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PROSPECTUS 1
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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 VUL-I, a flexible premium variable universal life
insurance contract (the "Policy"), offered by The Lincoln National Life
Insurance Company ("Lincoln Life," "Company", "we", "our" or "us").
The Policy features include: flexible premium payments; a choice of one of
two death benefit options; 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 Sub-accounts of our Flexible Premium
Variable Life Account M ("Separate Account"). Each Sub-account invests in one of
the funds listed below.
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AIM VARIABLE INSURANCE FUNDS FRANKLIN TEMPLETON VARIABLE INSURANCE
PRODUCTS
AIM V.I. Capital Appreciation Fund TRUST
AIM V.I. Diversified Income Fund Templeton Asset Strategy Fund--Class 1
AIM V.I. Growth Fund (formerly Templeton Asset Allocation Fund)
AIM V.I. Value Fund Templeton Growth Securities Fund--Class 1
DELAWARE GROUP PREMIUM FUND (formerly Templeton Stock Fund)
Emerging Markets Series -- Standard Class Templeton International Securities Fund--
Small Cap Value Series -- Standard Class Class 1
Trend Series -- Standard Class (formerly Templeton International Fund)
DEUTSCHE ASSET MANAGEMENT VIT FUNDS LINCOLN NATIONAL MONEY MARKET FUND, INC.
(FORMERLY BT INSURANCE FUNDS TRUST) Money Market Fund
Equity 500 Index Fund MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE
TRUST
FIDELITY VARIABLE INSURANCE PRODUCTS FUND MFS Emerging Growth Series
Equity-Income Portfolio -- Initial Class MFS Total Return Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II MFS Utilities Series
Asset Manager Portfolio -- Initial Class OCC ACCUMULATION TRUST
Investment Grade Bond Portfolio -- Initial Global Equity Portfolio
Class Managed Portfolio
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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, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 2000
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TABLE OF CONTENTS
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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
Charges and Fees.................... 5
Changes in Specified Amount......... 5
Lincoln Life, the Separate Account and
The General Account.................. 6
Buying Variable Life Insurance........ 7
Replacements........................ 8
The Funds............................. 8
Substitution of Securities.......... 12
Voting Rights....................... 12
Fund Participation Agreements....... 13
Death Benefit......................... 13
Death Benefit Options............. 13
Changes in Death Benefit Option... 13
Guaranteed Death Benefit
Provision........................ 14
Payment of Death Benefit.......... 14
Changes in Specified Amount....... 14
Premium Payments; Transfers........... 15
Premium Payments.................. 15
Allocation of Net Premium
Payments......................... 16
Transfers......................... 17
Optional Sub-Account Allocation
Programs......................... 17
Dollar Cost Averaging........... 17
Automatic Rebalancing........... 18
Charges; Fees......................... 18
Premium Load...................... 19
Monthly Deductions................ 19
Transaction Fee for Excess
Transfers........................ 19
Mortality and Expense Risk Charge
and Fund Expenses................ 20
Surrender Charge.................. 22
Reduction of Charges--
Purchases on a Case Basis........ 23
Policy Values......................... 23
Accumulation Value................ 23
Variable Accumulation Unit
Value............................ 24
Surrender Value................... 24
Surrenders............................ 24
Partial Surrenders................ 24
Full Surrenders................... 25
Deferral of Payment and
Transfers........................ 25
Lapse and Reinstatement............... 25
Lapse of a Policy; Effect of
Guaranteed Death Benefit
Provision........................ 25
Reinstatement of a Lapsed
Policy........................... 25
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Policy Loans.......................... 26
Settlement Options.................... 27
Other Policy Provisions............... 27
Issuance.......................... 27
Effective Date of Coverage........ 27
Short-Term Right to Cancel the
Policy........................... 27
Policy Owner...................... 28
Beneficiary....................... 28
Assignment........................ 28
Right to Exchange for a Fixed
Benefit Policy................... 28
Incontestability.................. 29
Misstatement of Age or Sex........ 29
Suicide........................... 29
Nonparticipating Policies......... 29
Riders............................ 30
Tax Issues............................ 30
Taxation of Life Insurance
Contracts In General............. 30
Policies Which Are MECS........... 31
Policies Which Are Not MECS....... 32
Other Considerations.............. 32
Tax Status of Lincoln Life........ 33
Other Matters......................... 33
Directors and Officers of Lincoln
Life............................. 33
Distribution of Policies.......... 35
Changes of Investment Policy...... 36
Other Contracts Issued by Lincoln
Life............................. 36
State Regulation.................. 36
Reports to Policy Owners.......... 36
Advertising....................... 36
Legal Proceedings................. 37
Experts........................... 37
Registration Statement............ 37
Appendix 1............................ 38
Corridor Percentages.............. 38
Appendix 2............................ 39
Guaranteed Maximum Cost of
Insurance Rates.................. 39
Appendix 3............................ 40
Illustration of Surrender
Charges.......................... 40
Appendix 4............................ 42
Illustration of Accumulation
Values, Surrender Values, and
Death Benefits................... 42
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 three 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.
