WITH
WITHOUT WAIVERS WAIVERS
MANAGEMENT 12(B)1 OTHER WAIVERS OR AND AND
FUND FEES(1) FEE EXPENSES REDUCTIONS REDUCTIONS REDUCTIONS
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AIM V.I. Growth Fund....... 0.63% N/A% 0.10% 0.73% N/A 0.73%
AIM V.I. International
Equity Fund.............. 0.75% N/A 0.22% 0.97% N/A 0.97%
AIM V.I. Value Fund........ 0.61% N/A 0.15% 0.76% N/A 0.76%
AFIS Global Small
Capitalization Fund-
Class 2.................. 0.78% 0.25% 0.03% 1.06% N/A 1.06%
AFIS Growth Fund
Class 2.................. 0.38% 0.25% 0.01% 0.64% N/A 0.64%
AFIS Growth Income Fund
Class 2.................. 0.34% 0.25% 0.01% 0.60% N/A 0.60%
Baron Capital Asset
Fund-Insurance
Shares(2)................ 1.00% 0.25% 0.63% 1.88% (0.38)% 1.50%
Delaware Devon Series
Standard Class (3a)...... 0.65% N/A 0.10% 0.75% N/A 0.75%
Delaware Emerging Markets
Series-Standard
Class (3b)............... 1.19% N/A 0.28% 1.53% (0.06)% 1.47%
Delaware High Yield Series
(formerly Delchester)
Standard Class (3c)...... 0.65% N/A 0.07% 0.72% N/A 0.72%
Delaware REIT Series
Standard Class (3d)...... 0.75% N/A 0.21% 0.96% (0.11)% 0.85%
Delaware Small Cap Value
Series Standard
Class (3e)............... 0.75% N/A 0.10% 0.85% N/A 0.85%
Delaware Trend Series
Standard Class (3f)...... 0.75% N/A 0.07% 0.82% N/A 0.82%
Deutsche VIT EAFE Index
Fund(4).................. 0.45% N/A 0.70% 1.15% (0.50)% 0.65%
Deutsche VIT Equity 500
Index Fund(4)............ 0.20% N/A 0.23% 0.43% (0.13)% 0.30%
Deutsche VIT Small Cap
Index Fund(4)............ 0.35% N/A 0.83% 1.18% (0.73)% 0.45%
Fidelity VIP Growth
Portfolio Service
Class (5)................ 0.58% 0.10% 0.09% 0.77% N/A 0.77%
Fidelity VIP High Income
Portfolio Service
Class (5)................ 0.58% 0.10% 0.11% 0.79% N/A 0.79%
Fidelity VIP II ContraFund
Portfolio-Service
Class (5)................ 0.58% 0.10% 0.10% 0.78% N/A 0.78%
Fidelity VIP III Growth
Opportunities Portfolio
Service Class (5)........ 0.58% 0.10% 0.11% 0.79% N/A 0.79%
Janus Aspen Series Balanced
Portfolio (Institutional
Shares)(6)............... 0.65% N/A 0.02% 0.67% N/A 0.67%
Janus Aspen Series Global
Technology Portfolio
(Service Shares)(6)...... 0.65% 0.25% 0.13% 1.03% N/A 1.03%
Janus Aspen Series
Worldwide Growth
Portfolio(6)............. 0.65% N/A 0.05% 0.70% N/A 0.70%
LN Bond Fund............... 0.45% N/A 0.08% 0.53% N/A 0.53%
LN Capital Appreciation
Fund..................... 0.72% N/A 0.06% 0.78% N/A 0.78%
LN Equity-Income Fund...... 0.72% N/A 0.07% 0.79% N/A 0.79%
LN Global Asset Allocation
Fund..................... 0.72% N/A 0.19% 0.91% N/A 0.91%
LN Money Market Fund....... 0.48% N/A 0.11% 0.59% N/A 0.59%
LN Social Awareness Fund... 0.33% N/A 0.05% 0.38% N/A 0.38%
MFS Emerging Growth
Fund(7).................. 0.75% N/A 0.09%(1) 0.84% N/A 0.84%
MFS Total Return
Series(7)................ 0.75% N/A 0.15%(1) 0.90% N/A 0.90%
MFS Utilities
Series (7)............... 0.75% N/A 0.16%(1) 0.91% N/A 0.91%
Neuberger Berman AMT
Mid-Cap Growth
Portfolio(8)............. 0.85% N/A 0.23% 1.08% (0.08)% 1.00%
Neuberger Berman AMT
Partners Portfolio(8).... 0.80% N/A 0.07% 0.87% N/A 0.87%
Templeton Growth Securities
Fund Class 2(9a,b,c)..... 0.83% 0.25% 0.05% 1.13% N/A 1.13%
Templeton International
Securities Fund
Class 2(9b,d)............ 0.69% 0.25% 0.19% 1.13% N/A 1.13%
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(1) Certain of the fund advisers reimburse the company
for administrative costs incurred in connection with
administering the funds as variable funding options
under the contract. These reimbursements are
generally paid out of the management fees and are not
charged to investors.
(2) The Adviser is contractually obligated to reduce its
fee to the extent required to limit Baron Capital
Asset Fund's total operating expenses to 1.5% for the
first $250 million of assets in the Fund, 1.35%
7
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for Fund assets over $250 million and 1.25% for Fund
assets over $500 million. Without the expense
limitations, total operating expenses for the Fund
for the period January 1, 1999 through December 31,
1999 would have been 1.88%.
(3)(a) The investment advisor for the Devon Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse each Series for expenses to the extent
that total expenses will not exceed 0.80%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets as follows:
0.65% on the first $500 million, 0.60% on the next
$500 million, 0.55% on the next $1,500 million,
0.50% on assets in excess of $2,500 million; all per
year.
(b) The investment advisor for the Emerging Markets
Series is Delaware International Advisers Ltd.
("DIAL"). Effective May 1, 2000 through October 31,
2000, DIAL has voluntarily agreed to waive its
management fee and reimburse the Series for expenses
to the extent that total expenses will not exceed
1.50%. Without such an arrangement, the total annual
operating expenses for the Series would have been
1.53%. Under its Management Agreement, the
Series pays a management fee based on average daily
net assets as follows: 1.25% on the first $500
million, 1.20% on the next $500 million, 1.15% on the
next $1,500 million, 1.10% on assets in excess of
$2,500 million; all per year.
(c) The investment advisor for the High Yield Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not exceed 0.80%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets as follows:
0.65% on the first $500 million, 0.60% on the next
$500 million, 0.55% on the next $1,500 million, 0.50%
on assets in excess of $2,500 million; all per year.
(d) The investment advisor for the REIT Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not exceed 0.85%. Without such an
arrangement, the total annual operating expenses for
the Series would have been 0.96%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets as follows:
0.75% on the first $500 million, 0.70% on the next
$500 million, 0.65% on the next $1,500 million, 0.60%
on assets in excess of $2,500 million; all per year.
(e) The investment advisor for the Small Cap Value
Series is Delaware Management Company ("DMC").
Effective May 1, 2000 through October 31, 2000, DMC
has voluntarily agreed to waive its management fee
and reimburse the Series for expenses to the extent
that total expenses will not exceed 0.85%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets as follows:
0.75% on the first $500 million, 0.70% on the next
$500 million, 0.65% on the next $1,500 million, 0.60%
on assets in excess of $2,500 million; all per year.
(f) The investment advisor for the Trend Series is
Delaware Management Company ("DMC"). Effective
May 1, 2000 through October 31, 2000, DMC has
voluntarily agreed to waive its management fee and
reimburse the Series for expenses to the extent that
total expenses will not exceed 0.85%. Under its
Management Agreement, the Series pays a management
fee based on average daily net assets as follows:
0.75% on the first $500 million, 0.70% on the next
$500 million, 0.65% on the next $1,500 million, 0.60%
on assets in excess of $2,500 million; all per year.
(4) Under the Advisory Agreement with Bankers Trust
Company (the "Advisor"), the fund will pay an
advisory fee at an annual percentage rate of 0.20% of
the average daily net assets of the Equity 500 Index
Fund. These fees are accrued daily and paid monthly.
The Advisor has voluntarily undertaken to waive its
fee and to reimburse the fund for certain expenses so
that the fund's total operating expenses will not
exceed 0.30% of average daily net assets. Under the
Advisory Agreement with the "Advisor", the Small Cap
Index Fund will pay an advisory fee at an annual
percentage rate of 0.35% of the average daily net
assets of the fund. These fees are accrued daily and
paid monthly. The Advisor has voluntarily undertaken
to waive its fee and to reimburse the fund for
certain expenses so that the fund's total operating
expenses will not exceed 0.45% of average daily net
assets. Under the Advisory Agreement the "Advisor",
the EAFE Equity Index Fund will pay an advisory fee
at an annual percentage rate of 0.45% of the average
daily net assets of the fund. These fees are accrued
daily and paid
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monthly. The Advisor has voluntarily undertaken to
waive its fee and to reimburse the fund for certain
expenses so that the fund's total operating expenses
will not exceed 0.65% of average daily net assets.
Without the reimbursement to the Funds for the year
ended 12/31/99 total expenses would have been 0.43%
for the Equity 500 Index Fund, 1.18% for the Small
Cap Index Fund and 1.15% for the EAFE Equity Index
Fund.
(5) A portion of the brokerage commissions that certain
funds pay was used to reduce fund expenses. In
addition, through arrangements with certain funds',
or FMR on behalf of certain funds' custodian, credits
realized as a result of uninvested cash balances were
used to reduce a portion of each applicable fund's
expenses. The total operating expenses, after
reimbursement would have been: Growth 0.75%
(service); Contrafund 0.75% (service); Growth
Opportunities 0.78% (service).
(6) Expenses (except for Global Technology Portfolio) are
based upon expenses for the fiscal year ended
December 31, 1999, restated to reflect a reduction in
the management fee for Worldwide Growth and Balanced
Portfolios. Expenses for Global Technology Portfolio
are based on the estimated expenses that the
Portfolio expects to incur in its initial fiscal
year. All expenses are shown without the effect of
expense offset arrangements.
(7) Each series has an expense offset arrangement which
reduces the series' custodian fee based on the amount
of cash maintained by the series with its custodian
and dividend disbursing agent. Each series may enter
into other such arrangement and directed brokerage
arrangements, which would also have the effect of
reducing the series' expenses. "Other Expenses" do
not take into account these expense reductions, and
are therefore higher than the actual expenses of the
series. Had the fee reductions been taken into
account, "Net Expenses" would be lower for certain
series and would equal:
0.83% for Emerging Growth Series
0.89% for Total Return Series
0.90% for Utilities Series
(8) Expenses reflect expense reimbursement. Neuberger
Berman Management Inc. ("NBMI") has undertaken
through May 1, 2001 to reimburse certain operating
expenses, including the compensation of NBMI and
excluding taxes, interest, extraordinary expenses,
brokerage commissions and transaction costs, that
exceed in the aggregate, 1.0% of the AMT Mid-Cap
Growth Portfolio's average daily net asset value.
Absent such reimbursement, Total Annual Expenses for
the portfolio for the year ended December 31, 1999
would have been 1.08%.
(9)(a) The fund administration fee is paid indirectly
through the management fee.
(b) The fund's class 2 distribution plan or "rule 12b-1
plan" is described in the fund's prospectus. While
the maximum amount payable under the fund's class 2
rule 12b-1 plan is 0.35% per year of the fund's
average daily net assets, the Board of Trustees of
Franklin Templeton Variable Insurance Products Trust
has set the current rate at 0.25% per year.
(c) On 2/8/00, a merger and reorganization was approved
that combined the fund with a similar fund of the
Templeton Variable Products Series Fund, effective
5/1/00. The table shows total expenses based on the
fund's assets as of 12/31/99, and not the assets of
the combined fund. However, if the table reflected
combined assets, the fund's expenses after 5/01/00
would be estimated as: Management Fees 0.80%,
Distribution and Service Fees 0.25%, Other Expenses
0.05%, and Total Fund Operating Expenses 1.10%
(d) On 2/8/00, shareholders approved a merger and
reorganization that combined the fund with the
Templeton International Equity Fund. The shareholders
of that fund approved new management fees, which
apply to the combined fund effective 5/1/00. The
table shows restated total expenses based on the new
fees and the assets of the fund as of 12/31/99, and
not the assets of the combined fund. However, if the
table reflected both the new fees and the combined
assets, the fund's expenses after 5/1/00 would be
estimated as: Management Fees 0.65%, Distribution and
Service Fees 0.25%, Other Expenses 0.20%, and Total
Fund Operating Expenses 1.10%.
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CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount you choose is the initial Death
Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum Specified Amount is currently
$100,000. Such changes will affect other aspects of your
Policy. See page 28.
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated
in 1905, is among the nation's largest writers of annuities,
individual life insurance and life reinsurance. Wholly-
owned by Lincoln National Corporation ("LNC"), a publicly
held Indiana insurance holding company incorporated in 1968,
it is licensed in all states (except New York), the District
of Columbia, Guam, and the Commonwealth of the Northern
Mariana Islands. Its principal office is at 1300 South
Clinton Street, Fort Wayne, IN 46802. Lincoln Life, LNC and
their affiliates comprise the "Lincoln Financial Group"
which provides a variety of wealth accumulation and
protection products and services.
Lincoln Life Flexible Premium Variable Life Account M
("Account M") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account M attributable to the Policies, though our
property, are not chargeable with liabilities of any other
business of Lincoln Life and are available first to satisfy
our obligations under the Policies. Account M income, gains,
and losses are credited to or charged against Account M
without regard to our other income, gains, or losses. Its
values and investment performance are not guaranteed. It is
registered with the Securities and Exchange Commission (the
"Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account M's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund other variable life insurance
policies and variable annuity contracts.
Account M is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the Funds available
as funding vehicles under the Policies. On each Valuation
Day, (any day on which the New York Stock Exchange is open
and trading is unrestricted) Net Premium Payments allocated
to Account M will be invested in Fund shares at net asset
value, and monies necessary to pay for deductions, charges,
transfers and surrenders from Account M are raised by
selling Fund shares at net asset value.
The Funds and their investment objectives, which they may or
may not achieve are described in "Funds." More Fund
information is in the Funds' prospectuses, which must
accompany or precede this prospectus and should be read
carefully. Some Funds have investment objectives and
policies similar to those of other funds managed by the same
investment adviser. Their investment results may be higher
or lower than those of the other funds. There can be no
assurance, and no representation is made, that a Fund's
investment results will be comparable to the investment
results of any other fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy and to compliance
with regulatory requirements if, in our sole discretion,
legal, regulatory, marketing, tax or investment
considerations so warrant or in the event
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a particular Fund is no longer available for investment by
the Sub-Accounts. No substitution will take place without
prior approval of the Commission, to the extent required by
law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and to decide what responsive action might be
appropriate. If a Sub-Account were to withdraw its
investment in a Fund because of a conflict, a Fund might
have to sell portfolio securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of Lincoln Life's General Account
supporting its insurance and annuity obligations. We will
credit interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-aversive or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy
inforce for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages. A parent or grandparent may find a policy on
the life of a child or grandchild a useful gifting
opportunity over a period of years and the basis of an
investment program for the donee. A business may be able to
use a Policy to fund non-qualified executive compensation or
business continuation plans.
Sufficient premiums must always be paid to keep a policy
inforce, and there is a risk of lapse if premiums are too
low in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, while in effect, may help to assure a death
benefit even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of funding options available, it is possible to fine
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tune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
Any investment income and realized capital gains within a
fund are automatically reinvested without being taxed to the
Policy owners. Policy values therefore accumulate on a tax-
deferred basis. These situations would normally result in
immediate tax liabilities in the case of direct investment
in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable life insurance. Unless a policy has become a
"modified endowment contract" (see page 32), an Owner can
borrow Policy values tax-free, without surrender charges and
at very low net interest cost. Policy loans can be a source
of retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insured's age. (See "Death Benefits.") The
death benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
There are costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs), as is true with investment in mutual
funds or variable annuities. A significant additional cost
of variable life insurance is the "cost of insurance" charge
which is imposed on the "amount at risk" (the death benefit
less Policy value) and increases as the insured grows older.
This charge varies by age, underwriting classification,
smoking status and in most states by gender. The effect of
its increase can be seen in illustrations in this Prospectus
(see Appendix 5) or in personalized illustrations available
upon request. Surrender Charges, which decrease over time,
are another significant additional cost if the Policy is not
retained.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, an applicant should consider a number of
matters. Will any commission be paid to an agent or any
other person with respect to the replacement? Are coverages
and comparable values available from the Policy, as compared
to his or her existing policy? The Insured may no longer be
insurable, or the contestability period may have elapsed
with respect to the existing policy, while the Policy could
be contested. You should consider similar matters before
deciding to replace the Policy or withdraw funds from the
Policy for the purchase of funding a new policy of life
insurance.
APPLICATION
Any person who wants to buy a Policy must first complete our
application form.
A completed application identifies and provides sufficient
information about the prospective insured to permit us to
begin underwriting the risks under the Policy. We
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require a medical history and examination of the Insured. We
may decline to provide insurance, or may place the Insured
into a special underwriting category (these include
preferred, non-smoker standard, smoker standard, non-smoker
substandard and smoker substandard). The amount of the Cost
of Insurance deducted monthly from the Policy value after
issue varies among the underwriting categories as well as by
Age and, in most states, gender of the Insured.
The applicant will initially select the Beneficiary or
Beneficiaries who are to receive Death Benefit Proceeds, the
initial face amount (the "Initial Specified Amount") of the
Death Benefit and which of two methods of computing the
Death Benefit is to be used. (See "Death Benefits -- Death
Benefit Options"). The applicant will also indicate both the
frequency and amount of Premium Payments, (see "Premium
Features"), and how Policy values are initially to be
allocated among the available funding options following the
expiration of the Right-to-Examine Period. (See
"Right-to-Examine Period").
OWNERSHIP
The Owner is the person or persons named as "Owner" in the
application, and on the Date of Issue will usually be
identified as "Owner" in the Policy Specifications. If no
person is identified as Owner in the Policy Specifications,
then the Insured is the Owner. The person or persons
designated to be Owner of the Policy must have, or hold
legal title for the sole benefit of a person who has, an
"insurable interest" in the life of the Insured under
applicable state law. The Owner may be the Insured, or any
other natural person or non-natural entity.
The Owner is entitled to exercise rights under the Policy so
long as the Insured is living. These rights include the
power to select and change the Beneficiary, except as state
law may restrict, and the Death Benefit Option. The Owner
generally also has the right to request policy loans, make
partial surrenders or surrender the Policy. The Owner may
also name a new owner, assign the Policy or agree not to
exercise all of the Owner's rights under the Policy.
If the Owner predeceases the Insured, the Owner's rights in
the Policy will belong to the Owner's estate, unless
otherwise specified to us.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
to receive the Death Benefit proceeds payable under the
Policy. The person or persons named in the application as
"Beneficiary" are the Beneficiaries of the Death Benefit
under the Policy, unless subsequently changed. Multiple
Beneficiaries will be paid in equal shares, unless otherwise
specified to us.
Except when we have acknowledged an assignment of the Policy
or an agreement not to change the Beneficiary, or when state
law restricts, the Owner may change the Beneficiary at any
time while the Insured is living. Any request for a change
in the Beneficiary must be submitted to us in a written form
satisfactory to us. When we have recorded the change of
Beneficiary, it will be effective as of the date of
signature or, if there is no such date, the date recorded.
No change of Beneficiary will affect or prejudice us as to
any payment made or action taken by us before it was
recorded.
If any Beneficiary dies before the Insured, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to us. If no named
Beneficiary survives the Insured, any Death Benefit Proceeds
will be paid to the Owner or the Owner's executor,
administrator or assignee.
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THE POLICY
The Policy is the life insurance contract described in the
Prospectus. The Date of Issue is the date on which we begin
life insurance coverage under a Policy, assuming the initial
premium has been paid. A Policy Year is each twelve month
period, beginning with the Date of Issue, during which the
Policy is in effect. The Policy Anniversary is the day of
the year the Policy was issued.
On issuance, we will deliver a life insurance contract
("Policy") to you. Please promptly review the Policy to
confirm that it sets forth the features specified in the
application. The ownership and other options set forth in
the Policy are registered, and may be transferred, solely on
our books and records. Mere possession of the Policy does
not imply ownership rights. If you lose the Policy, we will
issue a replacement on request and may charge a fee.
POLICY SPECIFICATIONS
The Policy includes a "Policy Specifications" page, with
supporting schedules, stating Policy information including
the identity of the Owner, the Date of Issue, the Initial
Specified Amount, the Death Benefit Option selected, the
Insured, the Issue Age, the Beneficiary, the initial Premium
Payment, the Surrender Charges, Expense Charges and Fees,
Guaranteed Maximum Cost of Insurance Rates, and the No Lapse
Premium, if elected.
PREMIUM FEATURES
You may select and vary the frequency and the amount of
Premium Payments and the allocation of Net Premium Payments.
After the Initial Premium Payment is made there is no
minimum premium required, except to maintain the No Lapse
Provision, if elected. (See LAPSE AND REINSTATEMENT No Lapse
Provision). The initial Premium Payment is due on the
Effective Date (the date on which the initial premium is
applied to the Policy) and must be equal to or exceed the
amount necessary to provide for two Monthly Deductions. If
the Insured is still living upon attaining Age 100, and the
Policy has not lapsed or been surrendered, there are certain
changes under the Policy. We will no longer accept Premium
Payments or transfer amounts to the Sub-Accounts, and will
make no further monthly deductions. Policy Values held in
the Separate Account will be transferred to the Fixed
Account. The Policy will remain in force until surrender or
the Insured's Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premiums (as shown in
the Policy Specifications) the Applicant chooses to pay on a
scheduled basis. This is the amount for which we send a
premium reminder notice.
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. We credit
Additional Premiums when we receive them. Premium Payments
may be billed annually, semiannually, or quarterly.
Pre-authorized automatic Additional Premium Payments can
also be arranged at any time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
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LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
You may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and our right
to limit the amount or frequency of Additional Premiums.
We may require evidence of insurability if any payment of
Additional Premium (including Planned Premium) would
increase the difference between the Death Benefit and the
Accumulation Value. If we are unwilling to accept the risk,
we will refund the increase in premium without interest and
without participation of such amounts in any underlying
investment.
We may also decline, and would return, any Additional
Premium (including Planned Premium) or a portion thereof
that would result in total Premium Payments exceeding the
maximum limitation for life insurance under federal tax
laws.
PREMIUM LOAD; NET PREMIUM PAYMENT
We deduct a "premium load" of 5% from each Premium Payment,
for certain Policy-related state tax and federal income tax
liabilities and a portion of our sales expenses. The Premium
Payment, net of the premium load, is called the "Net Premium
Payment."
RIGHT-TO-EXAMINE PERIOD
If you mail or deliver the Policy for cancellation to the
Administrative Office on or before 10 days (20 to 30 days in
some states) after delivery of the Policy (longer for
Policies issued in replacement of other insurance), (the
"Right-to-Examine Period"), we will refund to you all
Premium Payments.
Any Premium Payments we receive before the end of the
Right-to-Examine Period will be held in the Money Market
Sub-Account, and will be allocated to the Sub-Accounts
designated by the Owner at the end of the Right-to-Examine
Period. If the Policy is returned for cancellation within
the Right-to-Examine Period, we will return any Premium
Payments within seven days, although refund of a Premium
Payment made by check may be delayed until the check clears.
TRANSFERS AND ALLOCATION AMONG ACCOUNTS
ALLOCATION OF NET PREMIUM PAYMENTS
The allocation of Net Premium Payments among the Fixed
Account and Sub-Accounts may be set forth in the
application. You may change it at any time. The amount
allocated to any Sub-Account must be in whole percentages
and result in a Sub-Account Value of at least $100 or a
Fixed Account Value of $2,500. We may waive minimum balance
requirements on the Sub-Accounts.
TRANSFERS
You may make transfers among the Sub-Account and to the
Fixed Account as set forth below, until the Insured reaches
Age 100. Carefully consider current market conditions and
each Sub-Account's investment policies and related risks
before allocating money to the Sub-Accounts.
Within 30 days after each anniversary of the Date of Issue,
you may transfer up to 20% of the Fixed Account Value (as of
that anniversary date) to one or more Sub-Accounts.
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The cumulative amount of transfers from the Fixed Account
within any such 30 day period cannot exceed 20% of the Fixed
Account Value on the most recent Policy Anniversary. Up to
12 transfer requests (a request may involve more than a
single transfer) may be made in any Policy Year without
charge, and any value remaining in the Fixed Account or in a
Sub-Account after a transfer must be at least $100. We may
impose a minimum transfer amount and a charge for each
transfer request in excess of 12 requests in any Policy
Year, and may further limit transfers from the Fixed Account
at any time.
Transfers must be made in proper written form, unless you
have given us written authorization to accept telephone
transactions. Telephone transaction authorization and
procedures are described in COMMUNICATIONS WITH LINCOLN
LIFE, Telephone Transaction Privileges. Written transfer
requests or adequately authenticated telephone transfer
requests received at the Administrative Office by the close
of the New York Stock Exchange (usually 4:00 PM ET) on a
Valuation Day will be effective as of that day. Otherwise,
requests will be effective as of the next Valuation Day.
Any transfer among the Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests. Any transfer made which causes
the remaining value of Accumulation Units for a Sub-Account
or the Fixed Account to be less than $100 may result in
those remaining Accumulation Units being canceled and their
aggregate value reallocated proportionately among the other
Sub-Accounts and the Fixed Account to which Policy values
are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
You may participate either in Dollar Cost Averaging or
Automatic Rebalancing programs, currently without charge,
but not in both at once.
DOLLAR COST AVERAGING
Dollar Cost Averaging systematically transfers specified
dollar amounts from the Money Market Sub-Account. Transfer
allocations may be made to one or more of the Sub-Accounts
(not the Fixed Account) on a monthly or quarterly basis.
These transfers do not count against the free transfers
available. By making allocations on a regularly scheduled
basis, instead of on a lump sum basis, you may reduce
exposure to market volatility. Dollar Cost Averaging will
not assure a profit or protect against a declining market.
In Dollar Cost Averaging, the value in the Money Market
Sub-Account must be at least $1,000 initially. The minimum
amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives your request in proper
written form or by telephone, if adequately authenticated.
An election is effective within ten business days, but only
if there is sufficient value in the Money Market
Sub-Account. We may waive Dollar Cost Averaging minimum
deposit and transfer requirements.
Dollar Cost Averaging terminates automatically: (1) if the
number of designated transfers has been completed; (2) if
the value in the Money Market Sub-Account is insufficient to
complete the next transfer; (3) within one week after the
Administrative Office receives a request for termination in
proper written form or by telephone, if adequately
authenticated; or (4) if the Policy is surrendered.
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AUTOMATIC REBALANCING
Automatic Rebalancing periodically restores to a
pre-determined level the percentage of Policy value
allocated to each Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). The Fixed Account is not subject to
rebalancing. The pre-determined level is the allocation
initially selected on the application, until you change it.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
You may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days after our
Administrative Office receives your request in proper
written form or by telephone, if adequately authenticated.
POLICY VALUES
The Accumulation Value is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to pay for Policy fees and expenses, including the Cost
of Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require Additional Premium Payments beyond
those expected (unless the No Lapse Provision requirements
have been satisfied) to maintain the level of coverage or to
avoid lapse of the Policy. We strongly suggest you review
periodic statements to determine if Additional Premium
Payments may be necessary to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units credited to the Policy,
current Accumulation Unit values, Sub-Account values, the
Fixed Account Value and the Loan Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after deduction of 5.0%
for the premium load, is the Net Premium Payment. It is the
Net Premium Payment that is available for allocation to the
Fixed Account or Sub-Accounts.
We credit Net Premium Payments to the Policy as of the end
of the Valuation Period in which it is received at the
Administrative Office. The Valuation Period is the time
between Valuation Days, and a Valuation Day is every day on
which the New York Stock Exchange is open and trading is
unrestricted. Accumulation Units are valued on every
Valuation Day.
The "Accumulation Value" of a Policy is determined by:
(1) multiplying the total number of Variable Accumulation
Units credited to the Policy for each Sub-Account by its
appropriate current Variable Accumulation Unit Value;
(2) if a combination of Sub-Accounts is elected, totaling
the resulting values; and (3) adding any values attributable
to the Fixed Account and the Loan Account. The Accumulation
Value will be affected by Monthly Deductions.
SEPARATE ACCOUNT VALUE
The Separate Account Value is the portion of the
Accumulation Value attributable to the Separate Account.
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VARIABLE ACCUMULATION UNIT VALUE
All or a part of a Net Premium Payment allocated to a
Sub-Account is converted into Variable Accumulation Units by
dividing the amount allocated by the value of the Variable
Accumulation Unit for the Sub-Account next calculated after
it is received at the Administrative Office. The Variable
Accumulation Unit Value for each Sub-Account was initially
established at $10.00. It may increase or decrease from one
Valuation Period to the next. Allocations to Sub-Accounts
are made only as of the end of a Valuation Day.
VARIABLE ACCUMULATION UNITS
The "Variable Accumulation Unit" is a unit of measure used
in the calculation of the value of each Sub-Account. The
Variable Accumulation Unit value for a Sub-Account for a
Valuation Period is determined as follows:
1. The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and
adding any dividend or other distribution of the Fund
if an ex-dividend date occurs during the Valuation
Period; minus
2. The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by Lincoln Life that Lincoln Life
determines result from the operations of the Separate
Account; and
3. The result of (1) minus (2) is divided by the number
of Variable Accumulation Units outstanding at the
beginning of the Valuation Period.
The daily charge imposed on a Sub-Account for any Valuation
Period is equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Variable Accumulation Units that have an aggregate value on
the date of such deduction equal to the total amount by
which the Sub-Account Value is reduced.
The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. Such value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the Fund used in a particular
Sub-Account and fees and charges under the Policy.
FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to our general account through payment of
premiums, through transfers from the Separate Account or
loans and interest charged. We guarantee the Fixed Account
Value.
NET ACCUMULATION VALUE
The "Net Accumulation Value" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
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FUNDS
Each of the Sub-Accounts of the Separate Acount is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds, in turn, is an investment
portfolio of one of the trusts or corporations listed below.
A given Fund may have a similar investment objective and
principal investment strategy to those for another mutual
fund managed by the same investment advisor or subadvisor.
However, because of timing of investments and other
variables we cannot guarantee that there will be any
correlation between the two investments. Even though the
management strategy and the objectives of the Funds are
similar, the investment results may vary.
The portfolios, their investment advisers and distributors,
and the Funds within each that are available under the
Policies are:
AIM VARIABLE INSURANCE FUNDS, managed by A I M
Advisors, Inc., and distributed by A I M Distributors Inc.,
11 Greenway Plaza, Suite 100, Houston, TX 77046-1173
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
AMERICAN FUNDS INSURANCE SERIES (ALSO KNOWN AS AMERICAN
VARIABLE INSURANCE SERIES), managed by Capital Research and
Management Company and distributed by American Funds
Distributors, Inc., 333 South Hope Street, Los Angeles, CA
90071
AFIS Global Small Capitalization Fund -- Class 2
AFIS Growth Fund -- Class 2
AFIS Growth-Income Fund -- Class 2
BARON CAPITAL FUNDS TRUST, managed by BAMCO, Inc. and
distributed by Baron Capital Inc. 767 Fifth Avenue, New
York, NY 10153
Baron Capital Asset Fund -- Insurance Shares
DELAWARE GROUP PREMIUM FUND, managed by Delaware Management
Company, One Commerce Square, Philadelphia, PA 19103 and for
International and Emerging Markets, Delaware International
Advisors, Ltd., 80 Cheapside, London, England ECV2 6EE, and
distributed by Delaware Distributors, L.P., 1818 Market
Street, Philadelphia, PA 19103
Devon Series -- Standard Class
Emerging Markets Series -- Standard Class
High Yield Series -- Standard Class (formerly Delchester
Series)
REIT Series -- Standard Class
Small Cap Value Series -- Standard Class
Trend Series -- Standard Class
DEUTSCHE ASSET MANAGEMENT VIT FUNDS TRUST (FORMERLY BT
INSURANCE FUNDS TRUST), managed by Bankers Trust Company,
130 Liberty Street (One Bankers Trust Plaza), New York, NY
10006 and distributed Provident Distributors, Inc., Four
Falls Corporate Center, West Conshohocken, PA 19428.
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
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FIDELITY VARIABLE INSURANCE PRODUCTS FUND, FIDELITY VARIABLE
INSURANCE PRODUCTS FUND II, AND FIDELITY VARIABLE INSURANCE
PRODUCTS FUND III, managed by Fidelity Management & Research
Company and distributed by Fidelity Distributors
Corporation, Inc., 82 Devonshire Street, Boston, MA 02109
Fidelity VIP Growth Portfolio -- Service Class
Fidelity VIP High Income Portfolio -- Service Class
Fidelity VIP II Contrafund Portfolio -- Service Class
Fidelity VIP III Growth Opportunities Portfolio --
Service Class
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST,
managed by Templeton Investment Counsel, Inc., Broward
Financial Centre, Suite 2100, Fort Lauderdale, FL 33394, and
its Templeton and Franklin affiliates and distributed by
Franklin/Templeton Distributors, Inc., 777 Mariners Island
Blvd., San Mateo, CA 94403-7777
Templeton Growth Securities Fund -- Class 2 (formerly
Templeton Stock Fund)
Templeton International Securities Fund -- Class 2
(formerly Templeton International Fund)
JANUS ASPEN SERIES, managed by Janus Capital and distributed
by Janus Distributors, Inc., 100 Fillmore St. Denver, CO
80206-4928.
Janus Aspen Series Balanced Portfolio -- Institutional
Shares
Janus Aspen Series Global Technology Portfolio --
Service Class
Janus Aspen Series Worldwide Growth Portfolio --
Institutional Shares
LINCOLN NATIONAL FUNDS, managed by Lincoln Investment
Management, Inc., 200 East Berry Street, Fort Wayne IN
46802, and distributed by Lincoln Financial Advisors Corp.,
350 Church Street, Hartford CT 06103. Sub-advisors are also
noted.
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc. (Sub-advised by Janus
Capital Corp.)
LN Equity-Income Fund, Inc. (Sub-advised by Fidelity
Management Trust Co.)
LN Global Asset Allocation Fund, Inc. (Sub-advised by
Putnam Investment Management, Inc.)
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Sub-advised by Vantage
Investment Advisors, Inc.)
Lincoln Investment Management, Inc. (Lincoln Investment) has
informed the funds to which it provides advisory services
that it intends to merge into a newly created series of its
affiliate, Delaware Management Business Trust, during the
second or third quarter of 2000. Lincoln Investment does not
expect the merger to result in any change in the level of
advisory services that it currently provides to these funds,
although there may be some changes in, and additions to,
personnel. See the prospectuses for these funds for more
information.
MFS-Registered Trademark- VARIABLE INSURANCE TRUST, managed
by Massachusetts Financial Services Company and distributed
by MFS Fund Distributors, Inc., 500 Boylston Street, Boston,
MA 02116
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST, managed and
distributed by Neuberger Berman Management Incorporated, 605
Third Avenue, 2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
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The investment advisory fees charged the Funds by their
advisers are shown on page 7 of this Prospectus.
Below is a brief description of the investment objective and
program of each Fund. There can be no assurance that any of
the stated investment objectives will be achieved.
AIM V.I. GROWTH FUND: Seeks growth of capital primarily by
investing in seasoned and better capitalized companies
considered to have strong earnings momentum. Focus is on
companies that have experienced above-average growth in
earnings and have excellent prospects for future growth.
AIM V.I. INTERNATIONAL EQUITY FUND: Seeks to provide
long-term growth of capital by investing in a diversified
portfolio of international equity securities whose issuers
are considered to have strong earnings momentum.
AIM V.I. VALUE FUND: Seeks to achieve long-term growth of
capital by investing primarily in equity securities judged
by its investment advisor to be undervalued relative to the
investment advisor's appraisal of current or projected
earnings of the companies issuing the securities, or
relative to current market values of assets owned by the
companies issuing the securities or relative to the equity
markets generally, income is a secondary objective.
AFIS-GLOBAL SMALL CAPITALIZATION FUND -- CLASS 2: The fund
seeks to make your investment grow over time by investing
primarily in stocks of smaller companies located around the
world that typically have market capitalizations of $50
million to $1.5 billion. The fund is designed for investors
seeking capital appreciation through stocks. Investors in
the fund should have a long-term perspective and be able to
tolerate potentially wide price fluctuations.
AFIS-GROWTH FUND -- CLASS 2: The fund seeks to make your
investment grow over time by investing primarily in common
stocks of companies that appear to offer superior
opportunities for growth of capital. The fund is designed
for investors seeking capital appreciation through stocks.
Investors in the fund should have a long-term perspective
and be able to tolerate potentially wide price fluctuations.
AFIS-GROWTH-INCOME FUND -- CLASS 2: The fund seeks to make
your investment grow and provide you with income over time
by investing primarily in common stocks or other securities
which demonstrate the potential for appreciation and/or
dividends. The fund is designed for investors seeking both
capital appreciation and income.
BARON CAPITAL ASSET FUND -- INSURANCE SHARES: The investment
objective is to purchase stocks, judged by the advisor, to
have the potential of increasing their value at least 50%
over two subsequent years, although that goal may not be
achieved.
DELAWARE GROUP DEVON SERIES -- STANDARD CLASS: Seeks growth
and income by investing primarily in income-producing stocks
that the manager believes have the potential for
above-average dividend increases over time. This fund blends
traditional growth and value investment styles.
DELAWARE GROUP EMERGING MARKETS SERIES -- STANDARD CLASS:
Seeks long-term growth by investing primarily in stocks of
companies located or operating in emerging or developing
countries.
DELAWARE GROUP HIGH YIELD SERIES -- STANDARD CLASS (FORMERLY
DELCHESTER SERIES): Seeks total return and, as a secondary
objective, high current income. The Series invests in rated
and unrated corporate bonds (including high-risk, high-yield
bonds commonly known as junk bonds), foreign bonds, U.S.
Government securities and commercial paper. An investment in
this Series may involve greater risks than an investment in
a portfolio comprised primarily of investment-grade bonds.
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<PAGE>
DELAWARE GROUP REIT SERIES -- STANDARD CLASS: Seeks to
achieve maximum long-term total return by investing
primarily in the securities of real estate investment trusts
and real estate operating companies.
DELAWARE GROUP SMALL CAP VALUE SERIES -- STANDARD CLASS:
Seeks growth by investing primarily in stocks of small cap
companies whose market values appear low relative to
underlying value or future earnings and growth potential.
DELAWARE GROUP TREND SERIES -- STANDARD CLASS: Seeks
long-term growth by investing primarily in stocks of small
companies and convertible securities of emerging and other
growth-oriented companies.
DEUTSCHE VIT EAFE-Registered Trademark- FUND: Seeks to
replicate as closely as possible (before the deduction of
expenses) the total return of the Europe, Australia, Far
East Index (the EAFE-Registered Trademark- Index), a
capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United
States.
DEUTSCHE VIT EQUITY 500 INDEX FUND: The investment objective
is to replicate as closely as possible the performance of
the Standard & Poor's 500 Composite Stock Price Index,
before the deduction of Fund expenses.
DEUTSCHE VIT SMALL CAP INDEX FUND: The investment objective
is to replicate as closely as possible (before the deduction
of expenses) the total return of the Russell 2000 Small
Stock Index (the "Russell 2000"), an index consisting of
approximately 2,000 small-capitalization common stocks.
FIDELITY VIP GROWTH PORTFOLIO -- SERVICE CLASS: Seeks
long-term capital appreciation. The portfolio normally
purchases commons stocks.
FIDELITY VIP HIGH INCOME PORTFOLIO -- SERVICE CLASS: Seeks
high current income by investing at least 65% of total
assets in income-producing debt securities, with an emphasis
on lower quality securities.
FIDELITY VIP II CONTRAFUND PORTFOLIO -- SERVICE CLASS: Seeks
long-term capital appreciation by investing primarily in
securities of companies whose value the adviser believes is
not fully recognized by the public.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO -- SERVICE
CLASS: Seeks capital growth by investing primarily in common
stocks.
JANUS ASPEN SERIES BALANCED PORTFOLIO -- INSTITUTIONAL
SHARES: Seeks long term growth of capital, consistent with
the preservation of capital and balanced by current income.
The Portfolio normally invests 40-60% of its assets in
securities selected primarily for their growth potential and
40-60% of its assets in securities selected primarily for
their income potential.
JANUS ASPEN SERIES GLOBAL TECHNOLOGY PORTFOLIO -- SERVICE
SHARES: To seek long-term growth of capital. The Portfolio
invests primarily in equity securities of U.S. and foreign
companies selected for their growth potential. Normally, it
invests at least 65% of its total assets in securities or
companies that the portfolio manager believes will benefit
significantly from advancements or improvements in
technology.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO --
INSTITUTIONAL SHARES: To seek long-term growth of capital in
a manner consistent with the preservation of capital.
Pursues objective by investing primarily in common stocks of
companies of any size throughout the world. The Portfolio
normally invests in issuers from at least 5 different
countries, including the U.S. The Portfolio may at times
invest in fewer than 5 countries or even a single country.
LINCOLN NATIONAL BOND FUND: Seeks maximum current income
consistent with prudent investment strategy. The fund
invests primarily in medium-and long-term corporate and
government bonds.
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<PAGE>
LINCOLN NATIONAL CAPITAL APPRECIATION FUND: Seeks 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 and services are in high demand.
It may also buy some money market securities and bonds,
including junk (high risk) bonds.
LINCOLN NATIONAL EQUITY-INCOME FUND: Seeks reasonable income
by investing primarily in income-producing equity
securities. The fund invests mostly in high-income stocks
with some high-yielding bonds (including junk bonds)
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND: Long-term
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 insurers.
LINCOLN NATIONAL MONEY MARKET FUND: Seeks 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.
LINCOLN NATIONAL SOCIAL AWARENESS FUND: Long-term capital
appreciation. The fund buys stocks of established companies
which adhere to certain specific social criteria.
MFS EMERGING GROWTH SERIES: Seeks to provide long-term
growth of capital.
MFS TOTAL RETURN SERIES: Seeks primarily to provide
above-average income (compared to a portfolio invested
entirely in equity securities) consistent with the prudent
employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES: Seeks capital growth and current
income (income above that available from a portfolio
invested entirely in equity securities).
NB AMT MID-CAP GROWTH PORTFOLIO: Seeks capital appreciation
by investing primarily in common stocks of
medium-capitalization companies, using a growth-oriented
investment approach.
NB AMT PARTNERS PORTFOLIO: Seeks capital growth by investing
mainly in common stocks of mid- to large capitalization
established companies using the value-oriented investment
approach. Neuberger Berman Management Inc. serves as the
Fund's investment adviser. Neuberger Berman, LLC serves as
the Fund's investment sub-adviser.
TEMPLETON GROWTH SECURITIES FUND -- CLASS 2 (FORMERLY
TEMPLETON STOCK FUND): Seeks long-term capital growth. It
invests primarily in stocks of companies in various nations
throughout the world, including the U.S. and emerging
markets. Templeton Global Advisors Limited serves as the
Fund's investment advisor.
TEMPLETON INTERNATIONAL SECURITIES FUND -- CLASS 2 (FORMERLY
TEMPLETON INTERNATIONAL FUND): Seeks long-term capital
growth. It invests primarily in stocks of companies outside
the United States, including emerging markets. Templeton
Investment Counsel, Inc. serves as the Fund's investment
adviser.
Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses. Please review the prospectuses carefully.
There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Read each Fund's prospectus carefully and
understand the risks before making or changing investment
choices.
23
<PAGE>
Additional Funds may, from time to time, be made available
as underlying investments. The right to select among Funds
will be limited by terms and conditions we impose (See
"Allocation of Net Premium Payments").
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in our judgment,
further investment in such shares should cease to be
appropriate in view of the purpose of the Separate Account
or in view of legal, regulatory or federal income tax
restrictions, we may substitute shares of another Fund.
There will be no substitution of securities in any
Sub-Account without prior approval of the Commission.
Substitute funds may have higher charges than the funds
being replaced.
VOTING RIGHTS
We will vote the shares of each Fund held in the Separate
Account at special meetings of the shareholders of the
particular Fund in accordance with instructions received by
the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares in
the Separate Account for which it has received instructions.
The Funds do not hold regular meetings of shareholders.
To determine how many votes each policy owner is entitled to
direct with respect to a Fund, first we will calculate the
dollar amount of your account value attributable to that
Fund. Second, we will divide that amount by $100.00. The
result is the number of votes you may direct.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
Fund not more than sixty (60) days prior to the meeting of
the particular Fund. Voting instructions will be solicited
by written communication at least fourteen (14) days prior
to the meeting.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
trusts or corporations and their advisers or distributors
under which Lincoln Life makes the Funds available under the
Policies and performs certain administrative services. In
some cases, the advisers or distributors may compensate
Lincoln Life at annual rates of between .10% and .25% of
assets in a particular Fund attributable to the Policies.
CHARGES AND FEES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. See "Fund Expenses."
We deduct charges in connection with the Policy to
compensate us for providing the Policy's insurance benefit,
administering the Policy, assuming certain risks under the
Policy and for sales-related expenses we incur.
The nature and amount of these charges are as follows:
DEDUCTIONS FROM PREMIUM PAYMENTS
We deduct a premium charge of 5% from each Premium Payment.
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<PAGE>
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deductions, including administrative expenses, the Cost of
Insurance Charges, and charges for supplemental riders or
benefits, if any, are deducted proportionately from the Net
Accumulation Value of each underlying investment subject to
the charge. For Sub-Accounts, Variable Accumulation Units
are canceled and the value of the canceled Units withdrawn
in the same proportion as their respective values have to
the Net Accumulation Value. The Monthly Deductions are made
on the "Monthly Anniversary Day", the Date of Issue and the
same day of each month thereafter, or if there is no such
date in a given month, then the first Valuation Day of the
next month. If the day that would otherwise be a Monthly
Anniversary Day is not a Valuation Day, then the Monthly
Anniversary Day is the next Valuation Day.
If the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period ("Grace
Period") to make a payment sufficient to cover that
deduction. (See Lapse and Reinstatement: Lapse of a Policy)
If the Insured attains Age 100 with the Policy still in
effect, no further Monthly Deductions will be made, the
Separate Account Value will be transferred to the Fixed
Account, and Policy will then remain in force until
surrender or the Insured's death.
ADMINISTRATIVE EXPENSES
There is a flat dollar Monthly Deduction of $10.
In addition, during the first two Policy Years, and for 24
months after any increase in Specified Amount, there is a
monthly charge per $1000 of Specified Amount, or increase
therein, based on the Insured's age nearest birthday at the
Policy's issue date and the date of any increase. That
charge is $0.0283 for ages 15 through 30 (or $2.83 per month
for a Policy with a $100,000 Specified Amount) and rises
gradually to $0.07 for age 40, $0.12 for age 52, $0.2075 for
age 64, $0.32 for age 76, and $0.4242 for ages 81 and older.
A complete table is in Appendix 1.
These charges compensate us for administrative expenses
associated with Policy issue and ongoing Policy maintenance
including premium billing and collection, policy value
calculation, confirmations, periodic reports and other
similar matters.
COST OF INSURANCE CHARGE
The Cost of Insurance is the portion of the Monthly
Deduction designed to compensate us for the anticipated cost
of paying Death Benefits in excess of the Accumulation
Value, not including riders, supplementary benefits or
monthly expense charges.
The Cost of Insurance charge depends on the Age, policy
duration, underwriting category and gender (in accordance
with state law) of the Insured and the current Net Amount at
Risk. The Net Amount at Risk is the Death Benefit minus the
Accumulation Value. The rate on which the Monthly Deduction
for the Cost of Insurance is based will generally increase
as the Insured ages. The Cost of Insurance charge could
decline if the Net Amount at Risk drops relatively faster
than the Cost of Insurance Rate increases.
The Cost of Insurance charge is determined by dividing the
Death Benefit at the beginning of the Policy month by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the beginning of the
Policy month, and
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<PAGE>
multiplying the result (the "Net Amount at Risk") by the
applicable Cost of Insurance Rate as determined by us. The
Guaranteed Maximum Cost of Insurance Rates are in Appendix
2.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily mortality and expense risk
charge as a percentage of the assets of the Separate
Account. The mortality risk assumed is that insureds may not
live as long as estimated, and therefore, a greater amount
of death benefit will be payable. The expense risk assumed
is that expenses incurred in issuing and administering the
policies will be greater than estimated. The mortality and
expense risk charge is guaranteed at an annual rate of 0.90%
in Policy Years 1-19 and 0.20% in Policy Years 20 and
beyond.
SURRENDER CHARGES
A generally declining "Surrender Charge" may apply if the
Policy is totally surrendered or lapses during the first
fifteen years following the Date of Issue or the first
fifteen years following an increase in Specified Amount. The
Surrender Charge varies by Age of the Insured, the number of
years since the Date of Issue, and Specified Amount.
The charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The
maximum Surrender Charge is included in each Policy and is
in compliance with each state's nonforfeiture law. Examples
of the Surrender Charge can be seen in Appendix 3.
The surrender charge under a Policy is proportional to the
face amount of the Policy. As a percentage of face amount,
it is higher for older than for younger issue ages. The
surrender charge cannot exceed Policy value. All surrender
charges decline to zero over the 15 years following issuance
of the Policy. See, for example, the illustrations in
Appendix 5.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. We may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 (not to exceed 2% of the amount
surrendered) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken.
Any surrender may result in tax implications. SEE TAX
ISSUES.
Based on its actuarial determination, we do not anticipate
that the Surrender Charge, together with the portion of the
premium load attributable to sales expense, will cover all
sales and administrative expenses we will incur in
connection with the Policy. Any such shortfall, including
but not limited to payment of sales and distribution
expenses, would be available for recovery from our general
account, which supports insurance and annuity obligations.
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<PAGE>
REDUCTION OF CHARGES -- PURCHASES ON A CASE BASIS; EXCHANGES
This Policy is available for purchases by corporations and
other groups or sponsoring organizations on a Case basis. We
reserve the right to reduce premium loads or any other
charges on certain cases, where it is expected that the
amount or nature of such cases will result in savings of
sales, underwriting, administrative or other costs.
Eligibility for these reductions and the amount of
reductions will be determined by a number of factors,
including but not limited to, the number of lives to be
insured, the total premiums expected to be paid, total
assets under management for the policy owner, the nature of
the relationship among the insured individuals, the purpose
for which the Policies are being purchased, the expected
persistency of the individual policies and any other
circumstances which we believe to be relevant to the
expected reduction of expenses.
We also reserve the right to reduce premium charges or any
other charges under a Policy where it is expected that the
issuance of the Policy will result in savings of sales,
underwriting, administrative or other costs. In particular,
we would expect such savings to apply, and our expenses to
be reduced, whenever a Policy is issued in exchange for
another life insurance policy issued or administered by us,
or issued by a company which controls or is controlled by us
or is under common ownership and control with us.
Some of these reductions may be guaranteed, and others may
be subject to withdrawal or modification by us. In any
event, all such reductions as applicable will be uniformly
applied, and they will not be unfairly discriminatory
against any person, including the affected Policy Owners
funded by the Separate Account.
TRANSACTION FEE FOR EXCESS TRANSFERS
We reserve the right to impose a charge for each transfer
request in excess of 12 in any Policy Year. A single
transfer request, either in writing or by telephone, may
consist of multiple transactions.
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the death of the Insured, in accordance
with the Death Benefit Option elected. Loans (if any) and
overdue deductions are deducted from the Death Benefit
Proceeds prior to payment.
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $100,000, and the Death
Benefit Option. The two Death Benefit Options are described
below. The applicant must consider a number of factors in
selecting the Specified Amount, including the amount of
proceeds required when the Insured dies and the Owner's
ability to make Premium Payments. The ability of the Owner
to support the Policy, particularly in later years, is an
important factor in selecting between the Death Benefit
Options, because the greater the Net Amount at Risk at any
time, the more that will be deducted each month from the
value of the Policy to pay the Cost of Insurance.
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available under the
Policy. The Death Benefit Proceeds payable under the Policy
is the greater of (a) the Corridor Death Benefit or (b) the
amount determined under the Death Benefit Option in effect
on the date of the Insured's Death, less any indebtedness,
as applicable, under the Policy. In the case of Death
Benefit Option 1, the Specified Amount is reduced by the
amount of any partial
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<PAGE>
surrender. The "Corridor Death Benefit" is the applicable
percentage (the "Corridor Percentage") of the Accumulation
Value (rather than by reference to the Specified Amount)
required to maintain the Policy as a "life insurance
contract" for Federal income tax purposes. The Corridor
Percentage is 250% through the time the insured reaches Age
40 and decreases in accordance with the table in Appendix 4
to 100% when the Insured reaches Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $100,000). If
Option 1 is selected, the Policy pays level Death Benefit
Proceeds, less indebtedness and any partial surrenders,
unless the Minimum Death Benefit exceeds the Specified
Amount. (See DEATH BENEFITS, Federal Income Tax Definition
of Life Insurance).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Net Accumulation
Value as of the date of the Insured's death, less loan
interest accrued but not yet charged. If Option 2 is
selected, the Death Benefit Proceeds increase or decrease
over time, depending on the amount of premium paid and the
investment performance of the underlying Sub-Accounts.
If for any reason the applicant fails to affirmatively elect
a particular Death Benefit Option, Death Benefit Option 1
shall apply until changed as provided below.
Owners who prefer insurance coverage that generally does not
vary in amount and generally has lower Cost of Insurance
Charges should elect Death Benefit Option 1. Owners who
prefer to have favorable investment experience reflected in
increased insurance coverage should select Death Benefit
Option 2. Under Option 1, any Surrender Value at the time of
the Insured's Death will revert to Lincoln Life.
CHANGES IN DEATH BENEFIT OPTIONS AND SPECIFIED AMOUNT
All requests for changes between Death Benefit Options and
changes in the Specified Amount must be submitted in proper
written form to the Administrative Office. The minimum
increase in Specified Amount currently permitted is $1,000.
If requested, a supplemental application and evidence of
insurability must also be submitted to us.
In a change from Death Benefit Option 1 to Death Benefit
Option 2, the Specified Amount shall be reduced so it
thereafter equals (a) the amount payable under the Death
Benefit Option in effect immediately before the change,
minus (b) the Accumulation Value immediately before the
change. In a change from Death Benefit Option 2 to Death
Benefit Option 1, the Specified Amount shall be increased so
that it thereafter equals the amount payable under the Death
Benefit Option in effect immediately before the change.
Any reductions in Specified Amount will be made against the
initial Specified Amount and any later increase in the
Specified Amount on a last in, first out basis. Any increase
in the Specified Amount will increase the amount of the
Surrender Charge applicable to the Policy.
We may decline any request for a change between Death
Benefit Options or an increase in the Specified Amount. We
may also decline any request for change of the Death Benefit
Option or reduction of the Specified Amount if, after the
change, the Specified Amount would be less than the minimum
Specified Amount or would reduce the Specified Amount below
the level required to maintain the Policy as life insurance
for purposes of Federal income tax law.
Any change is effective on the first Monthly Anniversary Day
on or after the date of approval of the request by Lincoln
Life, unless the Monthly Deduction Amount would
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increase as a result of the change. In that case, the change
is effective on the first Monthly Anniversary Day on which
the Accumulation Value is equal to or greater than the
Monthly Deduction Amount, as increased.
FEDERAL INCOME TAX DEFINITION OF LIFE INSURANCE
The amount of the Death Benefit must satisfy certain
requirements under the Code if the policy is to qualify as
insurance for federal income tax purposes. The amount of the
Death Benefit Proceeds required to be paid under the Code to
maintain the Policy as life insurance under each of the
Death Benefit Options (see INSURANCE COVERAGE PROVISIONS,
Death Benefit) is equal to the product of the Accumulation
Value and the applicable Corridor Percentage. A table of
Corridor Percentages is in Appendix 4.
NOTICE OF DEATH OF INSURED
Due Proof of Death must be furnished to us at our
Administrative Office as soon as reasonably practical after
the death of the Insured. "Due Proof of Death" must be in
proper written form and includes a certified copy of an
official death certificate, a certified copy of a decree of
a court of competent jurisdiction as to the finding of
death, or any other proof of death satisfactory to us.
PAYMENT OF DEATH BENEFIT PROCEEDS
The Death Benefit Proceeds under the Policy will ordinarily
be paid within seven days, if in a lump sum, or in
accordance with any Settlement Option selected by the Owner
or the Beneficiary, after receipt at the Administrative
Office of Due Proof of Death of the Insured. SEE SETTLEMENT
OPTIONS. The amount of the Death Benefit Proceeds under
Option 2 will be determined as of the date of the Insured's
death. Payment of the Death Benefit Proceeds may be delayed
if the Policy is contested or if Separate Account values
cannot be determined.
SETTLEMENT OPTIONS
There are several ways in which the Beneficiary may receive
the Death Benefit Proceeds, or in which the owner may choose
to receive payments upon surrender of the Policy.