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
(the Specified Amount may be found on the Policy's
Specification Page); or
2) the "Corridor Death Benefit," which is the Death Benefit
calculated as a percentage of the Accumulation Value.
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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"
when the Insured died. The Net Accumulation Value is the
total of the balances in the Fixed Account and the
Separate Account, minus any outstanding Loan Account
amounts; or
2) the Corridor Death Benefit. See page 13.
This policy contains a Guaranteed Initial Death Benefit
Premium. This means that the Death Benefit will not be lower
than the Initial Specified Amount regardless of the gains or
losses of the Funds you select as long as you pay that
Premium. Therefore, the Initial Death Benefit under your
Policy would be guaranteed for five years even though your
Net Accumulation Value is insufficient to pay your current
Monthly Deductions. If you have borrowed against your Policy
or surrendered a portion of your Policy, your Initial Death
Benefit will be reduced by the Loan Account balance 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 19)
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. See page 25.
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 Fixed 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 27.
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 fund(s) 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.
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 8.
You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium payments put into the Fixed Account:
- become part of Lincoln Life's General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
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Interest beyond 4% is credited at Lincoln Life's discretion.
For additional information on the Fixed Account, See
page 7.
CHARGES AND FEES
We deduct a premium charge of 5% from each Premium Payment.
We make monthly deductions for administrative expenses
(currently, $15 per month for the first Policy Year and $5
per month afterwards, guaranteed not to exceed $10 after the
first Policy Year) along with the Cost of Insurance and any
riders that are placed on your Policy. We make daily charges
against the Separate Account for mortality and expense risk.
This charge is currently at an annual rate of .80% for
Policy Years 1-12, 0.55% for Policy Year 13 and beyond. The
charge is guaranteed not to exceed .90% per year.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on page 20 shows you current expense
levels for each Fund.
Each Policy Year you may make 12 transfers between funding
options without charge. Beyond 12, a $25 fee may apply.
The Surrender Charge is the amount retained by us if the
Policy is surrendered. We charge you $25, but not more than
2% of the amount withdrawn, each time you request a partial
surrender of your Policy. If you totally surrender your
Policy within the first 10 years, a Surrender Charge will be
deducted in computing what will be paid you. If you
surrender your Policy within the first 10 years after an
increase in the Specified Amount, a Surrender Charge will
also be imposed in addition to any existing Surrender
Charges. See page 22.
You may borrow within described limits against the Policy.
You may totally surrender the Policy or withdraw part of its
value. A Surrender Charge may be applied if the Policy is
totally surrendered.
If you borrow against your Policy, interest will be charged
to the Loan Account Value. The annual interest rate is 8%.
Lincoln Life will credit interest on the Loan Account Value.
For the first ten Policy Years, interest will be credited at
a current annual rate equal to the interest rate charged
minus 1%, guaranteed not to exceed 2%. For Policy Years
eleven and beyond, the credited annual rate will be equal to
the interest rate charged minus .25% guaranteed not to
exceed 1%. See page 26.
Charges and fees may be reduced in some circumstances where
Policies are purchased by corporations and other groups or
sponsoring organizations on a case basis. See page 23.
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is initially equal to the 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 14.
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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 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. On each
Valuation Day (any day on which the New York Stock Exchange
is open), Net Premium Payments allocated to Account M will
be invested in Fund shares at net asset value, and monies 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 "The 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, and there can be no
assurance, and no representation is made, that a Fund's
investment results will be comparable to those 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 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
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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 Guaranteed
Death Benefit Provision, if elected, 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 fund options available, it is possible to fine
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.