You may elect or change a Settlement Option while the
insured is alive. If you have not irrevocably selected a
Settlement Option, the Beneficiary may within 90 days after
the Insured dies. If no Settlement Option is selected, the
Death Benefit Proceeds will be paid in a lump sum.
If the Policy is assigned as collateral security, we will
pay any amount due the assignee in a lump sum. Any remaining
Death Benefit Proceeds will be paid as elected.
Our Administrative Office must receive your request to
elect, change, or revoke a Settlement Option in proper
written form before payment of the lump sum or under any
Settlement Option. The first payment under the Settlement
Option selected will become payable on the date proceeds are
settled under the option. We will make subsequent payments
on the first day of each month. Once payments have begun,
the Policy cannot be surrendered and neither the payee nor
the Settlement Option may be changed.
There are at least four Settlement Options:
The first Settlement Option is an annuity for the
lifetime of the payee.
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The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
The third Settlement Option, provides for monthly
payments for a stated number of years, at least five but
no more than thirty.
Under the fourth Settlement Option, we pay at least 3%
interest annually on the sum left on deposit, and pays
the amount on deposit on the payee's death.
Any other Settlement Option we offer at that time may
also be selected.
POLICY LIQUIDITY
The accumulated value of the Policy is available for loans
or withdrawals. Subject to certain limitations, you may
borrow against the Surrender Value of the Policy, may make a
partial surrender of some of the Surrender Value of the
Policy and may fully surrender the Policy for its Surrender
Value.
POLICY LOANS
You may at any time borrow in the aggregate up to 100% of
the Surrender Value at the time a Policy Loan is made. We
may, however, limit the amount of the loan so that the total
Policy indebtedness will not exceed 90% of the amount of the
Accumulation Value less any Surrender Charge that would be
imposed on a full surrender. You must execute a loan
agreement and assign the Policy to us free of any other
assignments. The Loan Account is the account in which Policy
indebtedness (outstanding loans and interest) accrues once
it is transferred out of the Fixed Account or Sub-Accounts.
Interest on Policy Loans accrues at an annual rate of 8%,
and is payable once a year in arrears on each Policy
Anniversary, or earlier upon full surrender or other payment
of proceeds of a Policy.
The amount of a loan, plus any accrued but unpaid interest,
is added to the outstanding Policy Loan balance. Unless paid
before due, any loan interest due will be transferred
proportionately from the values in the Fixed Account and
each Sub-Account, and treated as an additional Policy Loan,
and added to the Loan Account Value.
We credit interest on the Loan Account Value of 7% per year
so the net cost of a Policy Loan is 1%.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest charged will be made in proportion to the
assets in each Sub-Account at that time, unless you instruct
our Administrative Office otherwise in proper written form.
Repayments on the loan and interest credited on the Loan
Account Value will be allocated according to the most recent
Premium Payment allocation at the time of the repayment.
A Policy Loan affects Death Benefit Proceeds payable and the
Accumulation Value. The longer a Policy Loan is outstanding,
the greater the effect is likely to be. An outstanding
Policy Loan reduces the amount of assets invested. Depending
on the investment results of the Sub-Accounts, the effect
could be favorable or unfavorable.
If at any time the total indebtedness against the Policy,
including interest accrued but not due, equals or exceeds
the then current Accumulation Value less Surrender Charges,
the Policy will terminate without value subject to the
conditions in the Grace Period Provision, unless the No
Lapse Provision is in effect. (SEE LAPSE AND REINSTATEMENT,
Lapse of a Policy)
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result.
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PARTIAL SURRENDER
You may make a partial surrender at any time while the
Insured is alive by request to the Administrative Office in
proper written form or by telephone, if you have authorized
telephone transactions. A $25 transaction fee (not to exceed
2% of the amount surrendered) is charged for each partial
surrender. Total partial surrenders may not exceed 90% of
the Surrender Value of the Policy. Each partial surrender
may not be less than $500. Partial surrenders are subject to
other limitations as described below.
Partial surrenders may reduce the Specified Amount and, in
each case, reduce the Death Benefit Proceeds. To the extent
that a requested partial surrender would cause the Specified
Amount to be less than $100,000, we will not permit the
partial surrender. In addition, if following a partial
surrender and the corresponding decrease in the Specified
Amount, the Policy would not comply with the maximum premium
limitations required by federal tax law, the surrender may
be limited to the extent necessary to meet the federal tax
law requirements.
The effect of partial surrenders on the Death Benefit
Proceeds depends on the Death Benefit Option elected under
the Policy. If Death Benefit Option 1 has been elected, a
partial surrender would reduce the Accumulation Value and
the Specified Amount. The reduction in the Specified Amount,
which would reduce any past increases on a last in, first
out basis, reduces the amount of the Death Benefit Proceeds.
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at the time
of the surrender, unless you instruct our Administrative
Office otherwise in proper written form. We may decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, we will pay you, or your assignee, the Surrender
Value next computed after our Administrative Office receives
the request in proper written form. If the owner makes a
full surrender all coverage under the policy will
automatically terminate and may not be reinstated.
SURRENDER VALUE
The "Surrender Value" of a Policy is the amount you can
receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value, less any loan
interest accrued, but not yet charged, less the Surrender
Charge (SEE CHARGES AND FEES, Surrender Charge). All or part
of the Surrender Value may be applied to one or more of the
Settlement Options. Surrender Values are illustrated in
Appendix 5.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any of the
Sub-Accounts will be made within seven days. We may defer
payment or transfer from the Fixed Account up to six months.
If we do so, interest will accrue and be paid as required by
law from the date the recipient would otherwise have been
entitled to receive the payment.
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ASSIGNMENT; CHANGE OF OWNERSHIP
While the Insured is living, you may assign your rights in
the Policy, including the right to change the beneficiary
designation, in proper written form, signed by you and
recorded at the Administrative Office. No assignment will
affect, or prejudice us as to, any payment we make or action
we take before it was recorded. We are not responsible for
any assignment not submitted for recording, or for the
sufficiency or validity of any assignment. Any assignment is
subject to any indebtedness owed us when the assignment is
recorded and any interest later accrued on such
indebtedness.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. While it is
effective, the assignee must give written consent for you to
take any action with respect to the Policy.
So long as the Insured is living, you may name a new Owner
by recording a change in ownership in proper written form at
the Administrative Office. On recordation, the change will
be effective, as of the date of execution of the document of
transfer or, if there is no such date, the date of
recordation. No such change of ownership will affect, or
prejudice us as to, any payment we made or action we took
before it was recorded. We may require you to submit the
Policy for endorsement before making a change.
LAPSE AND REINSTATEMENT
LAPSE OF A POLICY
If at any time the Net Accumulation Value is insufficient to
pay the Monthly Deduction, or if the amount of indebtedness
exceeds the Accumulation Value less the Surrender Charge(s),
unless the No Lapse Provision is in effect, the Policy is
subject to lapse and automatic termination of all Policy
coverage. The Net Accumulation Value may be insufficient
(1) because it has been exhausted by earlier deductions,
(2) due to poor investment performance, (3) due to partial
surrenders, (4) due to indebtedness for policy loans, or
(5) because of some combination of the foregoing factors.
If we have not received a Premium Payment or payment of
indebtedness on policy loans necessary so that the Net
Accumulation Value is sufficient to pay the Monthly
Deduction Amount on a Monthly Anniversary Day, we will send
a written notice to you and any assignee of record. The
notice will state the amount of the Premium Payment or
payment of indebtedness on Policy Loans necessary such that
the Net Accumulation Value is at least equal to two times
the Monthly Deduction Amount. If the minimum required amount
set forth in the notice is not paid to us on or before the
day that is the later of (a) 31 days after the date of
mailing of the notice, and (b) 61 days after the date of the
Monthly Anniversary Day with respect to which such notice
was sent (together, the "Grace Period"), then the Policy
shall terminate and all coverage under the Policy shall
lapse without value.
NO LAPSE PROVISION
Availability of the No Lapse Provision may vary in some
states.
The No Lapse Premium is the cumulative premium required to
have been paid by each Monthly Anniversary Day to prevent
the Policy from lapsing during the first ten Policy Years.
If this Policy has a No Lapse Premium shown on the
specifications, this Policy will not lapse during the first
ten Policy Years if, at each Monthly Anniversary Day, the
sum of all Premium Payments less any policy loans (including
any accrued loan interest) and partial surrenders is at
least equal to the sum of the No Lapse Premiums
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(as indicated in the Policy Specifications) due since the
Date of Issue of the Policy. A Grace Period will be allotted
after each Monthly Anniversary Day on which insufficient
premiums have been paid (see preceding paragraph). The
payment of sufficient additional premiums during the Grace
Period will keep the No Lapse Provision in force.
The No Lapse Provision will be terminated after ten years or
earlier if you fail to meet the premium requirements, if
there is an increase in Specified Amount or if you change
the Death Benefit Option. Once the No Lapse Provision
terminates, it cannot be reinstated.
REINSTATEMENT OF A LAPSED POLICY
After the Policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, assuming the No Lapse provision is not in effect, it
may be reinstated provided (a) it has not been surrendered,
(b) there is an application for reinstatement in proper
written form, (c) evidence of insurability of the insured is
furnished us and we agree to accept the risk, (d) we receive
a payment sufficient to keep the Policy in force for at
least two months, and (e) any accrued loan interest is paid.
The effective date of the reinstated Policy shall be the
Monthly Anniversary Day after the date on which we approve
the application for reinstatement. Surrender Charges will be
reinstated as of the Policy Year in which the Policy lapsed.
Any Policy reinstatement is effective on the Monthly
Anniversary Day after our approval. The Accumulation Value
at reinstatement will be the Net Premium Payment then made
less all Monthly Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LINCOLN LIFE
PROPER WRITTEN FORM
Whenever this Prospectus refers to a communication "in
proper written form," it means a written document, in form
and substance reasonably satisfactory to us, received at the
Administrative Office.
TELEPHONE TRANSACTION PRIVILEGES
We allow telephone transactions authorized in proper written
form by you or the applicant. To effect a permitted
telephone transaction, you or your authorized representative
must call the Administrative Office and provide, as
identification, your policy number, a requested portion of
your Social Security number, and such other authenticating
information as we may require. We disclaim all liability for
losses resulting from unauthorized or fraudulent telephone
transactions, but acknowledge that if we do not follow these
procedures, which we believe to be reasonable, we may be
liable for such losses.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when the
Insured is at least Age 18 and at most Age 85.
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DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided the
initial premium has been paid, the Insured is alive and
prior to any change in the health and insurability of the
Insured as represented in the application.
INCONTESTABILITY
We will not contest payment of the Death Benefit Proceeds
based on the initial Specified Amount after the Policy has
been in force during the Insured's lifetime for two years
from the Date of Issue. We will not contest payment of the
Death Benefit Proceeds based on any increase in Specified
Amount requiring evidence of insurability after two years
after the increase's effective date.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of the Insured has been misstated, the
affected benefits will be adjusted. The amount of the Death
Benefit Proceeds will be 1. multiplied by 2. and then the
result added to 3. where:
1. is the Net Amount at Risk at the time of the Insured's
Death;
2. is the ratio of the monthly Cost of Insurance applied in
the Policy month of death to the monthly Cost of
Insurance that should have been applied at the true Age
and gender in the Policy month of death; and
3. is the Accumulation Value at the time of the Insured's
Death.
SUICIDE
If the Insured dies by suicide, within two years from the
Date of Issue, we will pay no more than the sum of the
premiums paid, less any indebtedness and partial surrenders.
If the Insured dies by suicide, within two years from the
date of any increase in the Specified Amount, we will pay no
more than a refund of the monthly Cost of Insurance charges
for the increased amount.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in the profits or
surplus earnings of Lincoln Life.
RIDERS
A Waiver of Monthly Deduction Rider may be added to the
Policy. Under this Rider, we will maintain the Death Benefit
by paying covered monthly deductions during periods of
disability. Charges for this rider, if elected, are part of
the Monthly Deductions. Rider availability may vary by
state.
There may be a separate charge(s) for any other rider(s)
that become part of the Policy.
TAX ISSUES
INTRODUCTION. The Federal income tax treatment of the policy
is complex and sometimes uncertain. The Federal income tax
rules may vary with your particular circumstances. This
discussion does not include all the Federal income tax
rules that may affect you and your policy, and is not
intended as tax advice. This discussion also does not
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address other Federal tax consequences, or state or local
tax consequences, associated with the policy. As a result,
you should always consult a tax adviser about the
application of tax rules to your individual situation.
TAXATION OF LIFE INSURANCE CONTRACTS IN GENERAL
TAX STATUS OF THE POLICY. Section 7702 of the Code
establishes a statutory definition of life insurance for
Federal tax purposes. We believe that the policy will meet
the statutory definition of life insurance, which places
limitations on the amount of premium payments that may be
made and the contract values that can accumulate relative to
the death benefit. As a result, the death benefit payable
under the policy will generally be excludable from the
beneficiary's gross income, and interest and other income
credited under the policy will not be taxable unless certain
withdrawals are made (or are deemed to be made) from the
policy prior to the insured's death, as discussed below.
This tax treatment will only apply, however, if (1) the
investments of the Separate Account are "adequately
diversified" in accordance with Treasury Department
regulations, and (2) we, rather than you, are considered the
owner of the assets of the Separate Account for Federal
income tax purposes.
INVESTMENTS IN THE SEPARATE ACCOUNT MUST BE DIVERSIFIED. For
a policy to be treated as a life insurance contract for
Federal income tax purposes, the investments of the Separate
Account must be "adequately diversified." IRS regulations
define standards for determining whether the investments of
the Separate Account are adequately diversified. If the
Separate Account fails to comply with these diversification
standards, you could be required to pay tax currently on the
excess of the contract value over the contract premium
payments. Although we do not control the investments of the
subaccounts, we expect that the subaccounts will comply with
the IRS regulations so that the Separate Account will be
considered "adequately diversified."
RESTRICTION ON INVESTMENT OPTIONS. Federal income tax law
limits your right to choose particular investments for the
policy. Because the IRS has not issued guidance specifying
those limits, the limits are uncertain and your right to
allocate contract values among the subaccounts may exceed
those limits. If so, you would be treated as the owner of
the assets of the Separate Account and thus subject to
current taxation on the income and gains from those assets.
We do not know what limits may be set by the IRS in any
guidance that it may issue and whether any such limits will
apply to existing policies. We reserve the right to modify
the policy without your consent to try to prevent the tax
law from considering you as the owner of the assets of the
Separate Account.
NO GUARANTEES REGARDING TAX TREATMENT. We make no guarantee
regarding the tax treatment of any policy or of any
transaction involving a policy. However, the remainder of
this discussion assumes that your policy will be treated as
a life insurance contract for Federal income tax purposes
and that the tax law will not impose tax on any increase in
your contract value until there is a distribution from your
policy.
TAX TREATMENT OF LIFE INSURANCE DEATH BENEFIT PROCEEDS. In
general, the amount of the death benefit payable from a
policy because of the death of the insured is excludable
from gross income. Certain transfers of the policy for
valuable consideration, however, may result in a portion of
the death benefit being taxable. If the death benefit is not
received in a lump sum and is, instead, applied under one of
the settlement options, payments generally will be prorated
between amounts attributable to the death benefit which will
be excludable from the beneficiary's income and amounts
attributable to interest (accruing after the insured's
death) which will be includible in the beneficiary's income.
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TAX DEFERRAL DURING ACCUMULATION PERIOD. Under existing
provisions of the Code, except as described below, any
increase in your contract value is generally not taxable to
you unless amounts are received (or are deemed to be
received) from the policy prior to the insured's death. If
there is a total withdrawal from the policy, the surrender
value will be includible in your income to the extent the
amount received exceeds the "investment in the contract."
(If there is any debt at the time of a total withdrawal,
such debt will be treated as an amount received by the
owner.) The "investment in the contract" generally is the
aggregate amount of premium payments and other consideration
paid for the policy, less the aggregate amount received
under the policy previously to the extent such amounts
received were excludable from gross income. Whether partial
withdrawals (or other amounts deemed to be distributed) from
the policy constitute income to you depends, in part, upon
whether the policy is considered a "modified endowment
contract" (a "MEC") for Federal income tax purposes.
POLICIES WHICH ARE MECS
CHARACTERIZATION OF A POLICY AS A MEC. A policy will be
classified as a MEC if premiums are paid more rapidly than
allowed by a "7-pay test" under the tax law or if the policy
is received in exchange for another policy that is a MEC. In
addition, even if the policy initially is not a MEC, it may
in certain circumstances become a MEC. These circumstances
would include a later increase in benefits, any other
material change of the policy (within the meaning of the tax
law), and a withdrawal or reduction in the death benefit
during the first seven contract years.
TAX TREATMENT OF WITHDRAWALS, LOANS, ASSIGNMENTS AND PLEDGES
UNDER MECS. If the policy is a MEC, withdrawals from the
policy will be treated first as withdrawals of income and
then as a recovery of premium payments. Thus, withdrawals
will be includible in income to the extent the contract
value exceeds the investment in the policy. The Code treats
any amount received as a loan under a policy, and any
assignment or pledge (or agreement to assign or pledge) any
portion of your contract value, as a withdrawal of such
amount or portion. Your investment in the policy is
increased by the amount includible in income with respect to
such assignment, pledge, or loan.
PENALTY TAXES PAYABLE ON WITHDRAWALS. A 10% penalty tax may
be imposed on any withdrawal (or any deemed distribution)
from your MEC which you must include in your gross income.
The 10% penalty tax does not apply if one of several
exceptions exists. These exceptions include withdrawals or
surrenders that: you receive on or after you reach age
59 1/2, you receive because you became disabled (as defined
in the tax law), or you receive as a series of substantially
equal periodic payments for your life (or life expectancy).
SPECIAL RULES IF YOU OWN MORE THAN ONE MEC. In certain
circumstances, you must combine some or all of the life
insurance contracts which are MECs that you own in order to
determine the amount of withdrawal (including a deemed
withdrawal) that you must include in income. For example, if
you purchase two or more MECs from the same life insurance
company (or its affiliates) during any calendar year, the
Code treats all such policies as one contract. Treating two
or more policies as one contract could affect the amount of
a withdrawal (or a deemed withdrawal) that you must include
in income and the amount that might be subject to the 10%
penalty tax described above.
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POLICIES WHICH ARE NOT MECS
TAX TREATMENT OF WITHDRAWALS. If the policy is not a MEC,
the amount of any withdrawal from the policy will generally
be treated first as a non-taxable recovery of premium
payments and then as income from the policy. Thus, a
withdrawal from a policy that is not a MEC will not be
includible in income except to the extent it exceeds the
investment in the policy immediately before the withdrawal.
CERTAIN DISTRIBUTIONS REQUIRED BY THE TAX LAW IN THE FIRST
15 POLICY YEARS.Section 7702 places limitations on the
amount of premium payments that may be made and the contract
values that can accumulate relative to the death benefit.
Where cash distributions are required under Section 7702 in
connection with a reduction in benefits during the first 15
years after the policy is issued (or if withdrawals are made
in anticipation of a reduction in benefits, within the
meaning of the tax law, during this period), some or all of
such amounts may be includible in income. A reduction in
benefits may occur when the face amount is decreased,
withdrawals are made, and in certain other instances.
TAX TREATMENT OF LOANS. If your policy is not a MEC, a loan
you receive under the policy is generally treated as your
indebtedness. As a result, no part of any loan under such a
policy constitutes income to you so long as the policy
remains in force. Nevertheless, in those situations where
the interest rate credited to the loan account equals the
interest rate charged to you for the loan, it is possible
that some or all of the loan proceeds may be includible in
your income. If a policy lapses (or if all contract value is
withdrawn) when a loan is outstanding, the amount of the
loan outstanding will be treated as withdrawal proceeds for
purposes of determining whether any amounts are includible
in your income.
OTHER CONSIDERATIONS
INSURED LIVES PAST AGE 100. If the insured survives beyond
the end of the mortality table used to measure charges under
the policy, which ends at age 100, we believe the policy
will continue to qualify as life insurance for Federal tax
purposes. However, there is some uncertainty regarding this
treatment, and it is possible that you would be viewed as
constructively receiving the cash value in the year the
insured attains age 100.
COMPLIANCE WITH THE TAX LAW. We believe that the maximum
amount of premium payments we have determined for the
policies will comply with the Federal tax definition of life
insurance. We will monitor the amount of premium payments,
and, if the premium payments during a contract year exceed
those permitted by the tax law, we will refund the excess
premiums within 60 days of the end of the policy year and
will pay interest and other earnings (which will be
includible in income subject to tax) as required by law on
the amount refunded. We also reserve the right to increase
the death benefit (which may result in larger charges under
a policy) or to take any other action deemed necessary to
maintain compliance of the policy with the Federal tax
definition of life insurance.
DISALLOWANCE OF INTEREST DEDUCTIONS. If an entity (such as a
corporation or a trust, not an individual) purchases a
policy or is the beneficiary of a policy issued after
June 8, 1997, a portion of the interest on indebtedness
unrelated to the policy may not be deductible by the entity.
However, this rule does not apply to a policy owned by an
entity engaged in a trade or business which covers the life
of an individual who is a
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20-percent owner of the entity, or an officer, director, or
employee of the trade or business, at the time first covered
by the policy. This rule also does not apply to a policy
owned by an entity engaged in a trade or business which
covers the joint lives of the 20% owner of the entity and
the owner's spouse at the time first covered by the policy.
FEDERAL INCOME TAX WITHHOLDING. We will withhold and remit
to the IRS a part of the taxable portion of each
distribution made under a policy unless you notify us in
writing at or before the time of the distribution that tax
is not to be withheld. Regardless of whether you request
that no taxes be withheld or whether the Company withholds a
sufficient amount of taxes, you will be responsible for the
payment of any taxes and early distribution penalties that
may be due on the amounts received. You may also be required
to pay penalties under the estimated tax rules, if your
withholding and estimated tax payments are insufficient to
satisfy your total tax liability.
CHANGES IN THE POLICY OR CHANGES IN THE LAW. Changing the
owner, exchanging the contract, and other changes under the
policy may have tax consequences (in addition to those
discussed herein) depending on the circumstances of such
change. The above discussion is based on the Code, IRS
regulations, and interpretations existing on the date of
this Prospectus. However, Congress, the IRS, and the courts
may modify these authorities, sometimes retroactively.
TAX STATUS OF LINCOLN LIFE
Under existing Federal income tax laws, Lincoln Life does
not pay tax on investment income and realized capital gains
of the Separate Account. Lincoln Life does not expect that
it will incur any Federal income tax liability on the income
and gains earned by the Separate Account. We, therefore, do
not impose a charge for Federal income taxes. If Federal
income tax law changes and we must pay tax on some or all of
the income and gains earned by the Separate Account, we may
impose a charge against the Separate Account to pay the
taxes.
FAIR VALUE OF THE POLICY
It is sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insured grows older. Moreover,
on the death of the Insured, it tends to increase
significantly. You should consult with your advisors for
guidance as to the appropriate methodology for determining
the fair value of the Policy for a particular purpose.
38
<PAGE>
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. Except as indicated below, the address of each is 1300
South Clinton Street, Fort Wayne, Indiana 46802, and each
has been employed by Lincoln Life or its affiliates for more
than 5 years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96 -- present],
VICE PRESIDENT formerly; Second Vice President [1/90 --
4/96], The Lincoln National Life Insurance
Company.
ROLAND C. BAKER Vice President [1/95 -- present] The
VICE PRESIDENT Lincoln National Life Insurance Co.,
1801 S. Meyers Rd. President and Director, First Penn Pacific
Oakbrook Terrace, IL Life Insurance Company.
60181
JON A. BOSCIA President, Chief Executive Officer and
PRESIDENT AND Director, Lincoln National Corporation
DIRECTOR [1/98 -- present], Formerly: President,
1500 Market Street Chief Executive Officer and Director
Suite 3900 [10/96 - 1/98] and President and Chief
Philadelphia, PA Operating Officer [5/94-10/96], The
19102 Lincoln National Life Insurance Company.
JOHN H. GOTTA Chief Executive Officer of Life Insurance,
CHIEF EXECUTIVE Senior Vice President and Assistant
OFFICER OF LIFE Secretary [12/99 -- present] The Lincoln
INSURANCE, SENIOR National Life Insurance Company. Formerly:
VICE PRESIDENT AND Senior Vice President and and Assistant
ASSISTANT SECRETARY Secretary [4/98 -- 12/99]; Senior Vice
350 Church Street President [2/98 -- 4/98]; Vice President
Hartford, CT 06103 and General Manager [1/98-2/98] The
Lincoln National Life Insurance Co.
Formerly: Senior Vice Vice President,
Connecticut General Life Insurance Company
[3/96-12/97]; Vice President, Connecticut
(Massachusetts Mutual) Mutual Life
Insurance Company [8/94-3/96].
J. MICHAEL HEMP President and Director [7/97 -- Present],
SENIOR VICE PRESIDENT Lincoln Financial Advisors Inc.; Senior
350 Church Street Vice President [formerly Vice
Hartford, CT 06103 President][10/95 -- present], The Lincoln
National Life Insurance Company.
STEPHEN H. LEWIS Interim Chief Executive Officer of
INTERIM CHIEF Annuities and Senior Vice President,
EXECUTIVE OFFICER [12/99-present]. Formerly: Senior Vice
AND SENIOR VICE President, [5/94 -- 12/99] The Lincoln
PRESIDENT OF ANNUITIES National Life Insurance Company.
H. THOMAS MCMEEKIN President and Director 5/94-present,
DIRECTOR Lincoln Investment Management, Inc.
One Commerce Square
2005 Market Street
Philadelphia, PA 19103
</TABLE>
39
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
GARY W. PARKER Senior Vice President [4/00 -- present],
SENIOR VICE PRESIDENT Vice President Product
350 Church Street Management,[7/98-4/00] The Lincoln
Hartford, CT 06103 National Life Insurance Company Formerly:
Senior Vice President, Life Products
[10/97 --6/98]; Marketing Services [9/89
-10/97] Life of Virginia.
LAWRENCE T. ROWLAND Executive Vice President [10/96-present]
EXECUTIVE VICE Formerly: Senior Vice President
PRESIDENT AND [1/93-10/96], The Lincoln National Life
DIRECTOR Insurance Co. Chairman, Chief Executive
One Reinsurance Place Officer, President and Director [10/96 --
1700 Magnavox Way present], Formerly: Senior Vice President
Fort Wayne, IN 46802 [10/95 -- 10/96]
KEITH J. RYAN Vice President, Controller and Chief
VICE PRESIDENT, Accounting Officer [1/96-present] The
CONTROLLER AND Lincoln National Life Insurance Company.
CHIEF ACCOUNTING
OFFICER
TODD R. STEPHENSON Senior Vice President, Chief Financial
SENIOR VICE PRESIDENT, Officer and Assistant Treasurer [3/99 --
CHIEF FINANCIAL OFFICER present] The Lincoln National Life
AND ASSISTANT TREASURER Insurance Company; Formerly: Senior Vice
President and Chief Operating Officer
[1/98-3/99] Lincoln Life & Annuity
Distributors, Inc.; Senior Vice President
and Chief Operating Officer [1/98-3/99]
Lincoln Financial Advisors Corp.; Senior
Vice President, Treasurer, Chief Financial
Officer and Director, American States
Insurance Co. [2/95-12/97].
RICHARD C. VAUGHAN Executive Vice President and Chief
DIRECTOR Financial Officer [1/95-present], The
Centre Square Lincoln National Life Insurance Company.
West Tower
1500 Market Street
Suite 3900
Philadelphia, PA 19102
MICHAEL R. WALKER Senior Vice President [1/98 -- present];
SENIOR VICE PRESIDENT Vice President [1/96-1/98] The Lincoln
350 Church Street National Life Insurance Company Formerly:
Hartford, CT 06103 Vice President [3/93 -- 1/96] Employers
Health Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present] formerly,
VICE PRESIDENT Associate Counsel [2/95-7/96] The Lincoln
National Life Insurance Company.
</TABLE>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, the principal underwriter for the Policies, is
registered with the Securities and Exchange Commission under
the Securities Exchange Act of 1934 as a broker-dealer and
is a member of the National Association of Securities
Dealers ("NASD"). Our principal business address is 1300
South Clinton Street, Fort Wayne, Indiana 46802.
The Policy may be sold by individuals, who in addition to
being appointed as our life insurance agents, are also
registered representatives of Lincoln Financial Advisors,
Corp.
40
<PAGE>
(a registered broker-dealer affiliated with Lincoln Life) or
of other broker-dealers. These representatives may receive
commission and service fees up to 60% of the first year
premium, plus up to 5% of all other premiums paid. In lieu
of premium-based commission, Lincoln Life may pay equivalent
amounts based on Accumulation Value. The selling office
receives additional compensation on the first year premium
and all additional premiums. In some situations, the selling
office may elect to share its commission with the registered
representative. Selling representatives are also eligible
for bonuses and non-cash compensation if certain production
levels are reached. All compensation is paid from our
resources, which include sales charges made under this
Policy.
CHANGES OF INVESTMENT POLICY
We may materially change the investment policy of the
Separate Account. We must inform the Owners and obtain all
necessary regulatory approvals. Any change must be submitted
to the various state insurance departments which shall
disapprove it if deemed detrimental to the interests of the
Owners or if it renders our operations hazardous to the
public. If an Owner objects, the Policy may be converted to
a substantially comparable fixed benefit life insurance
policy offered by us on the life of the Insured. The Owner
has the later of 60 days (6 months in Pennsylvania) from the
date of the investment policy change or 60 days (6 months in
Pennsylvania) from being informed of such change to make
this conversion. We will not require evidence of
insurability for this conversion.
The new policy will not be affected by the investment
experience of any separate account. The new policy will be
for an amount of insurance not exceeding the Death Benefit
of the Policy converted on the date of such conversion.
OTHER CONTRACTS ISSUED BY LINCOLN LIFE
We offer other variable annuity contracts and other variable
life insurance policies with benefits which vary in
accordance with the investment experience of a separate
account of Lincoln Life.
STATE REGULATION
We are subject to the laws of Indiana governing insurance
companies and to regulation by the Indiana Insurance
Department. An annual statement in a prescribed form is
filed with the Insurance Department each year covering our
operation for the preceding year and its financial condition
as of the end of such year. The Insurance Department
periodically examines for accuracy our contract liabilities
and reserves. Our books and accounts are subject to review
by the Insurance Department at all times and a full
examination of our operations is conducted periodically by
the Indiana Department of Insurance. Such regulation does
not, however, involve any supervision of management or
investment practices or policies.
A blanket bond with a per event limit of $25 million and an
annual policy aggregate limit of $50 million covers all of
the officers and employees of the Company.
REPORTS TO OWNERS
We maintain Policy records and will mail to each Owner, at
the last known address of record, an annual statement
showing the amount of the current Death Benefit, the
Accumulation Value, and Surrender Value, premiums paid and
monthly charges deducted since the last report, the amounts
invested in each Sub-Account and any Loan Account Value.
41
<PAGE>
You will also be sent annual reports containing financial
statements for the Separate Account, annual and semi-annual
reports of the Funds as required by the 1940 Act, and
statements of significant transactions, such as changes in
Specified Amount, changes in Death Benefit Option, transfers
among Sub-Accounts, Premium Payments, loans, loan
repayments, reinstatement and termination.
ADVERTISING
Lincoln Life is ranked and rated by independent financial
rating services, including Moody's, Standard & Poor's,
Duff & Phelps and A.M. Best Company. The purpose of these
ratings is to reflect the financial strength or
claims-paying ability of Lincoln Life. The ratings are not
intended to reflect the investment experience or financial
strength of the Separate Account. We may advertise these
ratings from time to time. In addition, we may include in
certain advertisements, endorsements in the form of a list
of organizations, individuals or other parties which
recommend us or the Policies. We may also occasionally
include in advertisements comparisons of currently taxable
and tax deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisements.
Companies that belong to IMSA subscribe to a set of of
ethical standards covering the various aspects of sales and
services for individually sold life insurance and annuities.
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 they include claims
for unspecified or substantial punitive damages and similar
types of relief in addition to amounts 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.
Lincoln Life is presently defending several lawsuits in
which Plaintiffs seek to represent national classes of
policyholders in connection with alleged fraud, breach of
contract and other claims relating to the sale of
interest-sensitive universal and participating whole life
insurance policies. As of the date of this prospectus, the
courts have not certified a class in either of the suits.
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 preliminary stages of litigation, and it is premature
to make assessments about potential loss, if any. Management
is defending these suits vigorously. The amount of
liability, if any, which may ultimately arise as a result of
these suits cannot be reasonably determined at this time.
EXPERTS
The financial statements of the Separate Account and the
statutory-basis financial statements of Lincoln Life
appearing in this prospectus and registration statement have
been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports which also appear elsewhere in
this document and in the registration statement. The
financial statements audited by Ernst & Young LLP have been
included in this document in reliance on their reports given
on their authority as experts in accounting and auditing.
42
<PAGE>
Actuarial matters included in this prospectus have been
examined by Vaughn W. Robbins, FSA as stated in the opinion
filed as an exhibit to the registration statement.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
as stated in the opinion filed as an exhibit to the
registration statement.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Separate Account, Lincoln Life, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
43
<PAGE>
APPENDIX 1 MONTHLY CHARGE
<TABLE>
<CAPTION>
INSURED'S EXPENSE
AGE AT ISSUE CHARGE
(NEAREST BIRTHDAY) PER $1,000
- ------------------ ----------
<S> <C>
0-12 0.0158
13 0.0200
14 0.0242
15-30 0.0283
31 0.0325
32 0.0367
33 0.0408
34 0.0450
35 0.0492
36 0.0533
37 0.0575
38 0.0617
39 0.0658
40 0.0700
41 0.0742
42 0.0783
43 0.0825
44 0.0867
45 0.0908
46 0.0950
47 0.0992
48 0.1033
49 0.1075
50 0.1117
51 0.1158
52 0.1200
53 0.1242
54 0.1283
55 0.1325
56 0.1408
57 0.1492
58 0.1575
59 0.1658
60 0.1742
61 0.1825
62 0.1908
63 0.1992
64 0.2075
65 0.2158
66 0.2242
67 0.2325
68 0.2408
69 0.2492
70 0.2575
71 0.2656
72 0.2742
73 0.2825
74 0.2908
75 0.2992
76 0.3200
77 0.3408
78 0.3617
79 0.3825
80 0.4033
81+ 0.4242
</TABLE>
44
<PAGE>
APPENDIX 2
GUARANTEED MAXIMUM COST OF INSURANCE RATES
The Guaranteed Maximum Cost of Insurance Rates, per $1,000
of Net Amount at Risk, for standard risks are set forth in
the following Table based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO);
or for unisex rates, on the 1980 CSO-B Table.
<TABLE>
<CAPTION>
ATTAINED AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- --------- -------- -------- --------
<S> <C> <C> <C>
0 0.34845 0.24089 0.32677
1 0.08917 0.07251 0.08667
2 0.08251 0.06750 0.07917
3 0.08167 0.06584 0.07834
4 0.07917 0.06417 0.07584
5 0.07501 0.06334 0.07251
6 0.07167 0.06084 0.06917
7 0.06667 0.06000 0.06584
8 0.06334 0.05834 0.06250
9 0.06167 0.05750 0.06084
10 0.06084 0.05667 0.06000
11 0.06417 0.05750 0.06250
12 0.07084 0.06000 0.06917
13 0.08251 0.06250 0.07834
14 0.09584 0.06887 0.09001
15 0.11085 0.07084 0.10334
16 0.12585 0.07601 0.11585
17 0.13919 0.07917 0.12752
18 0.14836 0.08167 0.13502
19 0.15502 0.08501 0.14085
20 0.15836 0.08751 0.14502
21 0.15919 0.08917 0.14585
22 0.15752 0.09084 0.14419
23 0.15502 0.09251 0.14252
24 0.15189 0.09501 0.14085
25 0.14752 0.09668 0.13752
26 0.11419 0.09918 0.13585
27 0.14252 0.10168 0.13418
28 0.14169 0.10501 0.13418
29 0.14252 0.10635 0.13585
30 0.14419 0.11251 0.13752
31 0.14836 0.11668 0.14169
32 0.15252 0.12085 0.14585
33 0.15919 0.12502 0.15252
34 0.16889 0.13168 0.15919
35 0.17586 0.13752 0.16836
36 0.18670 0.14669 0.17837
37 0.20004 0.15752 0.19170
38 0.21505 0.17003 0.20588
39 0.23255 0.18503 0.22338
40 0.25173 0.20171 0.24173
41 0.27424 0.22005 0.26340
42 0.29675 0.23922 0.28508
43 0.32260 0.25757 0.31010
44 0.34929 0.27674 0.33428
45 0.37931 0.29675 0.36263
46 0.41017 0.31677 0.39182
47 0.44353 0.33761 0.42268
48 0.47856 0.36096 0.45437
49 0.51777 0.38598 0.49107
<CAPTION>
ATTAINED AGE MALE FEMALE UNISEX
(NEAREST MONTHLY MONTHLY MONTHLY
BIRTHDAY) RATE RATE RATE
- --------- -------- -------- --------
<S> <C> <C> <C>
50 0.55948 0.41350 0.53028
51 0.60870 0.44270 0.57533
52 0.66377 0.47523 0.62539
53 0.72636 0.51276 0.68297
54 0.79730 0.55114 0.74722
55 0.87326 0.59118 0.81566
56 0.95591 0.63123 0.88996
57 1.04192 0.66961 0.96593
58 1.13378 0.70633 1.04609
59 1.23236 0.74556 1.13211
60 1.34180 0.78979 1.22817
61 1.46381 0.84488 1.33511
62 1.60173 0.91417 1.45796
63 1.75809 1.00267 1.59922
64 1.93206 1.10539 1.75725
65 2.12283 1.21731 1.92955
66 2.32623 1.33511 2.11195
67 2.54312 1.45461 2.30614
68 2.77350 1.57247 2.50878
69 3.02328 1.69955 2.72909
70 3.30338 1.84590 2.97466
71 3.62140 2.02325 3.25640
72 3.98666 2.24419 3.58279
73 4.40599 2.51548 3.95978
74 4.87280 2.83552 4.38330
75 5.37793 3.19685 4.84334
76 5.91225 3.59370 5.33245
77 6.46824 4.01942 5.84227
78 7.04089 4.47410 6.36948
79 7.64551 4.97042 6.92851
80 8.30507 5.52957 7.54229
81 9.03761 6.17118 8.22883
82 9.86724 6.91414 9.01216
83 10.80381 7.77075 9.90124
84 11.82571 8.72632 10.87533
85 12.91039 9.76952 11.92213
86 14.03509 10.89151 13.01471
87 15.18978 12.08770 14.15507
88 16.36948 13.35774 15.33494
89 17.57781 14.70820 16.56493
90 18.82881 16.15259 17.85746
91 20.14619 17.71416 19.23699
92 21.57655 19.43814 20.76665
93 23.20196 21.40786 22.49837
94 25.28174 23.63051 24.70915
95 28.27411 27.16158 27.82758
96 33.10577 32.32378 32.78845
97 41.68476 41.21204 41.45783
98 58.01259 57.81394 57.95663
99 90.90909 90.90909 90.90909
</TABLE>
45
<PAGE>
APPENDIX 3
ILLUSTRATION OF SURRENDER CHARGES
The initial Surrender Charge is calculated as (a) plus (b),
with that result not to exceed (c), minus (d), where
(a) is 1.25 times the curtate net level premium for the
Specified Amount of insurance, calculated using the 1980
Commissioners Standard Ordinary mortality table and 4%
interest;
(b) is $10 per $1000 of Specified Amount;
(c) is $50 per $1000 of Specified Amount; and
(d) is the total of the per thousand charges assessed in the
first 24 months.
Algebraically, this formula is equivalent to min{a+b,c}-d.
The Surrender Charge decreases from its initial amount
during the first 15 years. No Surrender Charge is applied in
the 16th policy year or beyond. In general terms, the
initial Surrender Charge is amortized in proportion to a
twenty year life contingent annuity due. In formulas, the
Surrender Charge at a point in time "t" years after issue is
(a) times (b), where
(a) is the initial Surrender Charge; and
(b) is the ratio of a life contingent annuity due beginning
at time t and ending 20 years after issue, divided by a
life contingent annuity due beginning at issue and
ending 20 years after issue, both calculated using the
1980 Commissioners Standard Ordinary mortality table and
4% interest.
EXAMPLE 1: A male, Age 45, purchases a policy with a
Specified Amount of $100,000.
The initial Surrender Charge is computed as follows:
curtate net level premium = $1,987.66
$10 per $1000 of Specified Amount = $1000
$50 per $1000 of Specified Amount = $5000
the total of the per thousand charges = $9.08 per month X 24
months = $217.92
initial Surrender Charge = (1.25 X $1987.66 + $1000) -
$217.92=
$3,484.57- $217.92 = $3,266.65. Note that $3,484.57 is less
than $5000.
This amount decreases as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
0 3,266.65 1.00000 3,266.65
1 3,266.65 0.96609 3,155.89
2 3,266.65 0.93101 3,041.30
3 3,266.65 0.89471 2,922.71
4 3,266.65 0.85711 2,799.89
5 3,266.65 0.81818 2,672.70
6 3,266.65 0.77782 2,540.86
7 3,266.65 0.73600 2,404.26
8 3,266.65 0.69265 2,262.65
9 3,266.65 0.64769 2,115.79
10 3,266.65 0.60104 1,963.40
</TABLE>
46
<PAGE>
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
11 3,266.65 0.55257 1,805.05
12 3,266.65 0.50212 1,640.25
13 3,266.65 0.44952 1,468.41
14 3,266.65 0.39456 1,288.88
15 3,266.65 0.33701 1,100.90
16 0.00
</TABLE>
EXAMPLE 2: A female, Age 75, purchases a policy with a
Specified Amount of $200,000.
The initial Surrender Charge is computed as follows:
curtate net level premium = $15,727.74
$10 per $1000 of Specified Amount = $2,000
$50 per $1000 of Specified Amount = $10,000
the total of the per thousand charges = $59.84 per month X
24 months = $1,436.16
The value (1.25 X $15,727.74 + $2,000) exceeds $10,000, so
the initial Surrender Charge = $10,000 - $1,436.16 =
$8,563.84
This amount decreases as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY SURRENDER
ISSUE CHARGE RATIO CHARGE
----- --------- ------- ---------
<S> <C> <C> <C>
0 8,563.84 1.00000 8,563.84
1 8,563.84 0.95375 8,167.79
2 8,563.84 0.90821 7,777.77
3 8,563.84 0.86329 7,393.11
4 8,563.84 0.81888 7,012.72
5 8,563.84 0.77490 6,636.15
6 8,563.84 0.73145 6,264.02
7 8,563.84 0.68868 5,897.71
8 8,563.84 0.64680 5,539.10
9 8,563.84 0.60603 5,189.95
10 8,563.84 0.56635 4,850.10
11 8,563.84 0.52753 4,517.67
12 8,563.84 0.48915 4,189.03
13 8,563.84 0.45058 3,858.68
14 8,563.84 0.41088 3,518.67
15 8,563.84 0.36873 3,157.74
16 0.00
</TABLE>
47
<PAGE>
APPENDIX 4
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
ATTAINED AGE OF
THE INSURED CORRIDOR
(NEAREST BIRTHDAY) PERCENTAGE
- ------------------ ----------
<S> <C>
0-40 250%
41 243%
42 236%
43 229%
44 222%
45 215%
46 209%
47 203%
48 197%
49 191%
50 185%
51 178%
52 171%
53 164%
54 157%
55 150%
56 146%
57 142%
58 138%
59 134%
60 130%
61 128%
62 126%
63 124%
64 122%
65 120%
66 119%
67 118%
68 117%
69 116%
70 115%
71 113%
72 111%
73 109%
74 107%
75-90 105%
91 104%
92 103%
93 102%
94 101%
95-99 100%
</TABLE>
48
<PAGE>
APPENDIX 5
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES, AND
DEATH BENEFIT PROCEEDS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations illustrate how
Accumulation Values, Surrender Values and Death Benefit
Proceeds under a Policy would vary over time if the
hypothetical gross investment rates of return were a uniform
annual effective rate of either 0%, 6% or 12%. If the
hypothetical gross investment rate of return averages 0%,
6%, or 12% over a period of years, but fluctuates above or
below those averages for individual years, the Accumulation
Values, Surrender Values and Death Benefit Proceeds may be
different. The illustrations also assume there are no Policy
Loans or Partial Surrenders, no additional Premium Payments
are made other than shown, no Accumulation Values are
allocated to the Fixed Account, and there are no changes in
the Specified Amount or Death Benefit Option.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit Proceeds as of each Policy
Anniversary reflect the fact that charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The mortality and expense risk charges are
equivalent to an annual effective rate of 0.90% of the daily
net asset value of the Separate Account in years 1-19 and
0.20% in years 20 and later. In addition, the amounts shown
also reflect the deduction of Fund investment advisory fees
and other expenses which will vary depending on which
funding vehicle is chosen but which are assumed for purposes
of these illustrations to be equivalent to an annual
effective rate of 0.82% of the daily net asset value of the
Separate Account. This rate reflects an arithmetic average
of total Fund portfolio annual expenses for the year ending
December 31, 1999.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.70%, 4.24% and 10.19% for years 1-19 and -1.02%, 4.97%
and 10.96% in years 20 and later.
The illustrations also reflect the fact that the Company
makes monthly charges for providing insurance protection.
Current values reflect current Cost of Insurance charges and
guaranteed values reflect the maximum Cost of Insurance
charges guaranteed in the Policy. The values shown are for
Policies which are issued as preferred and standard.
Policies issued on a substandard basis would result in lower
Accumulation Values and Death Benefit Proceeds than those
illustrated.
The illustrations also reflect the fact that the Company
deducts a premium load of 5% from each Premium Payment.
The Surrender Values shown in the illustrations reflect the
fact that the Company will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first fifteen Policy Years. Surrender
Charges reflect, in part, age and Specified Amount, and are
shown in the illustrations.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is a flat dollar charge of $10 per month in
the first year. The illustrations also reflect a monthly
charge per $1,000 of Specified Amount assessed during the
first two Policy Years.
Certain fund groups waive a portion of fund expenses or
reimburse the funds for such expenses. Those waivers or
reimbursements remain in effect for varying periods of time,
are usually reviewed at least yearly by each fund group, and
are within the fund group's
49
<PAGE>
control. The effect of discontinuing a waiver or
reimbursement arrangement could result in higher expense
levels for the affected fund, as shown in the "Portfolio
Expense Table". Assuming those waivers and reimbursements
were discontinued, the arithmetic average of the "Fund
Investment Advisory Fees and Other Expenses" listed in the
"Portfolio Expense Table" would be equivalent to an annual
effective rate of 1.12% of the daily net asset value of the
Separate Account.
Upon request, the Company will furnish a comparable
illustration based on the proposed insured's age, gender
classification, smoking classification, risk classification
and premium payment requested.
50
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $8,605 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 9,035 500,000 500,000 500,000 4,647 5,025 5,404
2 18,522 500,000 500,000 500,000 6,143 7,098 8,104
3 28,483 500,000 500,000 500,000 7,922 9,587 11,427
4 38,942 500,000 500,000 500,000 9,160 11,666 14,573
5 49,924 500,000 500,000 500,000 9,821 13,276 17,486
6 61,455 500,000 500,000 500,000 9,847 14,331 20,082
7 73,563 500,000 500,000 500,000 9,166 14,725 22,253
8 86,276 500,000 500,000 500,000 7,681 14,325 23,859
9 99,625 500,000 500,000 500,000 5,279 12,970 24,726
10 113,641 500,000 500,000 500,000 1,845 10,488 24,659
15 194,961 0 0 500,000 0 0 1,563
20 298,749 0 0 0 0 0 0
25 431,212 0 0 0 0 0 0
30 600,272 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 1,913
7 0 0 5,046
8 0 0 7,644
9 0 0 9,533
10 0 0 10,522
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
51
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $8,605 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 9,035 500,000 500,000 500,000 4,647 5,024 5,404
2 18,522 500,000 500,000 500,000 9,204 10,254 11,352
3 28,483 500,000 500,000 500,000 14,425 16,475 18,706
4 38,942 500,000 500,000 500,000 19,527 22,935 26,792
5 49,924 500,000 500,000 500,000 24,522 29,659 35,701
6 61,455 500,000 500,000 500,000 29,427 36,673 45,538
7 73,563 500,000 500,000 500,000 34,248 43,998 56,411
8 86,276 500,000 500,000 500,000 38,923 51,586 68,368
9 99,625 500,000 500,000 500,000 43,418 59,416 81,497
10 113,641 500,000 500,000 500,000 47,758 67,522 95,949
15 194,961 500,000 500,000 500,000 63,139 108,721 190,170
20 298,749 500,000 500,000 500,000 66,806 151,278 343,711
25 431,212 500,000 500,000 656,230 55,891 199,852 624,981
30 600,272 500,000 500,000 1,153,513 20,061 252,273 1,098,584
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 2,924 6,780
5 5,419 10,555 16,597
6 11,258 18,504 27,369
7 17,041 26,791 39,204
8 22,707 35,370 52,153
9 28,225 44,222 66,303
10 33,620 53,384 81,811
15 54,985 100,568 182,017
20 66,806 151,278 343,711
25 55,891 199,852 624,981
30 20,061 252,273 1,098,584
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
52
<PAGE>
MALE AGE 65 NONSMOKER
PREFERRED -- $13,988 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,687 500,000 500,000 500,000 6,503 7,084 7,670
2 30,109 500,000 500,000 500,000 4,621 5,954 7,371
3 46,302 500,000 500,000 500,000 2,748 4,777 7,074
4 63,305 0 500,000 500,000 0 2,115 5,304
5 81,157 0 0 500,000 0 0 1,724
6 99,903 0 0 0 0 0 0
7 119,585 0 0 0 0 0 0
8 140,252 0 0 0 0 0 0
9 161,952 0 0 0 0 0 0
10 184,737 0 0 0 0 0 0
15 316,934 0 0 0 0 0 0
20 485,654 0 0 0 0 0 0
25 700,989 0 0 0 0 0 0
30 975,816 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 0
6 0 0 0
7 0 0 0
8 0 0 0
9 0 0 0
10 0 0 0
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
53
<PAGE>
MALE AGE 65 NONSMOKER
PREFERRED -- $13,988 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 14,687 500,000 500,000 500,000 6,503 7,085 7,670
2 30,109 500,000 500,000 500,000 12,950 14,534 16,196
3 46,302 500,000 500,000 500,000 20,460 23,525 26,871
4 63,305 500,000 500,000 500,000 27,602 32,673 38,428
5 81,157 500,000 500,000 500,000 34,624 42,237 51,228
6 99,903 500,000 500,000 500,000 41,549 52,267 65,441
7 119,585 500,000 500,000 500,000 48,328 62,738 81,182
8 140,252 500,000 500,000 500,000 54,973 73,689 98,643
9 161,952 500,000 500,000 500,000 61,393 85,056 117,943
10 184,737 500,000 500,000 500,000 67,479 96,764 139,210
15 316,934 500,000 500,000 500,000 86,745 155,746 280,842
20 485,654 500,000 500,000 551,714 77,536 211,110 525,442
25 700,989 500,000 500,000 1,012,056 32,960 276,470 963,863
30 975,816 0 500,000 1,714,439 0 360,466 1,697,465
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 625 3,690 7,036
4 8,641 13,712 19,467
5 16,547 24,161 33,151
6 24,367 35,085 48,259
7 32,051 46,461 64,904
8 39,609 58,325 83,279
9 46,951 70,614 103,501
10 53,969 83,254 125,701
15 78,419 147,420 272,516
20 77,536 211,110 525,442
25 32,960 276,470 963,863
30 0 360,466 1,697,465
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
54
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $6,925 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 7,271 500,000 500,000 500,000 3,492 3,788 4,085
2 14,906 500,000 500,000 500,000 5,311 6,074 6,876
3 22,922 500,000 500,000 500,000 7,680 9,061 10,580
4 31,340 500,000 500,000 500,000 9,814 11,981 14,470
5 40,178 500,000 500,000 500,000 11,703 14,818 18,553
6 49,458 500,000 500,000 500,000 13,322 17,541 22,827
7 59,202 500,000 500,000 500,000 14,612 20,083 27,252
8 69,433 500,000 500,000 500,000 15,496 22,356 31,767
9 80,176 500,000 500,000 500,000 15,867 24,236 36,278
10 91,456 500,000 500,000 500,000 15,649 25,624 40,713
15 156,901 500,000 500,000 500,000 4,461 22,888 60,453
20 240,428 0 0 500,000 0 0 67,729
25 347,031 0 0 500,000 0 0 19,991
30 483,087 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 2,953
6 0 2,705 7,991
7 569 6,040 13,209
8 2,275 9,135 18,546
9 3,498 11,866 23,909
10 4,161 14,136 29,225
15 0 16,394 53,960
20 0 0 67,729
25 0 0 19,991
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
55
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $6,925 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 7,271 500,000 500,000 500,000 3,492 3,788 4,085
2 14,906 500,000 500,000 500,000 7,450 8,279 9,147
3 22,922 500,000 500,000 500,000 12,083 13,731 15,521
4 31,340 500,000 500,000 500,000 16,596 19,374 22,508
5 40,178 500,000 500,000 500,000 21,018 25,248 30,203
6 49,458 500,000 500,000 500,000 25,343 31,354 38,672
7 59,202 500,000 500,000 500,000 29,553 37,685 47,981
8 69,433 500,000 500,000 500,000 33,675 44,276 58,243
9 80,176 500,000 500,000 500,000 37,687 51,117 69,538
10 91,456 500,000 500,000 500,000 41,601 58,232 81,989
15 156,901 500,000 500,000 500,000 58,581 97,240 165,367
20 240,428 500,000 500,000 500,000 68,272 140,579 300,512
25 347,031 500,000 500,000 568,989 68,215 191,830 541,894
30 483,087 500,000 500,000 998,710 48,714 247,434 951,152
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 260 3,038 6,172
5 5,418 9,648 14,603
6 10,507 16,518 23,836
7 15,510 23,642 33,938
8 20,454 31,055 45,022
9 25,318 38,748 57,169
10 30,113 46,744 70,501
15 52,088 90,746 158,874
20 68,272 140,579 300,512
25 68,215 191,830 541,894
30 48,714 247,434 951,152
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
56
<PAGE>
FEMALE AGE 65 NONSMOKER
PREFERRED -- $11,501 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,076 500,000 500,000 500,000 6,056 6,555 7,058
2 24,756 500,000 500,000 500,000 7,579 8,830 10,149
3 38,070 500,000 500,000 500,000 9,701 11,862 14,256
4 52,049 500,000 500,000 500,000 11,144 14,380 18,145
5 66,728 500,000 500,000 500,000 11,856 16,304 21,745
6 82,140 500,000 500,000 500,000 11,726 17,488 24,917
7 98,323 500,000 500,000 500,000 10,570 17,706 27,433
8 115,316 500,000 500,000 500,000 8,123 16,636 28,961
9 133,158 500,000 500,000 500,000 4,065 13,883 29,080
10 151,892 0 500,000 500,000 0 9,010 27,311
15 260,584 0 0 0 0 0 0
20 399,307 0 0 0 0 0 0
25 576,356 0 0 0 0 0 0
30 802,320 0 0 0 0 0 0
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 0 0 0
4 0 0 0
5 0 0 3,599
6 0 263 7,691
7 0 1,424 11,151
8 0 1,318 13,643
9 0 0 14,745
10 0 0 13,977
15 0 0 0
20 0 0 0
25 0 0 0
30 0 0 0
</TABLE>
Amounts are in Dollars
Where a zero value is shown, the Policy will
lapse unless sufficient additional premium is
paid.
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
57
<PAGE>
FEMALE AGE 65 NONSMOKER
PREFERRED -- $11,501 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- --------------------- ----------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
1 12,076 500,000 500,000 500,000 6,056 6,555 7,058
2 24,756 500,000 500,000 500,000 12,510 13,911 15,377
3 38,070 500,000 500,000 500,000 20,098 22,870 25,883
4 52,049 500,000 500,000 500,000 27,522 32,183 37,444
5 66,728 500,000 500,000 500,000 34,768 41,852 50,163
6 82,140 500,000 500,000 500,000 41,863 51,923 64,193
7 98,323 500,000 500,000 500,000 48,732 62,337 79,601
8 115,316 500,000 500,000 500,000 55,302 73,041 96,473
9 133,158 500,000 500,000 500,000 61,722 84,196 115,120
10 151,892 500,000 500,000 500,000 67,909 95,747 135,667
15 260,584 500,000 500,000 500,000 91,017 156,191 272,332
20 399,307 500,000 500,000 525,543 88,975 214,215 500,517
25 576,356 500,000 500,000 953,689 56,326 281,249 908,275
30 802,320 0 500,000 1,606,826 0 365,790 1,590,917
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 0 0 0
2 0 0 0
3 184 2,956 5,969
4 8,480 13,141 18,402
5 16,622 23,706 32,017
6 24,638 34,698 46,967
7 32,450 46,055 63,319
8 39,984 57,723 81,155
9 47,386 69,861 100,784
10 54,575 82,413 122,333
15 83,182 148,356 264,498
20 88,975 214,215 500,517
25 56,326 281,249 908,275
30 0 365,790 1,590,917
</TABLE>
Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefit Proceeds,
Accumulation Values and Surrender Values would
be less than those illustrated.