And any investment income and realized capital gains within
a fund are automatically
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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 "Tax Issues"), 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 Benefit"). 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 4) 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. The Owner 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.
THE FUNDS
Each of the Sub-Accounts of the Separate Account 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.
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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. Capital Appreciation Fund
AIM V.I. Diversified Income Fund
AIM V.I. Growth Fund
AIM V.I. Value Fund
DELAWARE GROUP PREMIUM FUND, managed by Delaware
Management Company, One Commerce Square, Philadelphia,
PA 19103 and for 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;
Emerging Markets 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 by Provident
Distributors, Inc., Four Falls Corporate Center, West
Conshohocken, PA 19428;
Equity 500 Index Fund.
FIDELITY VARIABLE INSURANCE PRODUCTS FUND, and FIDELITY
VARIABLE INSURANCE PRODUCTS FUND II managed by Fidelity
Management & Research Company and distributed by
Fidelity Distributors Corporation, Inc., 82 Devonshire
Street, Boston, MA 02109;
Equity-Income Portfolio -- Initial Class
Asset Manager Portfolio -- Initial Class
Investment Grade Bond Portfolio -- Initial Class
FRANKLIN TEMPLETON VARIABLE INSURANCE PRODUCTS TRUST,
managed by Templeton Investment Counsel, Inc., Broward
Financial Centre, STE 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 Asset Strategy Fund -- Class 1 (formerly
Asset Allocation Fund)
Templeton Growth Securities Fund -- Class 1
(formerly Stock Fund)
Templeton International Securities Funds -- Class 1
(formerly International Fund)
LINCOLN NATIONAL MONEY MARKET FUND, INC., 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.
Money Market Fund
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.
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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
OCC ACCUMULATION TRUST, managed by OpCap Advisors and
distributed by OCC Distributors, 1345 Avenue of the
Americas New York, NY 10105
Global Equity Portfolio;
Managed Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown listed under "Fund Expenses" in this
Prospectus.
There follows 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. CAPITAL APPRECIATION FUND Seeks growth of capital
through investment in common stocks, with emphasis on medium
and small-sized growth companies. The investment advisor
will be particularly interested in companies that are likely
to benefit from new or innovative products, services or
processes as well as those that have experienced
above-average, long term growth in earnings and have
excellent prospects for future growth.
AIM V.I. DIVERSIFIED INCOME FUND: Seeks to achieve a high
level of current income primarily by investing in a
diversified portfolio of domestic corporate debt securities,
U.S. Government securities, securities issued by foreign
governments, and lower quality debt securities (commonly
known as "junk bonds").
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. 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.
DELAWARE 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 SMALL CAP VALUE SERIES -- STANDARD CLASS: Seeks
growth by investing in stocks of small cap companies whose
market values appear low relative to underlying value or
future earnings and growth potential.
DELAWARE 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 EQUITY 500 FUND: Seeks to replicate as closely
as possible the performance of the Standard & Poor's 500
Composite Stock Price Index before the deduction of Fund
expenses.
10
<PAGE>
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- INITIAL CLASS :
Seeks reasonable income by investing primarily in
income-producing equity securities, with some potential for
capital appreciation, seeking a yield that exceeds the
composite yield on the securities comprising the Standard
and Poor's 500 Index (S&P 500).
FIDELITY VIP II ASSET MANAGER PORTFOLIO -- INITIAL CLASS:
Seeks high total return with reduced risk over the long-term
by allocating its assets among domestic and foreign stocks,
bonds and money market instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO -- INITIAL
CLASS: Seeks as high a level of current income as is
consistent with the preservation of capital by investing in
U.S. dollar-denominated investment-grade bonds.
LINCOLN 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.
MFS EMERGING GROWTH SERIES: Seeks to provide long-term
growth of capital.
MFS TOTAL RETURN SERIES: Seeks primarily to obtain
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).
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO: Seeks
long-term capital appreciation through a global investment
strategy primarily involving equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO: Seeks growth of
capital over time through investment in a portfolio of
common stocks, bonds and cash equivalents, the percentage of
which will vary based on management's assessments of
relative investment values.