Assumes no policy loans or partial surrenders
have been made. Current cost of insurance
rates assumed. Current mortality and expense
risk charges, administrative fees and premium
load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of mortality and
expense risk charges and (2) assumed Fund
total expenses of 0.82% per year.
58
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
M-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1999
<TABLE>
<CAPTION>
AIM AIM AIM
V.I. V.I. AIM V.I. AIM
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $27,626,132) $ 28,882,271 $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $79,563,067) 90,643,593 3,565,893 460,855 11,039,437 208,717 14,096,870
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
Total Investments 119,525,864 3,565,893 460,855 11,039,437 208,717 14,096,870
Dividend Receivable 613 -- -- -- -- --
TOTAL ASSETS 119,526,477 3,565,893 460,855 11,039,437 208,717 14,096,870
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 2,520 77 10 231 4 294
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET ASSETS $119,523,957 $3,565,816 $ 460,845 $11,039,206 $ 208,713 $14,096,576
--------------------------------------- ============ ========== ========= =========== =========== ===========
Percent of net assets 100.00% 2.98% 0.39% 9.24% 0.17% 11.79%
--------------------------------------- ============ ========== ========= =========== =========== ===========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 225,973 47,627 296,357 -- 403,304
Unit value $ 15.780 $ 9.676 $ 15.630 $ -- $ 15.002
--------------------------------------- ---------- --------- ----------- ----------- -----------
3,565,816 460,845 4,632,135 -- 6,050,444
--------------------------------------- ---------- --------- ----------- ----------- -----------
LVUL Policies:
Units in accumulation period -- -- 508,794 13,386 671,441
Unit value $ -- $ -- $ 12.479 $ 15.239 $ 11.850
--------------------------------------- ---------- --------- ----------- ----------- -----------
-- -- 6,349,281 203,988 7,956,733
--------------------------------------- ---------- --------- ----------- ----------- -----------
VUL-DB Policies:
Units in accumulation period -- -- 4,528 334 7,315
Unit value $ -- $ -- $ 12.764 $ 14.131 $ 12.221
--------------------------------------- ---------- --------- ----------- ----------- -----------
-- -- 57,790 4,725 89,399
--------------------------------------- ---------- --------- ----------- ----------- -----------
NET ASSETS $3,565,816 $ 460,845 $11,039,206 $ 208,713 $14,096,576
--------------------------------------- ========== ========= =========== =========== ===========
<CAPTION>
AVIS AVIS
AVIS GROWTH & GLOBAL SMALL BARON BT
GROWTH INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
---------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $79,563,067) 48,320 1,295 1,188 299,299 613,120
--------------------------------------- --------- --------- ----------- --------- -----------
Total Investments 48,320 1,295 1,188 299,299 613,120
Dividend Receivable -- -- -- -- --
TOTAL ASSETS 48,320 1,295 1,188 299,299 613,120
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 1 -- -- 6 13
--------------------------------------- --------- --------- ----------- --------- -----------
NET ASSETS $ 48,319 $ 1,295 $ 1,188 $ 299,293 $ 613,107
--------------------------------------- ========= ========= =========== ========= ===========
Percent of net assets 0.04% 0.00% 0.00% 0.25% 0.51%
--------------------------------------- ========= ========= =========== ========= ===========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period -- -- -- -- --
Unit value $ -- $ -- $ -- $ -- $ --
--------------------------------------- --------- --------- ----------- --------- -----------
-- -- -- -- --
--------------------------------------- --------- --------- ----------- --------- -----------
LVUL Policies:
Units in accumulation period -- -- -- 26,062 48,472
Unit value $ -- $ -- $ -- $ 11.295 $ 12.478
--------------------------------------- --------- --------- ----------- --------- -----------
-- -- -- 294,359 604,824
--------------------------------------- --------- --------- ----------- --------- -----------
VUL-DB Policies:
Units in accumulation period 3,628 118 89 388 697
Unit value $ 13.316 $ 10.929 $ 13.363 $ 12.715 $ 11.888
--------------------------------------- --------- --------- ----------- --------- -----------
48,319 1,295 1,188 4,934 8,283
--------------------------------------- --------- --------- ----------- --------- -----------
NET ASSETS $ 48,319 $ 1,295 $ 1,188 $ 299,293 $ 613,107
--------------------------------------- ========= ========= =========== ========= ===========
</TABLE>
See accompanying notes.
M-2
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BT BT DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$27,626,132) $ -- $ -- $ 191,273 $ 69,176 $ 742,896 $2,351,982 $ 8,850
Investments at
Market--Unaffiliated (Cost
$79,563,067) 20,110,936 500,139 -- -- -- -- --
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
Total Investments 20,110,936 500,139 191,273 69,176 742,896 2,351,982 8,850
Dividend Receivable -- -- 613 -- -- -- --
TOTAL ASSETS 20,110,936 500,139 191,886 69,176 742,896 2,351,982 8,850
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 425 10 4 1 16 49 --
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
NET ASSETS $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850
---------------------------------- =========== ========= ========= =========== ========= ========== =========
Percent of net assets 16.83% 0.42% 0.16% 0.06% 0.62% 1.97% 0.01%
---------------------------------- =========== ========= ========= =========== ========= ========== =========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 812,687 -- -- -- 25,318 180,810 --
Unit value $ 13.296 $ -- $ -- $ -- $ 11.369 $ 9.193 $ --
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
10,805,740 -- -- -- 287,864 1,662,059
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
LVUL Policies:
Units in accumulation period 838,894 43,587 20,103 7,464 36,700 72,822 861
Unit value $ 11.021 $ 11.416 $ 9.441 $ 9.141 $ 12.100 $ 9.460 $ 9.199
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
9,245,783 497,587 189,840 68,231 444,060 688,931 7,925
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
VUL-DB Policies:
Units in accumulation period 5,036 206 201 89 881 89 89
Unit value $ 11.714 $ 12.326 $ 10.178 $ 10.623 $ 12.442 $ 10.612 $ 10.415
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
58,988 2,542 2,042 944 10,956 943 925
---------------------------------- ----------- --------- --------- ----------- --------- ---------- ---------
NET ASSETS $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850
---------------------------------- =========== ========= ========= =========== ========= ========== =========
<CAPTION>
FIDELITY FIDELITY FIDELITY
DELAWARE VIP VIP II VIP II
PREMIUM EQUITY- ASSET CONTRAFUND
TREND INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated (Cost
$27,626,132) $3,653,313 $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$79,563,067) -- 4,515,096 897,427 2,371,632
------------------------------- ---------- ---------- --------- ----------
Total Investments 3,653,313 4,515,096 897,427 2,371,632
Dividend Receivable -- -- -- --
TOTAL ASSETS 3,653,313 4,515,096 897,427 2,371,632
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 76 98 20 48
------------------------------- ---------- ---------- --------- ----------
NET ASSETS $3,653,237 $4,514,998 $ 897,407 $2,371,584
------------------------------- ========== ========== ========= ==========
Percent of net assets 3.06% 3.78% 0.75% 1.98%
------------------------------- ========== ========== ========= ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 96,178 418,199 76,685 --
Unit value $ 18.637 $ 10.796 $ 11.702 $ --
------------------------------- ---------- ---------- --------- ----------
1,792,471 4,514,998 897,407 --
------------------------------- ---------- ---------- --------- ----------
LVUL Policies:
Units in accumulation period 118,467 -- -- 202,869
Unit value $ 15.583 $ -- $ -- $ 11.466
------------------------------- ---------- ---------- --------- ----------
1,846,123 -- -- 2,326,180
------------------------------- ---------- ---------- --------- ----------
VUL-DB Policies:
Units in accumulation period 1,055 -- -- 3,748
Unit value $ 13.884 $ -- $ -- $ 12.114
------------------------------- ---------- ---------- --------- ----------
14,643 -- -- 45,404
------------------------------- ---------- ---------- --------- ----------
NET ASSETS $3,653,237 $4,514,998 $ 897,407 $2,371,584
------------------------------- ========== ========== ========= ==========
</TABLE>
See accompanying notes.
M-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
FIDELITY JANUS
FIDELITY VIP III JANUS ASPEN
VIP II GROWTH ASPEN SERIES LN
INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL
GRADE BOND SERVICE CLASS BALANCED GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $2,250,443 $2,307,707
Investments at
Market--Unaffiliated
(Cost $79,563,067) 2,312,798 1,485,092 3,009,790 4,092,079 -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
Total Investments 2,312,798 1,485,092 3,009,790 4,092,079 2,250,443 2,307,707
Dividend Receivable -- -- -- -- -- --
TOTAL ASSETS 2,312,798 1,485,092 3,009,790 4,092,079 2,250,443 2,307,707
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 51 30 62 83 47 48
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET ASSETS $2,312,747 $ 1,485,062 $3,009,728 $4,091,996 $2,250,396 $2,307,659
---------------------------------- ========== =========== ========== ========== ========== ==========
Percent of net assets 1.93% 1.24% 2.52% 3.42% 1.88% 1.93%
---------------------------------- ========== =========== ========== ========== ========== ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 224,937 -- -- -- -- --
Unit value $ 10.282 $ -- $ -- $ -- $ -- $ --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
2,312,747 -- -- -- -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
LVUL Policies:
Units in accumulation period -- 147,153 261,892 265,069 225,312 173,337
Unit value $ -- $ 10.053 $ 11.377 $ 15.087 $ 9.958 $ 12.919
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
-- 1,479,343 2,979,633 3,999,093 2,243,617 2,239,337
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
VUL-DB Policies:
Units in accumulation period -- 524 2,543 6,434 678 5,298
Unit value $ -- $ 10.908 $ 11.833 $ 14.440 $ 10.001 $ 12.895
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
-- 5,719 30,095 92,903 6,779 68,322
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET ASSETS $2,312,747 $ 1,485,062 $3,009,728 $4,091,996 $2,250,396 $2,307,659
---------------------------------- ========== =========== ========== ========== ========== ==========
<CAPTION>
LN
LN GLOBAL LN LN MFS
EQUITY- ASSET MONEY SOCIAL EMERGING
INCOME ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
ASSETS
Investments at
Market--Affiliated
(Cost $27,626,132) $ 214,504 $ 119,502 $16,394,196 $ 578,429 $ --
Investments at
Market--Unaffiliated
(Cost $79,563,067) -- -- -- -- 8,932,616
------------------------------- --------- --------- ----------- --------- ----------
Total Investments 214,504 119,502 16,394,196 578,429 8,932,616
Dividend Receivable -- -- -- -- --
TOTAL ASSETS 214,504 119,502 16,394,196 578,429 8,932,616
LIABILITY--
Payable to The Lincoln National
Life Insurance Company 4 2 355 12 185
------------------------------- --------- --------- ----------- --------- ----------
NET ASSETS $ 214,500 $ 119,500 $16,393,841 $ 578,417 $8,932,431
------------------------------- ========= ========= =========== ========= ==========
Percent of net assets 0.18% 0.10% 13.72% 0.48% 7.47%
------------------------------- ========= ========= =========== ========= ==========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period -- -- 549,282 -- 151,327
Unit value $ -- $ -- $ 10.622 $ -- $ 20.051
------------------------------- --------- --------- ----------- --------- ----------
-- -- 5,834,385 -- 3,034,218
------------------------------- --------- --------- ----------- --------- ----------
LVUL Policies:
Units in accumulation period 21,553 10,961 862,204 51,662 354,598
Unit value $ 9.830 $ 10.812 $ 10.273 $ 11.176 $ 16.498
------------------------------- --------- --------- ----------- --------- ----------
211,878 118,507 8,857,709 577,361 5,850,136
------------------------------- --------- --------- ----------- --------- ----------
VUL-DB Policies:
Units in accumulation period 232 89 168,723 89 2,996
Unit value $ 11.319 $ 11.177 $ 10.086 $ 11.886 $ 16.049
------------------------------- --------- --------- ----------- --------- ----------
2,622 993 1,701,747 1,056 48,077
------------------------------- --------- --------- ----------- --------- ----------
NET ASSETS $ 214,500 $ 119,500 $16,393,841 $ 578,417 $8,932,431
------------------------------- ========= ========= =========== ========= ==========
</TABLE>
See accompanying notes.
M-4
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF ASSETS AND LIABILITY (CONTINUED)
DECEMBER 31, 1999
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION OCC
TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $79,563,067) 2,620,778 1,874,323 689,832 180,986 586,589 832,378
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
Total Investments 2,620,778 1,874,323 689,832 180,986 586,589 832,378
Dividend Receivable -- -- -- -- -- --
TOTAL ASSETS 2,620,778 1,874,323 689,832 180,986 586,589 832,378
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 56 40 14 4 13 18
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS $2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360
------------------------------------------- ========== ========== ========= ========= =========== ===========
Percent of net assets 2.19% 1.57% 0.58% 0.15% 0.49% 0.70%
------------------------------------------- ========== ========== ========= ========= =========== ===========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 176,952 91,206 -- -- 47,556 81,740
Unit value $ 10.623 $ 14.003 $ -- $ -- $ 12.334 $ 10.183
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
1,879,685 1,277,133 -- -- 586,576 832,360
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
LVUL Policies:
Units in accumulation period 73,463 48,482 45,686 18,919 -- --
Unit value $ 9.837 $ 12.170 $ 15.069 $ 9.513 $ -- $ --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
722,651 590,017 688,461 179,970 -- --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
VUL-DB Policies:
Units in accumulation period 1,760 592 89 89 -- --
Unit value $ 10.448 $ 12.059 $ 15.277 $ 11.386 $ -- $ --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
18,386 7,133 1,357 1,012 -- --
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS $2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360
------------------------------------------- ========== ========== ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------------------
ASSETS
Investments at Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $ --
Investments at Market--Unaffiliated
(Cost $79,563,067) 305,090 3,106,566 1,308,007 509,120 67,325
------------------------------------------- --------- ----------- ----------- --------- ---------
Total Investments 305,090 3,106,566 1,308,007 509,120 67,325
Dividend Receivable -- -- -- -- --
TOTAL ASSETS 305,090 3,106,566 1,308,007 509,120 67,325
LIABILITY--
Payable to The Lincoln National Life
Insurance Company 7 67 27 11 1
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS $ 305,083 $ 3,106,499 $ 1,307,980 $ 509,109 $ 67,324
------------------------------------------- ========= =========== =========== ========= =========
Percent of net assets 0.26% 2.60% 1.09% 0.43% 0.06%
------------------------------------------- ========= =========== =========== ========= =========
NET ASSETS ARE REPRESENTED BY:
VUL I Policies:
Units in accumulation period 25,362 263,418 -- 42,937 --
Unit value $ 12.029 $ 11.793 $ -- $ 11.857 $ --
------------------------------------------- --------- ----------- ----------- --------- ---------
305,083 3,106,499 -- 509,109 --
------------------------------------------- --------- ----------- ----------- --------- ---------
LVUL Policies:
Units in accumulation period -- -- 115,540 -- 5,620
Unit value $ -- $ -- $ 11.267 $ -- $ 11.540
------------------------------------------- --------- ----------- ----------- --------- ---------
-- -- 1,301,803 -- 64,855
------------------------------------------- --------- ----------- ----------- --------- ---------
VUL-DB Policies:
Units in accumulation period -- -- 528 -- 205
Unit value $ -- $ -- $ 11.696 $ -- $ 12.069
------------------------------------------- --------- ----------- ----------- --------- ---------
-- -- 6,177 -- 2,469
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS $ 305,083 $ 3,106,499 $ 1,307,980 $ 509,109 $ 67,324
------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
M-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENTS OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM V.I. AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment
income $ 38,020 $ 508 $ 7,032 $ 2,314 $ -- $ 3,875
Dividends from net realized
gains on investments 119,630 9,006 2,243 43,375 -- 34,275
Mortality and expense
guarantees - VUL I (12,114) (528) (244) (893) -- (797)
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET INVESTMENT INCOME (LOSS) 145,536 8,986 9,031 44,796 -- 37,353
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 13,135 572 (231) 1,004 -- 2,502
Net change in unrealized
appreciation or
depreciation on investments 502,853 44,531 (7,193) 70,745 -- 69,059
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 515,988 45,103 (7,424) 71,749 -- 71,561
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 661,524 $ 54,089 $ 1,607 $ 116,545 $ -- $ 108,914
-------------------------------- =========== ========== ========= ========== =========== ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ 708,072 $ 2,374 $ 28,453 $ 19,481 $ 827 $ 32,972
Dividends from net realized
gains on investments 1,043,858 74,078 -- 341,494 3,472 172,422
Mortality and expense
guarantees:
VUL I (270,610) (14,995) (2,683) (21,104) -- (29,392)
LVUL (82,320) -- -- (9,893) (195) (10,866)
VUL-DB (311) -- -- (18) (2) (23)
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET INVESTMENT INCOME (LOSS) 1,398,689 61,457 25,770 329,960 4,102 165,113
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 528,621 57,689 (1,348) 82,345 282 94,081
Net change in unrealized
appreciation or
depreciation on investments 11,833,812 894,541 (32,495) 1,409,677 33,598 1,487,488
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 12,362,433 952,230 (33,843) 1,492,022 33,880 1,581,569
-------------------------------- ----------- ---------- --------- ---------- ----------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $13,761,122 $1,013,687 $ (8,073) $1,821,982 $ 37,982 $1,746,682
-------------------------------- =========== ========== ========= ========== =========== ==========
<CAPTION>
AVIS AVIS BT
AVIS GROWTH & GLOBAL SMALL BARON EAFE
GROWTH INCOME CAPITALIZATION CAPITAL EQUITY
CLASS 2 CLASS 2 CLASS 2 ASSET INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-----------------------------
PERIOD FROM JUNE 18, 1998 TO
Net Investment Income (Loss):
Dividends from investment
income $ -- $ -- $ -- $ -- $ --
Dividends from net realized
gains on investments -- -- -- -- --
Mortality and expense
guarantees - VUL I -- -- -- -- --
----------------------------- --------- --------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) -- -- -- -- --
Net Realized and Unrealized G
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- -- --
Net change in unrealized
appreciation or
depreciation on investme -- -- -- -- --
----------------------------- --------- --------- ----------- --------- ---------
NET REALIZED AND UNREALIZED G
(LOSS) ON INVESTMENTS -- -- -- -- --
----------------------------- --------- --------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NE
ASSETS RESULTING FROM
OPERATIONS $ -- $ -- $ -- $ -- $ --
----------------------------- ========= ========= =========== ========= =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ -- $ 5 $ -- $ 1 $ 9,596
Dividends from net realized
gains on investments 1,059 211 107 11 17,927
Mortality and expense
guarantees:
VUL I -- -- -- -- --
LVUL -- -- -- (263) (654)
VUL-DB (8) (2) (2) (2) (3)
----------------------------- --------- --------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) 1,051 214 105 (253) 26,866
Net Realized and Unrealized G
(Loss) on Investments:
Net realized gain (loss) on
investments 2 (1) 6 (623) 2,214
Net change in unrealized
appreciation or
depreciation on investme 622 (100) 195 29,918 39,201
----------------------------- --------- --------- ----------- --------- ---------
NET REALIZED AND UNREALIZED G
(LOSS) ON INVESTMENTS 624 (101) 201 29,295 41,415
----------------------------- --------- --------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NE
ASSETS RESULTING FROM
OPERATIONS $ 1,675 $ 113 $ 306 $ 29,042 $ 68,281
----------------------------- ========= ========= =========== ========= =========
</TABLE>
See accompanying notes.
M-6
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BT BT DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ 4,231 $ -- $ -- $ -- $ -- $ -- $ --
Dividends from net realized
gains on investments 27,082 -- -- -- -- -- --
Mortality and expense guarantees
- VUL I (2,531) -- -- -- (17) (247) --
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) 28,782 -- -- -- (17) (247) --
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 3,674 -- -- -- (75) 946 --
Net change in unrealized
appreciation or depreciation
on investments 111,040 -- -- -- (512) 19,663 --
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 114,714 -- -- -- (587) 20,609 --
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 143,496 $ -- $ -- $ -- $ (604) $ 20,362 $ --
---------------------------------- ========== ========= ========= ========= ========= ========= =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 125,411 $ 4,719 $ 4,476 $ -- $ 747 $ 7,394 $ --
Dividends from net realized
gains on investments 58,975 13,510 -- -- -- 3,033 --
Mortality and expense
guarantees:
VUL I (57,431) -- -- -- (1,046) (8,959) --
LVUL (12,968) (508) (308) (57) (395) (600) (15)
VUL-DB (13) (2) (2) (2) (6) (2) (2)
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET INVESTMENT INCOME (LOSS) 113,974 17,719 4,166 (59) (700) 866 (17)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 121,178 614 (227) 140 618 (14,536) (19)
Net change in unrealized
appreciation or depreciation
on investments 1,738,936 38,073 (3,867) 812 106,630 (17,712) 47
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 1,860,114 38,687 (4,094) 952 107,248 (32,248) 28
---------------------------------- ---------- --------- --------- --------- --------- --------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $1,974,088 $ 56,406 $ 72 $ 893 $ 106,548 $ (31,382) $ 11
---------------------------------- ========== ========= ========= ========= ========= ========= =========
<CAPTION>
FIDELITY FIDELITY FIDELITY
DELAWARE VIP VIP II VIP II
PREMIUM EQUITY- ASSET CONTRAFUND
TREND INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
PERIOD FROM JUNE 18, 1998 TO DE
Net Investment Income (Loss):
Dividends from investment inc $ -- $ -- $ -- $ --
Dividends from net realized
gains on investments -- -- -- --
Mortality and expense guarant
- VUL I (225) (881) (73) --
------------------------------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) (225) (881) (73) --
Net Realized and Unrealized Gai
(Loss) on Investments:
Net realized gain (loss) on
investments 593 1,374 362 --
Net change in unrealized
appreciation or depreciati
on investments 30,739 48,819 4,003 --
------------------------------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAI
(LOSS) ON INVESTMENTS 31,332 50,193 4,365 --
------------------------------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 31,107 $ 49,312 $ 4,292 $ --
------------------------------- ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment inc $ 46 $ 18,261 $ 4,204 $ --
Dividends from net realized
gains on investments -- 40,365 5,324 --
Mortality and expense
guarantees:
VUL I (7,115) (23,929) (3,903) --
LVUL (1,652) -- -- (3,052)
VUL-DB (5) -- -- (8)
------------------------------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) (8,726) 34,697 5,625 (3,060)
Net Realized and Unrealized Gai
(Loss) on Investments:
Net realized gain (loss) on
investments 22,249 5,664 1,235 8,471
Net change in unrealized
appreciation or depreciati
on investments 899,442 (12,316) 55,916 213,827
------------------------------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAI
(LOSS) ON INVESTMENTS 921,691 (6,652) 57,151 222,298
------------------------------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 912,965 $ 28,045 $ 62,776 $ 219,238
------------------------------- ========= ========= ========= ==========
</TABLE>
See accompanying notes.
M-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY JANUS
FIDELITY VIP III JANUS ASPEN
VIP II GROWTH ASPEN SERIES LN
INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL
GRADE BOND SERVICE CLASS BALANCED GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ -- $ --
Dividends from net realized
gains on investments -- -- -- -- -- --
Mortality and expense guarantees
- VUL I (461) -- -- -- -- --
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) (461) -- -- -- -- --
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments 72 -- -- -- -- --
Net change in unrealized
appreciation or depreciation
on investments 5,094 -- -- -- -- --
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS 5,166 -- -- -- -- --
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 4,705 $ -- $ -- $ -- $ -- $ --
---------------------------------- ========== =========== ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 21,279 $ -- $ 31,010 $ 3 $ 21,511 $ --
Dividends from net realized
gains on investments 6,676 -- -- -- -- --
Mortality and expense
guarantees:
VUL I (11,282) -- -- -- -- --
LVUL -- (1,669) (3,457) (4,060) (1,523) (2,227)
VUL-DB -- (2) (11) (14) (3) (13)
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) 16,673 (1,671) 27,542 (4,071) 19,985 (2,240)
Net Realized and Unrealized Gain
(Loss) on Investments:
Net realized gain (loss) on
investments (6,618) (2,551) 15,984 13,553 (144) 24,904
Net change in unrealized
appreciation or depreciation
on investments (28,284) 35,718 187,623 718,343 (45,375) 209,924
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAIN
(LOSS) ON INVESTMENTS (34,902) 33,167 203,607 731,896 (45,519) 234,828
---------------------------------- ---------- ----------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (18,229) $ 31,496 $ 231,149 $ 727,825 $ (25,534) $ 232,588
---------------------------------- ========== =========== ========= ========= ========= ==========
<CAPTION>
LN
LN GLOBAL LN LN MFS
EQUITY- ASSET MONEY SOCIAL EMERGING
INCOME ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
PERIOD FROM JUNE 18, 1998 TO DE
Net Investment Income (Loss):
Dividends from investment inc $ -- $ -- $ 19,001 $ -- $ --
Dividends from net realized
gains on investments -- -- -- -- --
Mortality and expense guarant
- VUL I -- -- (3,216) -- (252)
------------------------------- --------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) -- -- 15,785 -- (252)
Net Realized and Unrealized Gai
(Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- -- 592
Net change in unrealized
appreciation or depreciati
on investments -- -- -- -- 41,059
------------------------------- --------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAI
(LOSS) ON INVESTMENTS -- -- -- -- 41,651
------------------------------- --------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ -- $ -- $ 15,785 $ -- $ 41,399
------------------------------- ========= ========= ========= ========= ==========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment inc $ 297 $ 374 $ 293,414 $ 1,906 $ --
Dividends from net realized
gains on investments -- -- -- -- --
Mortality and expense
guarantees:
VUL I -- -- (34,391) -- (10,782)
LVUL (153) (133) (13,538) (1,071) (8,916)
VUL-DB (2) (2) (135) (2) (10)
------------------------------- --------- --------- --------- --------- ----------
NET INVESTMENT INCOME (LOSS) 142 239 245,350 833 (19,708)
Net Realized and Unrealized Gai
(Loss) on Investments:
Net realized gain (loss) on
investments 519 12 -- 2,621 61,460
Net change in unrealized
appreciation or depreciati
on investments 7,477 6,950 -- 41,921 2,881,313
------------------------------- --------- --------- --------- --------- ----------
NET REALIZED AND UNREALIZED GAI
(LOSS) ON INVESTMENTS 7,996 6,962 -- 44,542 2,942,773
------------------------------- --------- --------- --------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 8,138 $ 7,201 $ 245,350 $ 45,375 $2,923,065
------------------------------- ========= ========= ========= ========= ==========
</TABLE>
See accompanying notes.
M-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENTS OF OPERATIONS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION OCC
TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ 1,059 $ --
Dividends from net realized gains on
investments -- -- -- -- 3,647 2
Mortality and expense guarantees - VUL I (451) (319) -- -- (104) (140)
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INVESTMENT INCOME (LOSS) (451) (319) -- -- 4,602 (138)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 599 600 -- -- 660 85
Net change in unrealized appreciation or
depreciation on investments 18,520 15,337 -- -- 1,012 4,808
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 19,119 15,937 -- -- 1,672 4,893
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 18,668 $ 15,618 $ -- $ -- $ 6,274 $ 4,755
-------------------------------------------- ========= ========= ========= ========= =========== ===========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 23,209 $ 7,124 $ -- $ -- $ 7,695 $ 3,979
Dividends from net realized gains on
investments 43,039 35,818 -- -- 80,398 8,929
Mortality and expense guarantees:
VUL I (11,122) (6,403) -- -- (2,314) (4,000)
LVUL (1,110) (853) (774) (436) -- --
VUL-DB (9) (3) (2) (2) -- --
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INVESTMENT INCOME (LOSS) 54,007 35,683 (776) (438) 85,779 8,908
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 1,031 20,214 7,203 (2,057) 5,559 851
Net change in unrealized appreciation or
depreciation on investments (24,617) 281,617 159,991 4,883 (20,051) (1,286)
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS (23,586) 301,831 167,194 2,826 (14,492) (435)
-------------------------------------------- --------- --------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 30,421 $ 337,514 $ 166,418 $ 2,388 $ 71,287 $ 8,473
-------------------------------------------- ========= ========= ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
--------------------------------------------
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 19
Net Investment Income (Loss):
Dividends from investment income $ -- $ -- $ -- $ -- $ --
Dividends from net realized gains on
investments -- -- -- -- --
Mortality and expense guarantees - VUL I (45) (582) -- (108) --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) (45) (582) -- (108) --
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 234 (357) -- (71) --
Net change in unrealized appreciation or
depreciation on investments 2,272 21,136 -- 2,721 --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 2,506 20,779 -- 2,650 --
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 2,461 $ 20,197 $ -- $ 2,542 $ --
-------------------------------------------- ========= =========== =========== ========= =========
YEAR ENDED DECEMBER 31, 1999
Net Investment Income (Loss):
Dividends from investment income $ 1,857 $ 32,375 $ -- $ 3,072 $ --
Dividends from net realized gains on
investments 10,335 112,459 -- 14,216 --
Mortality and expense guarantees:
VUL I (1,295) (16,129) -- (2,335) --
LVUL -- -- (906) -- (68)
VUL-DB -- -- 3 -- (2)
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INVESTMENT INCOME (LOSS) 10,897 128,705 (903) 14,953 (70)
Net Realized and Unrealized Gain (Loss) on
Investments:
Net realized gain (loss) on investments 48 6,081 (86) (193) 196
Net change in unrealized appreciation or
depreciation on investments 23,978 348,831 86,846 69,824 5,753
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET REALIZED AND UNREALIZED GAIN (LOSS) ON
INVESTMENTS 24,026 354,912 86,760 69,631 5,949
-------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS $ 34,923 $ 483,617 $ 85,857 $ 84,584 $ 5,879
-------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
M-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
AIM AIM AIM
V.I. V.I. AIM V.I. AIM
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 145,536 $ 8,986 $ 9,031 $ 44,796 $ -- $ 37,353
Net realized gain (loss) on
investments 13,135 572 (231) 1,004 -- 2,502
Net change in unrealized appreciation
or depreciation on investments 502,853 44,531 (7,193) 70,745 -- 69,059
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 661,524 54,089 1,607 116,545 -- 108,914
Change From Unit Transactions:
Participant purchases 20,516,015 440,198 220,792 871,193 -- 1,007,254
Participant withdrawals (6,789,814) (27,149) (42,127) (56,295) -- (61,324)
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 13,726,201 413,049 178,665 814,898 -- 945,930
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 14,387,725 467,138 180,272 931,443 -- 1,054,844
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 14,387,725 467,138 180,272 931,443 -- 1,054,844
Changes From Operations:
Net investment income (loss) 1,398,689 61,457 25,770 329,960 4,102 165,113
Net realized gain (loss) on
investments 528,621 57,689 (1,348) 82,345 282 94,081
Net change in unrealized appreciation
or depreciation on investments 11,833,812 894,541 (32,495) 1,409,677 33,598 1,487,488
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 13,761,122 1,013,687 (8,073) 1,821,982 37,982 1,746,682
Change From Unit Transactions:
Participant purchases 139,928,307 2,409,008 354,673 9,187,445 178,708 12,407,218
Participant withdrawals (48,553,197) (324,017) (66,027) (901,664) (7,977) (1,112,168)
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 91,375,110 2,084,991 288,646 8,285,781 170,731 11,295,050
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 105,136,232 3,098,678 280,573 10,107,763 208,713 13,041,732
--------------------------------------- ------------ ---------- --------- ----------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1999 $119,523,957 $3,565,816 $ 460,845 $11,039,206 $ 208,713 $14,096,576
--------------------------------------- ============ ========== ========= =========== =========== ===========
<CAPTION>
AVIS AVIS
AVIS GROWTH & GLOBAL SMALL BARON BT
GROWTH INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
---------------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ -- $ -- $ --
Net realized gain (loss) on
investments -- -- -- -- --
Net change in unrealized appreciation
or depreciation on investments -- -- -- -- --
--------------------------------------- --------- --------- ----------- --------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS -- -- -- -- --
Change From Unit Transactions:
Participant purchases -- -- -- -- --
Participant withdrawals -- -- -- -- --
--------------------------------------- --------- --------- ----------- --------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS -- -- -- -- --
--------------------------------------- --------- --------- ----------- --------- -----------
TOTAL INCREASE IN NET ASSETS -- -- -- -- --
--------------------------------------- --------- --------- ----------- --------- -----------
NET ASSETS AT DECEMBER 31, 1998 -- -- -- -- --
Changes From Operations:
Net investment income (loss) 1,051 214 105 (253) 26,866
Net realized gain (loss) on
investments 2 (1) 6 (623) 2,214
Net change in unrealized appreciation
or depreciation on investments 622 (100) 195 29,918 39,201
--------------------------------------- --------- --------- ----------- --------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 1,675 113 306 29,042 68,281
Change From Unit Transactions:
Participant purchases 49,345 1,320 991 295,372 582,674
Participant withdrawals (2,701) (138) (109) (25,121) (37,848)
--------------------------------------- --------- --------- ----------- --------- -----------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 46,644 1,182 882 270,251 544,826
--------------------------------------- --------- --------- ----------- --------- -----------
TOTAL INCREASE IN NET ASSETS 48,319 1,295 1,188 299,293 613,107
--------------------------------------- --------- --------- ----------- --------- -----------
NET ASSETS AT DECEMBER 31, 1999 $ 48,319 $ 1,295 $ 1,188 $ 299,293 $ 613,107
--------------------------------------- ========= ========= =========== ========= ===========
</TABLE>
See accompanying notes.
M-10
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BT BT DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 28,782 $ -- $ -- $ -- $ (17) $ (247) $ --
Net realized gain (loss) on
investments 3,674 -- -- -- (75) 946 --
Net change in unrealized
appreciation or depreciation on
investments 111,040 -- -- -- (512) 19,663 --
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 143,496 -- -- -- (604) 20,362 --
Change From Unit Transactions:
Participant purchases 2,738,345 -- -- -- 15,958 278,003 --
Participant withdrawals (53,631) -- -- -- (1,610) (18,198) --
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 2,684,714 -- -- -- 14,348 259,805 --
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 2,828,210 -- -- -- 13,744 280,167 --
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1998 2,828,210 -- -- -- 13,744 280,167 --
Changes From Operations:
Net investment income (loss) 113,974 17,719 4,166 (59) (700) 866 (17)
Net realized gain (loss) on
investments 121,178 614 (227) 140 618 (14,536) (19)
Net change in unrealized
appreciation or depreciation on
investments 1,738,936 38,073 (3,867) 812 106,630 (17,712) 47
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 1,974,088 56,406 72 893 106,548 (31,382) 11
Change From Unit Transactions:
Participant purchases 16,329,550 459,957 202,822 70,663 667,277 2,370,132 9,578
Participant withdrawals (1,021,337) (16,234) (11,012) (2,381) (44,689) (266,984) (739)
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 15,308,213 443,723 191,810 68,282 622,588 2,103,148 8,839
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
TOTAL INCREASE IN NET ASSETS 17,282,301 500,129 191,882 69,175 729,136 2,071,766 8,850
---------------------------------- ----------- --------- --------- --------- --------- ---------- ---------
NET ASSETS AT DECEMBER 31, 1999 $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850
---------------------------------- =========== ========= ========= ========= ========= ========== =========
<CAPTION>
FIDELITY FIDELITY FIDELITY
DELAWARE VIP VIP II VIP II
PREMIUM EQUITY- ASSET CONTRAFUND
TREND INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
-------------------------------
Changes From Operations:
Net investment income (loss) $ (225) $ (881) $ (73) $ --
Net realized gain (loss) on
investments 593 1,374 362 --
Net change in unrealized
appreciation or depreciation
investments 30,739 48,819 4,003 --
------------------------------- ---------- ---------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 31,107 49,312 4,292 --
Change From Unit Transactions:
Participant purchases 316,822 874,010 86,282 --
Participant withdrawals (10,588) (59,221) (9,144) --
------------------------------- ---------- ---------- --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 306,234 814,789 77,138 --
------------------------------- ---------- ---------- --------- ----------
TOTAL INCREASE IN NET ASSETS 337,341 864,101 81,430 --
------------------------------- ---------- ---------- --------- ----------
NET ASSETS AT DECEMBER 31, 1998 337,341 864,101 81,430 --
Changes From Operations:
Net investment income (loss) (8,726) 34,697 5,625 (3,060)
Net realized gain (loss) on
investments 22,249 5,664 1,235 8,471
Net change in unrealized
appreciation or depreciation
investments 899,442 (12,316) 55,916 213,827
------------------------------- ---------- ---------- --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 912,965 28,045 62,776 219,238
Change From Unit Transactions:
Participant purchases 2,605,257 4,049,302 844,190 2,269,529
Participant withdrawals (202,326) (426,450) (90,989) (117,183)
------------------------------- ---------- ---------- --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 2,402,931 3,622,852 753,201 2,152,346
------------------------------- ---------- ---------- --------- ----------
TOTAL INCREASE IN NET ASSETS 3,315,896 3,650,897 815,977 2,371,584
------------------------------- ---------- ---------- --------- ----------
NET ASSETS AT DECEMBER 31, 1999 $3,653,237 $4,514,998 $ 897,407 $2,371,584
------------------------------- ========== ========== ========= ==========
</TABLE>
See accompanying notes.
M-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
FIDELITY JANUS
FIDELITY VIP III JANUS ASPEN
VIP II GROWTH ASPEN SERIES LN
INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL
GRADE BOND SERVICE CLASS BALANCED GROWTH BOND APPRECIATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
---------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (461) $ -- $ -- $ -- $ -- $ --
Net realized gain (loss) on
investments 72 -- -- -- -- --
Net change in unrealized
appreciation or depreciation on
investments 5,094 -- -- -- -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 4,705 -- -- -- -- --
Change From Unit Transactions:
Participant purchases 474,803 -- -- -- -- --
Participant withdrawals (30,157) -- -- -- -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 444,646 -- -- -- -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 449,351 -- -- -- -- --
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1998 449,351 -- -- -- -- --
Changes From Operations:
Net investment income (loss) 16,673 (1,671) 27,542 (4,071) 19,985 (2,240)
Net realized gain (loss) on
investments (6,618) (2,551) 15,984 13,553 (144) 24,904
Net change in unrealized
appreciation or depreciation on
investments (28,284) 35,718 187,623 718,343 (45,375) 209,924
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS (18,229) 31,496 231,149 727,825 (25,534) 232,588
Change From Unit Transactions:
Participant purchases 2,084,025 1,526,114 2,965,963 3,562,159 2,337,796 2,171,761
Participant withdrawals (202,400) (72,548) (187,384) (197,988) (61,866) (96,690)
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 1,881,625 1,453,566 2,778,579 3,364,171 2,275,930 2,075,071
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
TOTAL INCREASE IN NET ASSETS 1,863,396 1,485,062 3,009,728 4,091,996 2,250,396 2,307,659
---------------------------------- ---------- ----------- ---------- ---------- ---------- ----------
NET ASSETS AT DECEMBER 31, 1999 $2,312,747 $ 1,485,062 $3,009,728 $4,091,996 $2,250,396 $2,307,659
---------------------------------- ========== =========== ========== ========== ========== ==========
<CAPTION>
LN
LN GLOBAL LN LN MFS
EQUITY- ASSET MONEY SOCIAL EMERGING
INCOME ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ -- $ 15,785 $ -- $ (252)
Net realized gain (loss) on
investments -- -- -- -- 592
Net change in unrealized
appreciation or depreciation
investments -- -- -- 41,059
------------------------------- --------- --------- ------------ --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS -- -- 15,785 -- 41,399
Change From Unit Transactions:
Participant purchases -- -- 10,886,091 -- 308,188
Participant withdrawals -- -- (6,303,498) -- (18,804)
------------------------------- --------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS -- -- 4,582,593 -- 289,384
------------------------------- --------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS -- -- 4,598,378 -- 330,783
------------------------------- --------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1998 -- -- 4,598,378 -- 330,783
Changes From Operations:
Net investment income (loss) 142 239 245,350 833 (19,708)
Net realized gain (loss) on
investments 519 12 -- 2,621 61,460
Net change in unrealized
appreciation or depreciation
investments 7,477 6,950 -- 41,921 2,881,313
------------------------------- --------- --------- ------------ --------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS 8,138 7,201 245,350 45,375 2,923,065
Change From Unit Transactions:
Participant purchases 214,187 117,417 52,799,689 556,555 6,133,471
Participant withdrawals (7,825) (5,118) (41,249,576) (23,513) (454,888)
------------------------------- --------- --------- ------------ --------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM UNIT
TRANSACTIONS 206,362 112,299 11,550,113 533,042 5,678,583
------------------------------- --------- --------- ------------ --------- ----------
TOTAL INCREASE IN NET ASSETS 214,500 119,500 11,795,463 578,417 8,601,648
------------------------------- --------- --------- ------------ --------- ----------
NET ASSETS AT DECEMBER 31, 1999 $ 214,500 $ 119,500 $ 16,393,841 $ 578,417 $8,932,431
------------------------------- ========= ========= ============ ========= ==========
</TABLE>
See accompanying notes.
M-12
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
STATEMENT OF CHANGES IN NET ASSETS (CONTINUED)
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998 AND THE YEAR ENDED DECEMBER 31,
1999
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION OCC
TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
-----------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (451) $ (319) $ -- $ -- $ 4,602 $ (138)
Net realized gain (loss) on investments 599 600 -- -- 660 85
Net change in unrealized appreciation or
depreciation on investments 18,520 15,337 -- -- 1,012 4,808
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 18,668 15,618 -- -- 6,274 4,755
Change From Unit Transactions:
Participant purchases 608,312 323,546 -- -- 96,433 188,146
Participant withdrawals (24,996) (11,122) -- -- (5,799) (9,805)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 583,316 312,424 -- -- 90,634 178,341
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 601,984 328,042 -- -- 96,908 183,096
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1998 601,984 328,042 -- -- 96,908 183,096
Changes From Operations:
Net investment income (loss) 54,007 35,683 (776) (438) 85,779 8,908
Net realized gain (loss) on investments 1,031 20,214 7,203 (2,057) 5,559 851
Net change in unrealized appreciation or
depreciation on investments (24,617) 281,617 159,991 4,883 (20,051) (1,286)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 30,421 337,514 166,418 2,388 71,287 8,473
Change From Unit Transactions:
Participant purchases 2,244,107 1,371,422 540,452 320,403 475,911 731,060
Participant withdrawals (255,790) (162,695) (17,052) (141,809) (57,530) (90,269)
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 1,988,317 1,208,727 523,400 178,594 418,381 640,791
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
TOTAL INCREASE IN NET ASSETS 2,018,738 1,546,241 689,818 180,982 489,668 649,264
------------------------------------------- ---------- ---------- --------- --------- ----------- -----------
NET ASSETS AT DECEMBER 31, 1999 $2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360
------------------------------------------- ========== ========== ========= ========= =========== ===========
<CAPTION>
TEMPLETON TEMPLETON TEMPLETON
ASSET TEMPLETON INTERNATIONAL TEMPLETON STOCK
ALLOCATION INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
-------------------------------------------
Changes From Operations:
Net investment income (loss) $ (45) $ (582) $ -- $ (108) $ --
Net realized gain (loss) on investments 234 (357) -- (71) --
Net change in unrealized appreciation or
depreciation on investments 2,272 21,136 -- 2,721 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 2,461 20,197 -- 2,542 --
Change From Unit Transactions:
Participant purchases 37,943 643,263 -- 100,433 --
Participant withdrawals (3,417) (35,182) -- (7,747) --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 34,526 608,081 -- 92,686 --
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 36,987 628,278 -- 95,228 --
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1998 36,987 628,278 -- 95,228 --
Changes From Operations:
Net investment income (loss) 10,897 128,705 (903) 14,953 (70)
Net realized gain (loss) on investments 48 6,081 (86) (193) 196
Net change in unrealized appreciation or
depreciation on investments 23,978 348,831 86,846 69,824 5,753
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE (DECREASE) IN NET ASSETS
RESULTING FROM OPERATIONS 34,923 483,617 85,857 84,584 5,879
Change From Unit Transactions:
Participant purchases 274,773 2,425,159 1,275,318 387,649 67,905
Participant withdrawals (41,600) (430,555) (53,195) (58,352) (6,460)
------------------------------------------- --------- ----------- ----------- --------- ---------
NET INCREASE IN NET ASSETS RESULTING FROM
UNIT TRANSACTIONS 233,173 1,994,604 1,222,123 329,297 61,445
------------------------------------------- --------- ----------- ----------- --------- ---------
TOTAL INCREASE IN NET ASSETS 268,096 2,478,221 1,307,980 413,881 67,324
------------------------------------------- --------- ----------- ----------- --------- ---------
NET ASSETS AT DECEMBER 31, 1999 $ 305,083 $ 3,106,499 $ 1,307,980 $ 509,109 $ 67,324
------------------------------------------- ========= =========== =========== ========= =========
</TABLE>
See accompanying notes.
M-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION
THE VARIABLE ACCOUNT:
Lincoln Life Flexible Premium Variable Life Account M (the
Variable Account) is a segregated investment account of The
Lincoln National Life Insurance Company (Lincoln Life) and
is registered as a unit investment trust with the Securities
and Exchange Commission under the Investment Company Act of
1940, as amended. The operations of the Variable Account,
which commenced on June 18, 1998, are part of the operations
of Lincoln Life. The Variable Account consist of three
products which are listed below.
--VUL I
--LVUL
--VUL-DB
The assets of the Variable Account are owned by Lincoln
Life. The portion of the Variable Account's assets
supporting the variable life policies may not be used to
satisfy liabilities arising from any other business of
Lincoln Life.
BASIS OF PRESENTATION:
The accompanying financial statements have been prepared in
accordance with accounting principles generally accepted in
the United States for unit investment trusts.
INVESTMENTS:
The assets of the Variable Account are divided into variable
subaccounts each of which is invested in shares of one of 43
portfolios of fourteen diversified open-end management
investment companies, each portfolio with its own investment
objective. The variable subaccounts are:
AIM Variable Insurance Funds, Inc.:
AIM V.I. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
American Variable Insurance Series (AVIS):
AVIS Growth Class 2 Fund
AVIS Growth & Income Class 2 Fund
AVIS Global Small Capitlization Class 2 Fund
Baron Capital Funds Trust:
Baron Capital Asset Fund
BT Insurance Funds Trust:
EAFE Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
Delaware Group Premium Fund, Inc.:
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
Fidelity Variable Insurance Products Fund:
Equity-Income Portfolio
M-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
Fidelity Variable Insurance Products Fund II:
Asset Manager Portfolio
Contrafund Service Class Portfolio
Investment Grade Bond Portfolio
Fidelity Variable Insurance Products Fund III:
Growth Opportunities Service Class Portfolio
Janus Aspen Series:
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
Lincoln National (LN):
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
Neuberger Berman Advisers Management Trust (AMT):
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Templeton Variable Products Series Fund:
Templeton Asset Allocation Fund
Templeton International Fund
Templeton International Class 2 Fund
Templeton Stock Fund
Templeton Stock Class 2 Fund
Investments in the variable subaccounts are stated at the
closing net asset value per share on December 31, 1999,
which approximates fair value. The difference between cost
and fair value is reflected as unrealized appreciation and
depreciation of investments.
Investment transactions are accounted for on a trade date
basis. The cost of investments sold is determined by the
average cost method.
DIVIDENDS:
Dividends paid to the Variable Account are automatically
reinvested in shares of the variable subaccounts on the
payable date. Dividend income is recorded on the ex-dividend
date.
FEDERAL INCOME TAXES:
Operations of the Variable Account form a part of and are
taxed with operations of Lincoln Life, which is taxed as a
"life insurance company" under the Internal Revenue Code.
The Variable Account will not be taxed as a regulated
investment company under Subchapter M of the Internal
Revenue Code. Using current federal income tax law, no
M-15
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. ACCOUNTING POLICIES AND VARIABLE ACCOUNT INFORMATION (CONTINUED)
federal income taxes are payable with respect to the
Variable Account's net investment income and the net
realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATE
Amounts are paid to Lincoln Life for mortality and expense
guarantees at a percentage of the current value of the
Variable Account each day. The mortality and expense risk
charges for each of the variable subaccounts are reported in
the statements of operations. The rates are as follows for
the three policy types within the Variable Account.
-- VUL I is currently at an annual rate of .80% for policy
years one through twelve and .55% thereafter.
-- LVUL is currently at an annual rate of .75% for policy
years one through ten, .35% for policy years eleven
through twenty and .20% thereafter.
-- VUL-DB is currently at an annual rate of .90% for policy
years one through nineteen and .20% thereafter.
Prior to the allocation of premiums to the Variable Account,
Lincoln Life deducts a premium load of 5% of each premium
payment to cover state taxes and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The premium loads for the year ended December
31, 1999 and the period ended December 31, 1998 amounted to
$3,155,407 and $562,526, respectively.
Lincoln Life charges a monthly administrative fee for items
such as premium billings and collection, policy value
calculation, confirmations and periodic reports. The fees
are as follows for the three policy types within the
Variable Account. Administrative fees for the year ended
December 31, 1999 and the period ended December 31, 1998
totaled $347,173 and $28,319, respectively.
-- VUL I and LVUL are currently $15 per month for the first
policy year and $5 per month thereafter, guaranteed not to
exceed $10 after the first policy year.
-- VUL-DB is currently at $10 per month and during the first
two policy years, a monthly charge per $1,000 of specified
amount.
Lincoln Life assumes responsibility for providing the
insurance benefit included in the policy. Lincoln Life
charges a monthly deduction for the cost of insurance and
any charges for supplemental riders. The cost of insurance
charge depends on the attained age, risk classification,
gender classification (in accordance with state law) and the
current net amount at risk. On a monthly basis, the
administrative fee and the cost of insurance charge are
deducted proportionately for the value of each variable
subaccount and/or fixed account funding options. The fixed
account is part of the general account of Lincoln Life and
is not included in these financial statements. The cost of
insurance charges for the year ended December 31, 1999 and
the period ended December 31, 1998 amounted to $5,399,180
and $501,514, respectively.
Under certain circumstances, Lincoln Life reserves the right
to charge a transfer fee of $25 for each transfer after the
twelfth transfer per year between variable subaccounts. For
the year ended December 31, 1999 and the period ended
December 31, 1998, no transfer fees were deducted from the
variable subaccounts.
Lincoln Life, upon full surrender of a policy, may charge a
surrender charge. This charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs. The amount of the surrender charge, if
any, will depend on the amount of the death benefit, the
amount of premium payments made during the first two policy
years and the age of the policy. In no event will the
surrender charge exceed the maximum
M-16
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATE
(CONTINUED)
allowed by state or federal law. No surrender charge is
imposed on a partial surrender, but an administrative fee of
$25 is imposed, allocated pro-rata among the variable sub-
accounts (and, where applicable, the fixed account) from
which the partial surrender proceeds are taken. Full
surrender charges and partial surrender administrative
charges paid to Lincoln Life attributable to the variable
subaccounts for the year ended December 31, 1999 and the
period ended December 31, 1998 were $351,525 and $3,764
respectively.
M-17
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December 31, 1999.
<TABLE>
<CAPTION>
AIM AIM AIM
V.I. V.I. AIM V.I. AIM
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I.
APPRECIATION INCOME GROWTH EQUITY VALUE
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Accumulation units $105,101,311 $2,498,040 $ 467,311 $ 9,100,679 $ 170,731 $12,240,980
Accumulated net
investment income
(loss) 1,544,225 70,443 34,801 374,756 4,102 202,466
Accumulated net realized
gain (loss) on
investments 541,756 58,261 (1,579) 83,349 282 96,583
Net unrealized
appreciation
(depreciation) on
investments 12,336,665 939,072 (39,688) 1,480,422 33,598 1,556,547
------------ ---------- --------- ----------- ----------- -----------
$119,523,957 $3,565,816 $ 460,845 $11,039,206 $ 208,713 $14,096,576
============ ========== ========= =========== =========== ===========
<CAPTION>
AVIS AVIS
AVIS GROWTH & GLOBAL SMALL BARON BT
GROWTH INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C>
- -------------------------
UNIT TRANSACTIONS:
Accumulation units $ 46,644 $ 1,182 $ 882 $ 270,251 $ 544,826
Accumulated net
investment income
(loss) 1,051 214 105 (253) 26,866
Accumulated net realized
gain (loss) on
investments 2 (1) 6 (623) 2,214
Net unrealized
appreciation
(depreciation) on
investments 622 (100) 195 29,918 39,201
--------- --------- ----------- --------- -----------
$ 48,319 $ 1,295 $ 1,188 $ 299,293 $ 613,107
========= ========= =========== ========= ===========
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BT BT DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Accumulation units $17,992,927 $ 443,723 $ 191,810 $ 68,282 $ 636,936 $2,362,953 $ 8,839
Accumulated net investment
income (loss) 142,756 17,719 4,166 (59) (717) 619 (17)
Accumulated net realized gain
(loss) on investments 124,852 614 (227) 140 543 (13,590) (19)
Net unrealized appreciation
(depreciation) on
investments 1,849,976 38,073 (3,867) 812 106,118 1,951 47
----------- --------- --------- --------- --------- ---------- ---------
$20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850
=========== ========= ========= ========= ========= ========== =========
<CAPTION>
FIDELITY FIDELITY FIDELITY
DELAWARE VIP VIP II VIP II
PREMIUM EQUITY- ASSET CONTRAFUND
TREND INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- -----------------------------
UNIT TRANSACTIONS:
Accumulation units $2,709,165 $4,437,641 $ 830,339 $2,152,346
Accumulated net investment
income (loss) (8,951) 33,816 5,552 (3,060)
Accumulated net realized gain
(loss) on investments 22,842 7,038 1,597 8,471
Net unrealized appreciation
(depreciation) on
investments 930,181 36,503 59,919 213,827
---------- ---------- --------- ----------
$3,653,237 $4,514,998 $ 897,407 $2,371,584
========== ========== ========= ==========
</TABLE>
M-18
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
FIDELITY JANUS
FIDELITY VIP III JANUS ASPEN
VIP II GROWTH ASPEN SERIES LN LN
INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL EQUITY-
GRADE BOND SERVICE CLASS BALANCED GROWTH BOND APPRECIATION INCOME
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Accumulation units $2,326,271 $ 1,453,566 $2,778,579 $3,364,171 $2,275,930 $2,075,071 $ 206,362
Accumulated net investment
income (loss) 16,212 (1,671) 27,542 (4,071) 19,985 (2,240) 142
Accumulated net realized
gain (loss) on
investments (6,546) (2,551) 15,984 13,553 (144) 24,904 519
Net unrealized appreciation
(depreciation) on
investments (23,190) 35,718 187,623 718,343 (45,375) 209,924 7,477
---------- ----------- ---------- ---------- ---------- ---------- ---------
$2,312,747 $ 1,485,062 $3,009,728 $4,091,996 $2,250,396 $2,307,659 $ 214,500
========== =========== ========== ========== ========== ========== =========
<CAPTION>
LN
GLOBAL LN LN MFS
ASSET MONEY SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------
UNIT TRANSACTIONS:
Accumulation units $ 112,299 $16,132,706 $ 533,042 $5,967,967
Accumulated net investment
income (loss) 239 261,135 833 (19,960)
Accumulated net realized
gain (loss) on
investments 12 -- 2,621 62,052
Net unrealized appreciation
(depreciation) on
investments 6,950 -- 41,921 2,922,372
--------- ----------- --------- ----------
$ 119,500 $16,393,841 $ 578,417 $8,932,431
========= =========== ========= ==========
</TABLE>
<TABLE>
<CAPTION>
OCC
MFS AMT ACCUMULATION OCC TEMPLETON
TOTAL MFS MID-CAP AMT GLOBAL ACCUMULATION ASSET
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
Accumulation units $2,571,633 $1,521,151 $ 523,400 $ 178,594 $ 509,015 $ 819,132 $ 267,699
Accumulated net investment
income (loss) 53,556 35,364 (776) (438) 90,381 8,770 10,852
Accumulated net realized
gain (loss) on
investments 1,630 20,814 7,203 (2,057) 6,219 936 282
Net unrealized appreciation
(depreciation) on
investments (6,097) 296,954 159,991 4,883 (19,039) 3,522 26,250
---------- ---------- --------- --------- ----------- ----------- ---------
$2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360 $ 305,083
========== ========== ========= ========= =========== =========== =========
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON INTERNATIONAL TEMPLETON STOCK
INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ----------------------------
UNIT TRANSACTIONS:
Accumulation units $ 2,602,685 $ 1,222,123 $ 421,983 $ 61,445
Accumulated net investment
income (loss) 128,123 (903) 14,845 (70)
Accumulated net realized
gain (loss) on
investments 5,724 (86) (264) 196
Net unrealized appreciation
(depreciation) on
investments 369,967 86,846 72,545 5,753
----------- ----------- --------- ---------
$ 3,106,499 $ 1,307,980 $ 509,109 $ 67,324
=========== =========== ========= =========
</TABLE>
M-19
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the
aggregate proceeds from investments sold were as follows for
1999.
<TABLE>
<CAPTION>
AGGREGATE
AGGREGATE COST PROCEEDS
OF PURCHASES FROM SALES
--------------------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 2,610,001 $ 463,486
AIM V.I. Diversified Income Fund 362,461 48,039
AIM V.I. Growth Fund 9,623,036 1,007,084
AIM V.I. International Fund 178,244 3,407
AIM V.I. Value Fund 12,585,193 1,124,759
AVIS Growth Class 2 Fund 47,737 41
AVIS Growth & Income Class 2 Fund 1,445 49
AVIS Global Small Capitalization Class 2 Fund 1,029 42
Baron Capital Asset Fund 300,039 30,035
BT EAFE Equity Index Fund 732,236 160,531
BT Equity 500 Index Fund 17,914,086 2,491,536
BT Small Cap Index Fund 477,053 15,601
Delaware Premium Delchester Series 205,276 9,909
Delaware Premium Devon Series 81,863 13,639
Delaware Premium Emerging Markets Series 638,536 16,632
Delaware Premium Small Cap Value Series 2,607,909 503,852
Delaware Premium REIT Series 9,211 389
Delaware Premium Trend Series 2,516,446 122,172
Fidelity VIP Equity-Income Portfolio 4,281,437 623,808
Fidelity VIP II Asset Manager Portfolio 857,631 98,787
Fidelity VIP II Contrafund Service Class Portfolio 2,696,137 546,803
Fidelity VIP II Investment Grade Bond Portfolio 2,298,935 400,596
Fidelity VIP III Growth Opportunities Service Class
Portfolio 1,539,602 87,677
Janus Aspen Series Balanced Portfolio 3,372,163 565,980
Janus Aspen Series Worldwide Growth Portfolio 3,774,072 413,889
LN Bond Fund 2,381,393 85,431
LN Capital Appreciation Fund 2,489,962 417,083
LN Equity-Income Fund 225,902 19,394
LN Global Asset Allocation Fund 115,409 2,869
LN Money Market Fund 35,872,572 24,076,862
LN Social Awareness Fund 604,587 70,700
MFS Emerging Growth Series 6,266,405 607,352
MFS Total Return Series 2,352,452 310,085
MFS Utilities Series 1,703,695 459,252
AMT Mid-Cap Growth Portfolio 576,323 53,685
AMT Partners Portfolio 629,264 451,104
OCC Accumulation Global Equity Portfolio 562,334 58,163
OCC Accumulation Managed Portfolio 814,175 164,466
Templeton Asset Allocation Fund 278,181 34,106
Templeton International Fund 2,785,021 661,659
Templeton International Class 2 Fund 1,302,113 80,866
Templeton Stock Fund 407,565 63,310
Templeton Stock Class 2 Fund 64,903 3,527
------------ -----------
$129,144,034 $36,368,657
============ ===========
</TABLE>
M-20
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at December
31, 1999.
<TABLE>
<CAPTION>
NET
SHARES ASSET VALUE OF
OUTSTANDING VALUE SHARES COST OF SHARES
----------------------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 100,222 $35.58 $ 3,565,893 $ 2,626,821
AIM V.I. Diversified Income Fund 45,810 10.06 460,855 500,543
AIM V.I. Growth Fund 342,308 32.25 11,039,437 9,559,015
AIM V.I. International Equity Fund 7,126 29.29 208,717 175,119
AIM V.I. Value Fund 420,802 33.50 14,096,870 12,540,323
AVIS Growth Class 2 Fund 685 70.57 48,320 47,698
AVIS Growth & Income Class 2 Fund 39 33.07 1,295 1,395
AVIS Global Small Capitlization Class 2 Fund 68 17.36 1,188 993
Baron Capital Asset Fund 16,843 17.77 299,299 269,381
BT EAFE Equity Index Fund 45,082 13.60 613,120 573,919
BT Equity 500 Index Fund 1,324,831 15.18 20,110,936 18,260,960
BT Small Cap Index Fund 43,078 11.61 500,139 462,066
Delaware Premium Delchester Series 25,778 7.42 191,273 195,140
Delaware Premium Devon Series 5,079 13.62 69,176 68,364
Delaware Premium Emerging Markets Series 88,441 8.40 742,896 636,778
Delaware Premium Small Cap Value Series 153,124 15.36 2,351,982 2,350,031
Delaware Premium REIT Series 1,021 8.67 8,850 8,803
Delaware Premium Trend Series 108,536 33.66 3,653,313 2,723,132
Fidelity VIP Equity-Income Portfolio 175,616 25.71 4,515,096 4,478,593
Fidelity VIP II Asset Manager Portfolio 48,067 18.67 897,427 837,508
Fidelity VIP II Contrafund Service Class
Portfolio 81,499 29.10 2,371,632 2,157,805
Fidelity VIP II Investment Grade Bond Portfolio 190,197 12.16 2,312,798 2,335,988
Fidelity VIP III Growth Opportunities Service
Class Portfolio 64,234 23.12 1,485,092 1,449,374
Janus Aspen Series Balanced Portfolio 107,800 27.92 3,009,790 2,822,167
Janus Aspen Series Worldwide Growth Portfolio 85,698 47.75 4,092,079 3,373,736
LN Bond Fund 196,793 11.44 2,250,443 2,295,818
LN Capital Appreciation Fund 73,341 31.47 2,307,707 2,097,783
LN Equity-Income Fund 9,730 22.05 214,504 207,027
LN Global Asset Allocation Fund 7,116 16.79 119,502 112,552
LN Money Market Fund 1,639,420 10.00 16,394,196 16,394,196
LN Social Awareness Fund 13,060 44.29 578,429 536,508
MFS Emerging Growth Series 235,441 37.94 8,932,616 6,010,244
MFS Total Return Series 147,649 17.75 2,620,778 2,626,875
MFS Utilities Series 77,580 24.16 1,874,323 1,577,369
AMT Mid-Cap Growth Portfolio 28,388 24.30 689,832 529,841
AMT Partners Portfolio 9,215 19.64 180,986 176,103
OCC Accumulation Global Equity Portfolio 35,422 16.56 586,589 605,628
OCC Accumulation Managed Portfolio 19,069 43.65 832,378 828,856
Templeton Asset Allocation Fund 13,055 23.37 305,090 278,840
Templeton International Fund 139,621 22.25 3,106,566 2,736,599
Templeton International Class 2 Fund 59,106 22.13 1,308,007 1,221,161
Templeton Stock Fund 20,875 24.39 509,120 436,575
Templeton Stock Class 2 Fund 2,772 24.29 67,325 61,572
------------ ------------
$119,525,864 $107,189,199
============ ============
</TABLE>
M-21
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. NEW INVESTMENT FUNDS
Effective May 3, 1999, the AIM V.I. International Equity
Fund, Baron Capital Asset Fund, BT EAFE Equity Index Fund,
BT Small Cap Index Fund, Delaware Premium Delchester Series,
Delaware Premium Devon Series, Delaware Premium REIT Series,
Fidelity VIP II Contrafund Service Class Portfolio, Fidelity
VIP III Growth Opportunity Service Class Portfolio, Janus
Aspen Series Balanced Portfolio, Janus Aspen Series
Worldwide Growth Portfolio, LN Bond Fund, LN Capital
Appreciation Fund, LN Equity-Income Fund, LN Global Asset
Allocation Fund, LN Social Awareness Fund, AMT Mid-Cap
Growth Portfolio, AMT Partners Portfolio, Templeton
International Class 2 Fund and Templeton Stock Class 2 Fund
became available as investment options for the Variable
Account policyholders. Effective October 15, 1999, the AVIS
Growth Fund, AVIS Growth & Income Fund and AVIS Global Small
Capitalization Fund become available as investment options
for the Variable Account policyholders.
M-22
<PAGE>
REPORT OF ERNST & YOUNG LLP,
INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance
Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life
Account M
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
M ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. International Equity, AIM V.I. Value, AVIS Growth Class 2,
AVIS Growth & Income Class 2, AVIS Global Small Capitalization
Class 2, Baron Capital Asset, BT EAFE Equity Index, BT Equity
500 Index, BT Small Cap Index, Delaware Premium Delchester,
Delaware Premium Devon, Delaware Premium Emerging Markets,
Delaware Premium Small Cap Value, Delaware Premium REIT,
Delaware Premium Trend, Fidelity VIP Equity-Income, Fidelity VIP
II Asset Manager, Fidelity VIP II Contrafund Service Class,
Fidelity VIP II Investment Grade Bond, Fidelity VIP III Growth
Opportunities Service Class, Janus Aspen Series Balanced, Janus
Aspen Series Worldwide Growth, Lincoln National Bond, Lincoln
National Capital Appreciation, Lincoln National Equity-Income,
Lincoln National Global Asset Allocation, Lincoln National Money
Market, Lincoln National Social Awareness, MFS Emerging Growth,
MFS Total Return, MFS Utilities, Nueberger Berman Advisers
Management Trust (AMT) Mid-Cap Growth, Neuberger Berman Advisers
Management Trust (AMT) Partners, OCC Accumulation Trust Global
Equity, OCC Accumulation Trust Managed, Templeton Variable
Products Asset Allocation, Templeton Variable Products
International, Templeton Variable Products International Class
2, Templeton Variable Products Stock and Templeton Variable
Products Stock Class 2 subaccounts), as of December 31, 1999,
and the related statements of operations and changes in net
assets for the year ended December 31, 1999 and for the period
from June 18, 1998 to December 31, 1998. These financial
statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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. Our procedures included confirmation of
investments owned as of December 31, 1999, by correspondence
with the custodian. 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.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account M at December 31,
1999, and the results of their operations and the changes in
their net assets for the year ended December 31, 1999 and for
the period from June 18, 1998 to December 31, 1998, in
conformity with accounting principles generally accepted in the
United States.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 24, 2000
M-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
--------- ---------
(IN MILLIONS)
---------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $22,985.0 $23,830.9
- ------------------------------------------------------------
Preferred stocks 253.8 236.0
- ------------------------------------------------------------
Unaffiliated common stocks 166.9 259.3
- ------------------------------------------------------------
Affiliated common stocks 604.7 322.1
- ------------------------------------------------------------
Mortgage loans on real estate 4,211.5 3,932.9
- ------------------------------------------------------------
Real estate 254.0 473.8
- ------------------------------------------------------------
Policy loans 1,652.9 1,606.0
- ------------------------------------------------------------
Other investments 426.6 434.4
- ------------------------------------------------------------
Cash and short-term investments 1,409.2 1,725.4
- ------------------------------------------------------------ --------- ---------
Total cash and investments 31,964.6 32,820.8
- ------------------------------------------------------------
Premiums and fees in course of collection 115.8 33.3
- ------------------------------------------------------------
Accrued investment income 435.3 432.8
- ------------------------------------------------------------
Reinsurance recoverable 199.0 171.6
- ------------------------------------------------------------
Funds withheld by ceding companies 73.5 53.7
- ------------------------------------------------------------
Federal income taxes recoverable from parent company 61.6 64.7
- ------------------------------------------------------------
Goodwill 43.1 49.5
- ------------------------------------------------------------
Other admitted assets 66.7 89.3
- ------------------------------------------------------------
Separate account assets 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total admitted assets $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,184.0 $12,310.6
- ------------------------------------------------------------
Other policyholder funds 16,589.5 16,647.5
- ------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 364.0 897.6
- ------------------------------------------------------------
Funds held under reinsurance treaties 796.9 795.8
- ------------------------------------------------------------
Asset valuation reserve 490.9 484.5
- ------------------------------------------------------------
Interest maintenance reserve 72.3 159.7
- ------------------------------------------------------------
Other liabilities 627.0 504.5
- ------------------------------------------------------------
Short-term loan payable to parent company 205.0 140.0
- ------------------------------------------------------------
Net transfers due from separate accounts (896.5) (789.0)
- ------------------------------------------------------------
Separate account liabilities 46,105.1 36,907.0
- ------------------------------------------------------------ --------- ---------
Total liabilities 76,538.2 68,058.2
- ------------------------------------------------------------
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
- ------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 1,250.0
- ------------------------------------------------------------
Paid-in surplus 1,942.6 1,930.1
- ------------------------------------------------------------
Unassigned surplus -- deficit (691.1) (640.6)
- ------------------------------------------------------------ --------- ---------
Total capital and surplus 2,526.5 2,564.5
- ------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $79,064.7 $70,622.7
- ------------------------------------------------------------ ========= =========
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
--------- --------- --------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 7,273.6 $12,737.6 $5,589.0
- ------------------------------------------------------------
Net investment income 2,203.2 2,107.2 1,847.1
- ------------------------------------------------------------
Amortization of interest maintenance reserve 29.1 26.4 41.5
- ------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 472.3 179.9 99.7
- ------------------------------------------------------------
Expense charges on deposit funds 146.5 134.6 119.3
- ------------------------------------------------------------
Separate account investment management and administration
service fees 473.9 396.3 325.5
- ------------------------------------------------------------
Other income 88.8 31.3 21.3
- ------------------------------------------------------------ --------- --------- --------
Total revenues 10,687.4 15,613.3 8,043.4
- ------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 8,504.9 13,964.1 4,522.1
- ------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 1,618.3 2,919.4 3,053.9
- ------------------------------------------------------------ --------- --------- --------
Total benefits and expenses 10,123.2 16,883.5 7,576.0
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before dividends to
policyholders, income taxes and net realized gain on
investments 564.2 (1,270.2) 467.4
- ------------------------------------------------------------
Dividends to policyholders 80.3 67.9 27.5
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before federal income taxes and
net realized gain on investments 483.9 (1,338.1) 439.9
- ------------------------------------------------------------
Federal income taxes (credit) 85.4 (141.0) 78.3
- ------------------------------------------------------------ --------- --------- --------
Gain (loss) from operations before net realized gain on
investments 398.5 (1,197.1) 361.6
- ------------------------------------------------------------
Net realized gain on investments, net of income tax expense
and excluding net transfers to the interest maintenance
reserve 114.4 46.8 31.3
- ------------------------------------------------------------ --------- --------- --------
Net income (loss) $ 512.9 $(1,150.3) $ 392.9
- ------------------------------------------------------------ ========= ========= ========
</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
1999 1998 1997
-------- -------- --------
(IN MILLIONS)
------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $2,564.5 $2,968.4 $1,868.0
- ------------------------------------------------------------
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) 512.9 (1,150.3) 392.9
- ------------------------------------------------------------
Difference in cost and admitted investment amounts (101.9) (304.8) (36.2)
- ------------------------------------------------------------
Nonadmitted assets (22.9) (17.1) (0.4)
- ------------------------------------------------------------
Regulatory liability for reinsurance 26.0 (35.2) (3.9)
- ------------------------------------------------------------
Gain on reinsurance of disability income business 71.8 -- --
- ------------------------------------------------------------
Life policy reserve valuation basis -- (0.4) (0.9)
- ------------------------------------------------------------
Asset valuation reserve (6.4) (34.5) (36.9)
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Paid-in surplus, including contribution of common stock of
affiliated company in 1997 12.5 108.4 938.4
- ------------------------------------------------------------
Separate account receivable due to change in valuation -- -- (2.6)
- ------------------------------------------------------------
Dividends to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ -------- -------- --------
Capital and surplus at end of year $2,526.5 $2,564.5 $2,968.4
- ------------------------------------------------------------ ======== ======== ========
</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
1999 1998 1997
--------- ---------- ---------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 7,671.1 $ 13,495.2 $ 6,364.3
- ------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (19.9) (632.4) (649.2)
- ------------------------------------------------------------
Investment income received 2,168.6 2,003.9 1,798.8
- ------------------------------------------------------------
Separate account investment management and administration
service fees 470.6 396.3 325.5
- ------------------------------------------------------------
Benefits paid (8,699.4) (7,395.8) (5,345.2)
- ------------------------------------------------------------
Insurance expenses paid (1,734.5) (2,909.7) (3,193.0)
- ------------------------------------------------------------
Proceeds related to sale of disability income business 71.8 -- --
- ------------------------------------------------------------
Federal income taxes recovered (paid) (81.2) 84.2 (87.0)
- ------------------------------------------------------------
Dividends to policyholders (82.8) (12.9) (28.4)
- ------------------------------------------------------------
Other income received and expenses paid, net 252.1 207.0 (8.7)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) operating activities 16.4 5,235.8 (822.9)
- ------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 6,557.7 10,926.5 12,142.6
- ------------------------------------------------------------
Purchase of investments (5,940.8) (16,950.0) (10,345.0)
- ------------------------------------------------------------
Other sources (uses) including reinsured policy loans (497.0) (778.3) 529.1
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) investing activities 119.9 (6,801.8) 2,326.7
- ------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 12.5 108.4 --
- ------------------------------------------------------------
Proceeds from surplus notes from shareholder -- 1,250.0 --
- ------------------------------------------------------------
Proceeds from borrowings from shareholder 205.0 140.0 120.0
- ------------------------------------------------------------
Repayment of borrowings from shareholder (140.0) (120.0) (100.0)
- ------------------------------------------------------------
Dividends paid to shareholder (530.0) (220.0) (150.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net cash provided by (used in) financing activities (452.5) 1,158.4 (130.0)
- ------------------------------------------------------------ --------- ---------- ---------
Net increase (decrease) in cash and short-term investments (316.2) (407.6) 1,373.8
- ------------------------------------------------------------
Cash and short-term investments at beginning of year 1,725.4 2,133.0 759.2
- ------------------------------------------------------------ --------- ---------- ---------
Cash and short-term investments at end of year $ 1,409.2 $ 1,725.4 $ 2,133.0
- ------------------------------------------------------------ ========= ========== =========
</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 (the "Company") is a wholly
owned subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1999, the Company owned 100% of the outstanding
common stock of four insurance company subsidiaries and four non-insurance
subsidiaries. The Company also owned 85% of the common stock of an Internet
distributor of variable annuities.
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 ("Insurance Department"), which practices differ from accounting
principles generally accepted in the United States ("GAAP"). The more
significant variances from GAAP are as follows:
INVESTMENTS
Bonds and preferred stocks 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 and preferred stocks 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. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. 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 a 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 in which the asset giving rise to the gain or loss is sold and
writedowns 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
insurance subsidiaries are carried at their statutory-basis net equity and
the non-insurance subsidiaries are carried at their GAAP-basis net equity,
adjusted for certain items which would be non-admitted under statutory
accounting principles. Both insurance subsidiaries and non-insurance
subsidiaries are presented in the balance sheet as investments in affiliated
common stocks.
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
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 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
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to 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 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 Insurance 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. Business
assumed under 100% indemnity reinsurance agreements is accounted for as a
purchase for GAAP reporting purposes and the ceding commission represents
the purchase price. Under purchase accounting, assets acquired and
liabilities assumed are reported at fair value at the date of the
transaction and the excess of the purchase price over the sum of the amounts
assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting; whereas, such contracts are accounted
for using deposit accounting under GAAP.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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.
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner; whereas, under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
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.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
----------------------------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1999 1998 1999 1998 1997
----------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,526.5 $ 2,564.5 $ 512.9 $(1,150.3) $392.9
-----------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
non-admitted goodwill 3,628.2 3,085.2 135.0 48.5 (98.9)
--------------------------------------
Policy and contract reserves (1,943.1) (2,299.9) (97.9) 1,743.4 (48.6)
--------------------------------------
Interest maintenance reserve 72.3 159.7 (86.6) 24.4 58.7
--------------------------------------
Deferred income taxes 244.5 181.6 (117.4) (218.6) 70.3
--------------------------------------
Policyholders' share of earnings and
surplus on participating business (122.7) (132.8) (1.8) 3.2 5.3
--------------------------------------
Asset valuation reserve 490.9 484.5 -- -- --
--------------------------------------
Net realized gain (loss) on investments (186.4) (174.1) (32.4) (116.7) (20.4)
--------------------------------------
Unrealized gain (loss) on investments (555.2) 1,335.1 -- -- --
--------------------------------------
Nonadmitted assets, including
nonadmitted investments 139.6 119.1 -- -- --
--------------------------------------
Investments in subsidiary companies 460.9 490.4 39.1 41.3 (80.5)
--------------------------------------
Surplus notes and related interest (1,250.0) (1,251.5) 1.5 (1.5) --
--------------------------------------
Other, net (61.0) (120.1) 129.8 103.6 (35.0)
-------------------------------------- --------- --------- --------- --------- ------
Net increase (decrease) 918.0 1,877.2 (30.7) 1,627.6 (149.1)
----------------------------------------- --------- --------- --------- --------- ------
Amounts on a GAAP basis $ 3,444.5 $ 4,441.7 $ 482.2 $ 477.3 $243.8
----------------------------------------- ========= ========= ========= ========= ======
</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
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
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 or deferred in IMR, where
applicable, and are amortized over the remaining lives of the hedged items
as adjustments to investment income. 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 amortized 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 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 are
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 cash collateral received which is
typically greater than the market value of the related securities loaned. In
other instances, the Company will hold as collateral securities with a
market value at least equal to the securities loaned. Securities held as
collateral are not recorded in the Company's balance sheet in accordance
with accounting guidance for secured borrowings and collateral. 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, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
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
Insurance 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 reserves released and 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, benefits 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
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
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 and certain LNC subsidiaries.
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
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
LNC's common stock at the grant date, or other measurement date, over the
amount an employee or agent must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "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.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification") effective January 1, 2001. 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 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 Insurance Department. At this time, it is anticipated that
Indiana will adopt Codification, however, based on current guidance,
management believes that the impact of Codification will not be material to
the Company's statutory-basis financial statements.
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
1999 1998 1997
--------------------------------------
(IN MILLIONS)
--------------------------------------
<S> <C> <C> <C>
Income:
Bonds $1,840.6 $1,714.3 $1,524.4
------------------------------------------------------------
Preferred stocks 20.3 19.7 23.5
------------------------------------------------------------
Unaffiliated common stocks 6.3 10.6 8.3
------------------------------------------------------------
Affiliated common stocks 7.8 5.2 15.0
------------------------------------------------------------
Mortgage loans on real estate 321.0 323.6 257.2
------------------------------------------------------------
Real estate 57.8 81.4 92.2
------------------------------------------------------------
Policy loans 101.7 86.5 37.5
------------------------------------------------------------
Other investments 50.6 26.5 28.2
------------------------------------------------------------
Cash and short-term investments 95.9 104.7 70.3
------------------------------------------------------------ -------- -------- --------
Total investment income 2,502.0 2,372.5 2,056.6
------------------------------------------------------------
Expenses:
Depreciation 14.4 19.3 21.0
------------------------------------------------------------
Other 284.4 246.0 188.5
------------------------------------------------------------ -------- -------- --------
Total investment expenses 298.8 265.3 209.5
------------------------------------------------------------ -------- -------- --------
Net investment income $2,203.2 $2,107.2 $1,847.1
------------------------------------------------------------ ======== ======== ========
</TABLE>
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, 1999:
Corporate $17,758.4 $ 229.6 $763.0 $17,225.0
------------------------------------------------
U.S. government 316.8 29.6 21.5 324.9
------------------------------------------------
Foreign government 984.5 49.8 39.9 994.4
------------------------------------------------
Mortgage-backed 3,913.7 46.2 139.0 3,820.9
------------------------------------------------
State and municipal 11.6 -- .5 11.1
------------------------------------------------ --------- -------- ------ ---------
$22,985.0 $ 355.2 $963.9 $22,376.3
========= ======== ====== =========
At December 31, 1998:
Corporate $17,658.4 $1,159.8 $148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- -------- ------ ---------
$23,830.9 $1,480.8 $246.2 $25,065.5
========= ======== ====== =========
</TABLE>
The carrying amounts of bonds in the balance sheets at
December 31, 1999 and 1998 reflect adjustments of
$38,900,000 and $11,800,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as in or near default.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1999, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Maturity:
In 2000 $ 598.0 $ 599.2
------------------------------------------------------------
In 2001-2004 4,359.8 4,313.4
------------------------------------------------------------
In 2005-2009 6,636.0 6,392.9
------------------------------------------------------------
After 2009 7,477.5 7,249.9
------------------------------------------------------------
Mortgage-backed securities 3,913.7 3,820.9
------------------------------------------------------------ --------- ---------
Total $22,985.0 $22,376.3
------------------------------------------------------------ ========= =========
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1999,
1998 and 1997 were $5,351,400,000, $9,395,000,000 and
$9,715,000,000, respectively. Gross gains during 1999, 1998
and 1997 of $95,400,000, $186,300,000 and $218,100,000,
respectively, and gross losses of $195,500,000, $138,000,000
and $78,000,000, respectively, were realized on those sales.
At December 31, 1999 and 1998, investments in bonds, with an
admitted asset value of $116,500,000 and $97,800,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks are reported directly in unassigned surplus
and are not reported in the statutory-basis Statements of
Operations. 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, 1999:
Preferred stocks $253.8 $ 1.3 $31.5 $223.6
----------------------------------------
Unaffiliated common stocks 150.4 34.2 17.7 166.9
----------------------------------------
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1999 and 1998 reflects adjustments of
$4,100,000 and $5,800,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1999, the minimum and maximum lending rates for
mortgage loans were 6.5% and 11.5%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
Components of the Company's investments in real estate are
summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------
(IN MILLIONS)
-------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
------------------------------------------------------------
Buildings 11.1 9.0
------------------------------------------------------------
Less accumulated depreciation (2.2) (1.7)
------------------------------------------------------------ ------ ------
Net real estate occupied by the Company 11.4 9.8
------------------------------------------------------------
Other:
Land 46.2 93.2
------------------------------------------------------------
Buildings 226.8 413.0
------------------------------------------------------------
Other 4.7 7.9
------------------------------------------------------------
Less accumulated depreciation (35.1) (50.1)
------------------------------------------------------------ ------ ------
Net other real estate 242.6 464.0
------------------------------------------------------------ ------ ------
Net real estate $254.0 $473.8
------------------------------------------------------------ ====== ======
</TABLE>
Net realized capital gains are reported net of federal
income taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------------
(IN MILLIONS)
--------------------------------
<S> <C> <C> <C>
Net realized capital gains $ 20.8 $179.7 $209.3
------------------------------------------------------------
Less amount transferred to IMR (net of related taxes
(credits) of ($31.4), $27.3 and $54.0 in 1999, 1998 and
1997, respectively) (58.3) 50.8 100.2
------------------------------------------------------------ ------ ------ ------
79.1 128.9 109.1
Less federal income taxes (credits) on realized gains (35.3) 82.1 77.8
------------------------------------------------------------ ------ ------ ------
Net realized capital gains after transfer to IMR and taxes
(credits) $114.4 $ 46.8 $ 31.3
------------------------------------------------------------ ====== ====== ======
</TABLE>
4. SUBSIDIARIES
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 ("LNY"). The Company also owns 100% of
the outstanding common stock of four non-insurance company
subsidiaries: Lincoln National Insurance Associates
("LNIA"), Sagemark Consulting, Inc. ("Sagemark"), Wakefield
Tower Alpha Limited ("Wakefield"), and Lincoln Realty
Capital
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
Corporation ("LRCC"). The Company also owns 85% of one
non-insurance company subsidiary, AnnuityNet, Inc.
(AnnuityNet). Statutory-basis financial information related
to the insurance subsidiaries is summarized as follows (in
millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1999
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,318.7 $434.6 $443.6 $1,888.6
---------------------------------------------------------
Other assets 40.6 55.5 492.6 403.1
--------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,242.2 $394.4 $261.4 $1,802.4
---------------------------------------------------------
Other liabilities 44.3 27.9 614.4 25.6
---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 328.8
---------------------------------------------------------
Capital and surplus 72.8 67.8 60.4 134.9
--------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,359.3 $490.1 $936.2 $2,291.7
--------------------------------------------------------- ======== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1999
-----------------------------------------------
FIRST
PENN LNH&C LNRAC LNY
-----------------------------------------------
<S> <C> <C> <C> <C>
Revenues $332.7 $263.3 $ 88.4 $ 313.3
-----------------------------------------------------------
Expenses 329.0 346.9 75.4 291.4
-----------------------------------------------------------
Net realized gains (losses) -- -- .2 (2.0)
----------------------------------------------------------- ------ ------ ------ --------
Net income (loss) $ 3.7 $(83.6) $ 13.2 $ 19.9
----------------------------------------------------------- ====== ====== ====== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
----------------------------------
FIRST
PENN LNH&C LNRAC LNY
----------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $1,221.1 $333.9 $403.6 $1,938.0
----------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
---------------------------------------------------------- -------- ------ ------ --------
Total admitted assets $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
Insurance reserves $1,149.8 $266.3 $281.8 $1,814.5
----------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
----------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
---------------------------------------------------------- -------- ------ ------ --------
Total liabilities and capital and surplus $1,261.4 $365.2 $893.6 $2,208.2
---------------------------------------------------------- ======== ====== ====== ========
</TABLE>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1998
---------------------------------
FIRST
PENN LNH&C LNRAC LNY
---------------------------------
<S> <C> <C> <C> <C>
Revenues $310.4 $ 165.0 $150.3 $1,402.6
-----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
-----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
----------------------------------------------------------- ------ ------- ------ --------
Net income (loss) $ (0.5) $ 1.5 $10.7 $ (254.2)
----------------------------------------------------------- ====== ======= ====== ========
</TABLE>
AnnuityNet was formed in 1998 for the distribution of
variable annuities over the Internet and is valued on the
equity method (at 85% of GAAP equity) with an admitted asset
value of $2,400,000 at December 31, 1999. LNIA was purchased
in 1998 for $600,000 and is valued on the equity method with
an admitted asset value of $800,000 at December 31, 1999.
Sagemark is a broker dealer and was acquired in connection
with a reinsurance transaction completed in 1998. Sagemark
is valued on the equity method with an admitted asset value
of $6,400,000 at December 31, 1999. Wakefield was formed in
1999 to engage in the ownership and management of
investments and is valued on the equity method with an
admitted asset value of $248,300,000. Wakefield's assets as
of December 31, 1999 consist entirely of investments in
bonds. LRCC was formed in 1999 to engage in the management
of certain real estate investments. It was capitalized with
cash and three real estate investments of $12,700,000 and is
valued on the equity method with an admitted asset value of
$10,900,000.
The carrying value of all affiliated common stocks, was
$604,700,000 and $322,100,000 at December 31, 1999 and 1998,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP-basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1999 and 1998 was $970,700,000 and
$631,100,000, respectively.
During 1999, 1998 and 1997 the Company's insurance
subsidiaries paid dividends of $5,200,000, $5,200,000 and
$15,000,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
Statements of Operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1999, 1998 and 1997, federal income tax expense (benefit)
incurred totaled $85,400,000, ($141,000,000) and
$78,300,000, respectively. In 1999, capital losses of
$151,700,000 were incurred, and carried back to recover
taxes paid in prior years.
The Company paid $45,300,000, $2,300,000 and $164,500,000 to
LNC in 1999, 1998 and 1997, respectively, in federal income
taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption "Reinsurance recoverable" includes
amounts recoverable from other insurers for claims paid by
the Company. The balance sheet caption, "Future policy
benefits and claims," and the balance sheet caption "Other
policyholder funds" have been reduced for insurance ceded as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Insurance ceded $5,340.0 $4,081.8
------------------------------------------------------------
Amounts recoverable from other insurers 81.2 79.9
------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
------------------------------------
(IN MILLIONS)
------------------------------------
<S> <C> <C> <C>
Insurance assumed $2,606.5 $9,018.9 $727.2
------------------------------------------------------------
Insurance ceded 1,675.1 877.1 302.9
------------------------------------------------------------ -------- -------- ------
Net amount included in premiums $ 931.4 $8,141.8 $424.3
------------------------------------------------------------ ======== ======== ======
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,609,000,000, $2,098,800,000 and $1,240,500,000 for 1999,
1998 and 1997, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-------------------------
(IN MILLIONS)
-------------------------
<S> <C> <C>
Premium deposit funds $16,208.3 $16,285.2
------------------------------------------------------------
Undistributed earnings on participating business 346.9 348.4
------------------------------------------------------------
Other 34.3 13.9
------------------------------------------------------------ --------- ---------
$16,589.5 $16,647.5
========= =========
</TABLE>
S-17
<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, 1999
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $10.8 $ 7.3 $ 3.5
------------------------------------------------------------
Ordinary renewal 54.2 6.8 47.4
------------------------------------------------------------
Group life 13.7 .1 13.6
------------------------------------------------------------ ----- ----- -----
$78.7 $14.2 $64.5
===== ===== =====
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
---------------------------------
NET OF
GROSS LOADING LOADING
---------------------------------
(IN MILLIONS)
---------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
------------------------------------------------------------
Group life 14.2 .2 14.0
------------------------------------------------------------ ----- ----- -----
$10.0 $14.9 $(4.9)
===== ===== =====
</TABLE>
7. ANNUITY RESERVES
At December 31, 1999, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
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 $ 2,427.7 4%
------------------------------------------------------------
At book value, less surrender charge 2,237.3 3
------------------------------------------------------------
At market value 44,076.2 68
------------------------------------------------------------ --------- ---
48,741.2 75
Subject to discretionary withdrawal without adjustment at
book value with minimal or no charge or adjustment 13,486.5 21
------------------------------------------------------------
Not subject to discretionary withdrawal 2,622.4 4
------------------------------------------------------------ --------- ---
Total annuity reserves and deposit fund 64,850.1 100%
------------------------------------------------------------ ===
Less reinsurance 1,548.0
------------------------------------------------------------ ---------
Net annuity reserves and deposit fund liabilities, including
separate accounts $63,302.1
------------------------------------------------------------ =========
</TABLE>
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA Corporation ("CIGNA")indemnity reinsurance
transaction on January 5, 1998. This note calls for the Company to pay the
principal amount of the notes on or before March 31, 2028 and interest to be
paid quarterly at an annual rate of 6.56%. Subject to approval by the
Indiana Insurance Commissioner, LNC also has a right to redeem the note for
immediate repayment in total or in part once per year on the anniversary
date of the note, but not before January 5, 2003. Any payment of interest or
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1999), and subject to approval by the Indiana Insurance
Commissioner.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna, Inc. ("Aetna") indemnity reinsurance transaction.
This note calls for the Company to pay the principal amount of the notes on
or before December 31, 2028 and interest to be paid quarterly at an annual
rate of 6.03%. Subject to approval by the Indiana Insurance Commissioner,
LNC also has a right to redeem the note for immediate repayment in total or
in part once per year on the anniversary date of the note, but not before
December 18, 2003. Any payment of interest or repayment of principal may be
paid only out of the Company's earnings, only if the Company's surplus
exceeds specified levels ($2,379,600,000 at December 31, 1999), and subject
to approval by the Indiana Insurance Commissioner.
A summary of the terms of these surplus notes follows (in millions):
<TABLE>
<CAPTION>
PRINCIPAL INCEPTION ACCRUED
OUTSTANDING AT TO DATE INTEREST AT
PRINCIPAL DECEMBER 31, CURRENT YEAR INTEREST DECEMBER 31,
DATE ISSUED AMOUNT OF NOTE 1999 INTEREST PAID PAID 1999
----------- -------------- -------------- ------------- ----------- ---------------
<S> <C> <C> <C> <C> <C>
January 5, 1998 $ 500.0 $ 500.0 $ 32.8 $ 65.1 $ --
-------------------------------
December 18, 1998 750.0 750.0 46.7 46.7 --
-------------------------------
</TABLE>
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,
1999, 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 January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in
October 1998, the Company assumed a block of individual life insurance
business from Aetna (SEE NOTE 10). The statutory accounting regulations do
not allow goodwill to be recognized on indemnity reinsurance transactions
and therefore, the related ceding commission was expensed in the
accompanying Statement of Operations and resulted in the reduction of
unassigned surplus. As a result of these transactions, the Company's
statutory-basis unassigned surplus is negative as of December 31, 1999 and
it will be necessary for the Company to obtain prior approval of the Indiana
Insurance Commissioner before paying any dividends to LNC until such time as
statutory-basis unassigned surplus is positive. The time frame for
unassigned surplus to return to a positive position is dependent upon future
statutory earnings and dividends paid to LNC. Although no assurance can be
given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
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). Effective July 1, 1999, the
agents' postretirement plan was changed to require agents retiring on or
after that date to pay the full premium costs. This change to the plan
resulted in a one-time curtailment gain of $1,400,000 in 1999. 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 Operations 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. Options issued subsequent to 1991
are exercisable in 25% increments on the option issuance anniversary in the
four years following issuance.
As of December 31, 1999, there were 2,072,087 and 1,397,005 shares of LNC
common stock subject to options granted to Company employees and agents,
respectively, under the stock option incentive plans of which 919,749 and
241,097, respectively, were exercisable on that date. The exercise prices of
the outstanding options range from $12.50 to $56.75. During 1999, 1998 and
1997, there were 318,421, 136,469 and 170,789 options exercised,
respectively, and 82,024, 18,288 and 1,846 options 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, 1999 and 1998 is
$221,600,000 and $670,100,000, respectively. This liability is based on the
assumption that the recent experience will continue in the future. If
incidence levels and/or claim termination rates fluctuate significantly from
the assumptions underlying reserves, adjustments to reserves could be
required in the future. Accordingly, this liability may prove to be
deficient or excessive. The Company reviews reserve levels on an ongoing
basis. However, it is management's opinion that such future development will
not materially affect the financial position of the Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. 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 reserves by $80,000,000 in
1997.
PERSONAL ACCIDENT PROGRAMS
In the past, the Company and its wholly owned subsidiary, LNH&C, accepted
personal accident reinsurance programs from other insurance companies. Most
of these programs were presented by independent brokers who represented the
ceding companies. Certain excess-of-loss personal accident reinsurance
programs created in the London market during 1993 through 1996 have produced
and have potential to produce significant losses. The liabilities for these
programs, net of related assets recoverable from reinsurers, were
$174,700,000 and $177,400,000 at December 31, 1999 and 1998, respectively.
Settlement activities relating to the Company's participation in workers'
compensation carve-out (i.e., life and health risks associated with workers'
compensation coverage) programs managed by Unicover Managers, Inc. have
allowed the Company to evaluate the possibility of settlements and to
estimate its potential costs to settle Unicover-related exposures. As of
December 31, 1999, a liability of $62,200,000 has been established for the
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
settlement of the Company's exposure to the Unicover programs.
These amounts are based on various estimates that are subject to
considerable uncertainty. Accordingly, the liabilities may prove to be
deficient or excessive. However, it is management's opinion that future
developments in these programs will not materially affect the financial
position of the Company.
HMO EXCESS-OF-LOSS REINSURANCE PROGRAMS
In light of the continued volatility in the HMO excess-of-loss line of
business, LNH&C discontinued writing new HMO excess-of-loss reinsurance
programs in the third quarter of 1999. The liability for HMO claims, net of
the related assets for amounts recoverable from reinsurers, was $101,900,000
and $55,900,000 at December 31, 1999 and 1998, respectively. LNH&C reviews
reserve levels on an ongoing basis. The liability is based on the assumption
that recent experience will continue in the future. If claims and loss
ratios fluctuate significantly from the assumptions underlying the reserves,
adjustments to reserves could be required in the future. Accordingly, the
liability may prove to be deficient or excessive. However, it is
management's opinion that such future developments will not materially
affect the financial position of the Company.
MARKETING AND COMPLIANCE MATTERS
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 1999, 1998 and 1997 was
$38,900,000, $34,000,000 and $29,300,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
2000 $ 28.7
--------------------------------
2001 28.8
--------------------------------
2002 27.5
--------------------------------
2003 26.2
--------------------------------
2004 26.5
--------------------------------
Thereafter 123.5
-------------------------------- ------
$261.2
======
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
operations. Total costs incurred in 1999 and 1998 were $67,400,000 and
$54,800,000, respectively. Future minimum annual costs range from
$33,600,000 to $56,800,000, however future costs are dependent on usage and
could exceed these amounts.
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. The Company limits its maximum coverage that
it retains on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been coinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1999, the
reserves associated with these reinsurance arrangements totaled
$1,422,800,000. 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.
Proceeds from the sale of common stock of American States Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LNY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA. The Company paid $1,264,400,000
to CIGNA on January 2, 1998 under the terms of the reinsurance agreement and
recognized a ceding commission expense of $1,127,700,000 in 1998, which is
included in the Statement of Operations line item "Underwriting,
acquisition, insurance and other expenses." At the time of closing, this
block of business had statutory liabilities of $4,780,300,000 that became
the Company's obligation. The Company also received assets, measured on a
historical statutory-basis, equal to the liabilities.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
In 1999, the Company and CIGNA reached an agreement through arbitration on
the final statutory-basis values of the assets and liabilities reinsured. As
a result, the Company's ceding commission for this transaction was reduced
by $58.6 million.
Subsequent to this transaction, the Company and LNY announced that they had
reached an agreement to sell the administration rights to a variable annuity
portfolio that had been acquired as part of the block of business assumed on
January 2, 1998. This sale closed on October 12, 1998 with an effective date
of September 1, 1998.
On October 1, 1998, the Company and LNY entered into an indemnity
reinsurance transaction whereby the Company and LNY reinsured 100% of a
block of individual life insurance business from Aetna. The Company paid
$856,300,000 to Aetna on October 1, 1998 under the terms of the reinsurance
agreement and recognized a ceding commission expense of $815,300,000 in
1998, which is included in the Statement of Operations line item
"Underwriting, acquisition, insurance and other expenses." At the time of
closing, this block of business had statutory liabilities of $2,813,800,000
that became the Company's obligation. The Company also received assets,
measured on a historical statutory-basis, equal to the liabilities. The
Company financed this reinsurance transaction with proceeds from short-term
debt borrowings from LNC until the December 18, 1998 surplus note was
approved by the Insurance Department. Subsequent to the Aetna transaction,
the Company and LNY announced that they had reached an agreement to
retrocede the sponsored life business assumed for $87,600,000. The
retrocession agreement closed on October 14, 1998 with an effective date of
October 1, 1998.
On November 1, 1999, the Company closed its previously announced agreement
to transfer a block of disability income business to MetLife. Under this
indemnity reinsurance agreement, the Company transferred $490,800,000 of
cash to MetLife representing the statutory reserves transferred on this
business less $17,800,000 of purchase price consideration. A gain on the
reinsurance transaction of $71,800,000 was recorded directly in unassigned
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
surplus and will be recognized in statutory earnings over the life of the
business.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1999, the Company provided $270,000,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. 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 $17,300,000 and $43,400,000 at December 31, 1999
and 1998, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1999, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1999, 29% of such mortgages ($1,212,700,000) involved
properties located in Texas and California. Such investments consist of
first mortgage liens on completed income-producing properties and the
mortgage outstanding on any individual property does not exceed $70,000,000.
At December 31, 1999, 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 certain claims in excess of $5,000,000. The
degree of applicability of this coverage will depend 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
proceedings will not have a material adverse affect on the financial
position of the Company.
With the recent filing of a lawsuit alleging fraud in the sale of interest
sensitive universal and whole life insurance policies, the Company now has
several such actions pending. While each of these lawsuits seeks class
action status, the court has not certified a class in any of them. In each
of these lawsuits, plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While relief sought in these
lawsuits is substantial, they are in the discovery stages of litigation, and
it is premature to make assessments about potential loss, if any. Management
intends to defend these lawsuits vigorously. The amount of liability, if
any, which may arise as a result of these lawsuits cannot be reasonably
estimated at this time. In another lawsuit, a settlement has been
preliminarily approved by the court, and a class has been conditionally
certified for settlement purposes. Two other similar lawsuits previously
have been resolved and dismissed.
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
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
credit exposure. Outstanding guarantees with off-balance-sheet risks at
December 31, 1999 relate to mortgage loan pass-through certificates. The
Company has sold commercial mortgage loans through grantor trusts that
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. The outstanding guarantees as of
December 31, 1999 and 1998 were $25,900,000 and $30,900,000, respectively.
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, 1999 and 1998.
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, commodity risk, credit risk 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:
<TABLE>
<CAPTION>
ASSETS (LIABILITIES)
---------------------------------
NOTIONAL OR CARRYING FAIR CARRYING FAIR
CONTRACT AMOUNTS VALUE VALUE VALUE VALUE
-----------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1999 1998 1999 1999 1998 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $2,508.8 $4,108.8 $ 5.2 $ 3.2 $ 9.3 $ .9
---------------------------------
Swaptions 1,837.5 1,899.5 12.2 10.8 16.2 2.5
---------------------------------
Interest rate swaps 630.9 258.3 -- (19.5) -- 9.9
---------------------------------
Put options 21.3 21.3 -- 1.9 -- 2.2
--------------------------------- -------- -------- ----- ------ ----- -----
4,998.5 6,287.9 17.4 (3.6) 25.5 15.5
Foreign currency derivatives:
Forward contracts -- 1.5 -- -- -- --
---------------------------------
Foreign currency swaps 44.2 47.2 -- (.4) -- .3
--------------------------------- -------- -------- ----- ------ ----- -----
44.2 48.7 -- (.4) -- .3
Commodity derivatives:
Commodity swaps -- 8.1 -- -- -- 2.4
--------------------------------- -------- -------- ----- ------ ----- -----
$5,042.7 $6,344.7 $17.4 $ (4.0) $25.5 $18.2
======== ======== ===== ====== ===== =====
</TABLE>
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
INTEREST RATE CAPS SWAPTIONS
-----------------------------------------------------
1999 1998 1999 1998
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $4,108.8 $4,900.0 $1,899.5 $1,752.0
-------------------------------------------------------
New contracts -- 708.8 -- 218.3
-------------------------------------------------------
Terminations and maturities (1,600.0) (1,500.0) (62.0) (70.8)
------------------------------------------------------- -------- -------- -------- --------
Balance at end of year $2,508.8 $4,108.8 $1,837.5 $1,899.5
------------------------------------------------------- ======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
INTEREST RATE SWAPS
-----------------------
1999 1998
-----------------------
<S> <C> <C>
Balance at beginning of year $ 258.3 $ 10.0
------------------------------------------------------------
New contracts 482.4 2,226.6
------------------------------------------------------------
Terminations and maturities (109.8) (1,978.3)
------------------------------------------------------------ ------- ---------
Balance at end of year $ 630.9 $ 258.3
------------------------------------------------------------ ======= =========
</TABLE>
<TABLE>
<CAPTION>
COMMODITY
PUT OPTIONS SWAPS
----------------------------------------
1999 1998 1999 1998
----------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $21.3 $ -- $ 8.1 $ --
------------------------------------------------------------
New contracts -- 21.3 -- 8.1
------------------------------------------------------------
Terminations and maturities -- -- (8.1) --
------------------------------------------------------------ ----- ----- ----- ----
Balance at end of year $21.3 $21.3 $ -- $8.1
------------------------------------------------------------ ===== ===== ===== ====
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
(FOREIGN INVESTMENTS)
-------------------------------------------
FOREIGN CURRENCY
SWAPS
FOREIGN EXCHANGE
-------------------------------------------
FORWARD CONTRACTS
1999 1998 1999 1998
-------------------------------------------
(IN MILLIONS)
-------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 1.5 $ 163.1 $47.2 $15.0
------------------------------------------------------------
New contracts 2.7 419.8 -- 39.2
------------------------------------------------------------
Terminations and maturities (4.2) (581.4) (3.0) (7.0)
------------------------------------------------------------ ----- ------- ----- -----
Balance at end of year $ -- $ 1.5 $44.2 $47.2
------------------------------------------------------------ ===== ======= ===== =====
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 2000 through 2006, 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
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
premium paid for the interest rate caps is included in other investments
(amortized costs of $5.2 million as of December 31, 1999) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2000 through 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 rising
interest rates. The premium paid for the swaptions is included in other
investments (amortized cost of $12.2 million as of December 31, 1999) and is
being amortized over the terms of the agreements. This amortization is
included in net investment income.
SPREAD LOCK AGREEMENTS
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 security 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. While spreadlocks are
used periodically, there are no spreadlock agreements outstanding at
December 31, 1999.
INTEREST RATE SWAP AGREEMENTS
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 agreement the stream of variable interest
payments based on the coupon payments hedged 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. The Company also uses interest rate swap agreements to
hedge its exposure to interest rate fluctuations related to the anticipated
purchase of assets to support newly acquired blocks of business or to extend
the duration of certain portfolios of assets. Once the assets are purchased
the gains (losses) resulting from the termination of the swap agreements
will be applied to the basis of the assets. The gains (losses) will be
recognized in earnings over the life of the assets. The anticipated purchase
of assets related to extending the duration of certain portfolios of assets
is expected to be completed in 2000.
PUT OPTIONS
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate fixed income, fixed
maturity investments. The risk being hedged is a drop in bond prices due to
credit concerns with international bond issuers. The put options allow the
Company to put the bonds back to the counterparties at original par.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts and
foreign currency swaps, 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. A foreign currency swap is a contractual
agreement to exchange the currencies of two different countries at a fixed
rate of exchange in the future.
COMMODITY SWAPS
The Company used a commodity swap to hedge its exposure to fluctuations in
the price of gold. A commodity swap is a contractual agreement to exchange a
certain amount of a particular commodity for a fixed amount of cash. The
Company owned a fixed income security that met its coupon
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
payment obligations in gold bullion. The Company is obligated to pay to the
counterparty the gold bullion, and in return, receives from the counterparty
a stream of fixed income payments. The fixed income payments were the
product of the swap notional multiplied by the fixed rate stated in the swap
agreement. The net receipts or payments from commodity swaps were recorded
in net investment income. The fixed income security was called in the third
quarter of 1999 and the commodity swap expired.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$6,200,000, $10,000,000 and $7,000,000 in 1999, 1998 and 1997, respectively.
Deferred gains of $100,000 as of December 31, 1999, were the result of
terminated interest rate swaps. These gains are included with the related
fixed maturity securities to which the hedge applied or as deferred
liabilities 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 various derivative contracts. 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 less collateral held for such agreements with each
counterparty if the net market value is in the Company's favor. At
December 31, 1999, the exposure was $8,500,000.
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.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market
prices, where available. For preferred stock not actively
traded, fair values are based on values of issues of
comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate
was established using a discounted cash flow method based on
credit rating, maturity and future income. The ratings 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.
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.,
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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.
SHORT-TERM DEBT
For short-term debt, the carrying value approximates fair
value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted
cash flow analysis based on the Company's current
incremental borrowing rate for similar types of borrowing
arrangements.
GUARANTEES
The Company's guarantees include guarantees related to
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
zero.
DERIVATIVES
The Company employs several different methods for
determining the fair value of its derivative instruments.
Fair values for these contracts are based on current
settlement values. These values are based on quoted market
prices for the foreign currency exchange contracts and
industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock
agreements, interest rate swaps, commodity swaps and put
options.
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.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the
accompanying statutory-basis balance sheets at fair value.
The related liabilities are also reported at fair value in
amounts equal to the separate account assets.
S-28
<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
-------------------------------------------------------------
1999 1998
-------------------------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
--------------------------------------------------------------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 22,985.0 $ 22,376.3 $ 23,830.9 $ 25,065.5
-----------------------------------------------
Preferred stocks 253.8 223.6 236.0 242.5
-----------------------------------------------
Unaffiliated common stocks 166.9 166.9 259.3 259.3
-----------------------------------------------
Mortgage loans on real estate 4,211.5 4,104.0 3,932.9 4,100.1
-----------------------------------------------
Policy loans 1,652.9 1,770.5 1,606.0 1,685.9
-----------------------------------------------
Other investments 426.6 426.6 434.4 434.4
-----------------------------------------------
Cash and short-term investments 1,409.2 1,409.2 1,725.4 1,725.4
-----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,730.4) (17,364.3) (17,845.8) (17,486.4)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (454.7) (465.1) (714.4) (738.2)
--------------------------------------------
Short-term debt (205.0) (205.0) (140.0) (140.0)
-----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,022.1) (1,250.0) (1,335.1)
-----------------------------------------------
Derivatives 17.4 (4.0) 25.5 18.2
-----------------------------------------------
Investment commitments -- (0.8) -- (.6)
-----------------------------------------------
Separate account assets 46,105.1 46,105.1 36,907.0 36,907.0
-----------------------------------------------
Separate account liabilities (46,105.1) (46,105.1) (36,907.0) (36,907.0)
-----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In 1997, LNC contributed 25,000,000 shares of common stock of 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 the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity
Distributors, Inc. ("LLAD"), has a nearly exclusive general agent's 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 LLAD override commissions of $60,400,000 and
$76,700,000 in 1999 and 1998, respectively, and override commissions and
operating expense allowances of $61,600,000 in 1997. LLAD incurred expenses
of $113,400,000, $102,400,000 and
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
$5,500,000 in 1999, 1998 and 1997, 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 LLAD agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1999 and 1998 include the
Company's participation in a short-term investment pool with LNC of
$390,300,000 and $383,600,000, respectively. Related investment income
amounted to $16,700,000, $16,800,000 and $15,500,000 in 1999, 1998 and 1997,
respectively. Short-term loan payable to parent company at December 31, 1999
and 1998 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $49,400,000, $92,100,000 and
$48,500,000 in 1999, 1998 and 1997, 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
1999 1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C> <C>
Insurance assumed $ 19.7 $ 13.7 $ 11.9
----------------------
Insurance ceded 777.6 290.1 100.3
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1999 1998
-----------------------
(IN MILLIONS)
-----------------------
<S> <C> <C>
Future policy benefits
and claims assumed
$ 413.7 $ 197.3
------------------------
Future policy benefits
and claims ceded 1,680.4 1,125.0
------------------------
Amounts recoverable on
paid and unpaid losses 146.4 84.2
------------------------
Reinsurance payable on
paid losses 8.8 6.0
------------------------
Funds held under
reinsurance treaties --
net liability 2,106.4 1,375.4
------------------------
</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 $917,300,000 and $318,300,000 at December 31, 1999 and 1998,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1999 and 1998, LNC had guaranteed $818,900,000 and $237,000,000,
respectively, of these letters of credit. At December 31, 1999 and 1998, the
Company has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $118,800,000 and $122,400,000,
respectively, for statutory surplus relief received under financial
reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially none of the separate accounts have
any minimum guarantees and the investment risks associated with market
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$4,572,600,000, $3,953,300,000 and $4,821,800,000 in 1999, 1998 and 1997,
respectively. Reserves for separate accounts with assets at fair value were
$45,198,900,000 and $36,145,900,000 at December 31, 1999 and 1998,
respectively. All reserves are subject to discretionary withdrawal at market
value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1999 1998 1997
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 4,573.2 $ 3,954.9 $ 4,824.0
------------------------------------------------------------
Transfers from separate accounts (4,933.8) (4,069.8) (2,943.8)
------------------------------------------------------------ --------- --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (360.6) $ (114.9) $ 1,880.2
------------------------------------------------------------ ========= ========= =========
</TABLE>
15. CENTURY COMPLIANCE (UNAUDITED)
The Year 2000 issue was complex and affected many aspects of the Company's
business. The Company was particularly concerned with Year 2000 issues that
related to the Company's computer systems and interfaces with the computer
systems of vendors, suppliers, customers and business partners. From 1996
through 1999 the Company and its operating subsidiaries redirected a large
portion of internal Information Technology ("IT") efforts and contracted
with outside consultants to update systems to address Year 2000 issues.
Experts were engaged to assist in developing work plans and cost estimates
and to complete remediation activities.
For the year ended December 31, 1999, the Company identified expenditures of
$39,500,000 to address this issue. This brings the expenditures for 1996
through 1999 to $75,300,000. Because updating systems and procedures is an
integral part of the Company's on-going operations, most of the expenditures
shown above are expected to continue after all Year 2000 issues have been
resolved. All Year 2000 expenditures have been funded from operating cash
flows.
The scope of the overall Year 2000 program included the following four major
project areas: 1) addressing the readiness of business applications,
operating systems and hardware on mainframe, personal computer and local
area network platforms (IT); 2) addressing the readiness of non-IT embedded
software and equipment (non-IT); 3) addressing the readiness of key business
partners and 4) establishing Year 2000 contingency plans. The Company
completed these projects prior to year-end.
The Company's businesses have not identified any major problems in their
business processing. Minor problems have been resolved quickly. The
Company's businesses have not experienced any significant interruption in
service to clients or business partners or in reporting to regulators.
S-31
<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 (the "Company"),
a wholly owned subsidiary of Lincoln National Corporation, as of
December 31, 1999 and 1998, and the related statutory-basis
statements of operations, changes in capital and surplus and
cash flows for each of the three years in the period ended
December 31, 1999. 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 auditing standards
generally accepted in the United States. 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 accounting principles
generally accepted in the United States. The variances between
such practices and accounting principles generally accepted in
the United States 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 accounting
principles generally accepted in the United States, the
financial position of The Lincoln National Life Insurance
Company at December 31, 1999 and 1998, or the results of its
operations or its cash flows for each of the three years in the
period ended December 31, 1999.
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, 1999 and 1998, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
January 31, 2000
S-32