TEMPLETON ASSET STRATEGY FUND -- CLASS 1: Seeks a high level
of total return. Invests in stocks of companies in any
nation, bonds of companies and governments of any nation,
and in money market instruments including emerging markets.
Assets are allocated among different investments depending
upon worldwide market and economic conditions.
TEMPLETON GROWTH SECURITIES FUND -- CLASS 1: Seeks long-term
capital growth. 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 1: 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 advisor.
Several of the portfolios 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 Fund prospectuses
carefully.
There is no assurance that the investment objective of any
of the Funds will be met. A Policy Owner bears the complete
investment risk for Accumulation Values allocated to a
Sub-Account. Each of the Sub-Accounts involves inherent
investment risk, and such risk
11
<PAGE>
varies significantly among the Sub-Accounts. Policy Owners
should read each Fund's prospectus carefully and understand
the Funds' relative degrees of risk before making or
changing investment choices. Additional Funds may, from time
to time, be made available as investments to underlie the
Policies. However, the right to make such selections will be
limited by the terms and conditions imposed on such
transactions by Lincoln Life (See "Premium Payments").
Required premium levels will vary based on market
performance. In a prolonged market downturn, affecting all
Sub-Accounts, additional Premium Payments may be necessary
to maintain the level of coverage or to avoid lapsing of the
Policy. Review of periodic contract statements is strongly
suggested to determine appropriate premium requirements.
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in the judgment of
Lincoln Life, further investment in such shares should
become inappropriate in view of the purpose of the
investment objectives of the Policies or in view of legal,
regulatory or federal income tax restrictions, Lincoln Life
may substitute shares of another Fund. No substitution of
securities in any Sub-Account may take place without prior
approval of the Commission and under such requirements as it
may impose. Substitute funds may have higher charges than
the funds being replaced.
VOTING RIGHTS
In accordance with its view of present applicable law,
Lincoln Life will vote the shares of each Fund held in the
Separate Account at special meetings of the shareholders of
the particular Trust in accordance with written instructions
received from persons having the voting interest in the
Separate Account. Lincoln Life will vote shares for which it
has not received instructions, as well as shares
attributable to it, in the same proportion as it votes
shares for which it has received instructions. The Trusts do
not hold regular meetings of shareholders.
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
Trust not more than sixty (60) days prior to the meeting of
the particular Trust. Voting instructions will be solicited
by written communication at least fourteen (14) days prior
to the meeting.
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 Funds' shares are issued and redeemed only in connection
with variable annuity contracts and variable life insurance
policies issued through separate accounts of Lincoln Life
and other life insurance companies. The Trusts do not
foresee any disadvantage to Policy Owners arising out of the
fact that shares may be made available to separate accounts
which are used in connection with both variable annuity and
variable life insurance products. Nevertheless, the Trusts'
Boards intend to monitor events in order to identify any
material irreconcilable conflicts which may possibly arise
and to determine what action, if any, should be taken in
response thereto. If such a conflict were to occur, one of
the separate accounts might withdraw its investment in a
Fund. This might force a Fund to sell portfolio securities
at disadvantageous prices.
12
<PAGE>
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
Trusts or corporations and their advisors or distributors
under which we make the Funds available under the Policies
and perform certain administrative services. The advisors or
distributors may compensate us therefore at rates ranging
from .10% to .25% per year of policy assets held in a
particular Fund.
DEATH BENEFIT
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available for
determining the Death Benefit. The amount payable under
either option will be determined as of the date of the
Insured's death.
Under OPTION 1 the Death Benefit will be the greater of the
Specified Amount (a minimum of $100,000 as of the date of
this Prospectus), or the applicable percentage (the
"Corridor Percentage") of the Accumulation Value required to
maintain the Policy as a "life insurance contract" for tax
purposes (the "Corridor Death Benefit"). The Corridor
Percentage is 250% through the Insured's age 40 and
decreases in accordance with the table in Appendix 1 to 100%
at the Insured's age 95. Option 1 provides a level Death
Benefit until the Corridor Death Benefit exceeds the
Specified Amount.
Under OPTION 2 the Death Benefit will be the greater of the
Specified Amount (a minimum of $100,000 as of the date of
this Prospectus), plus the Accumulation Value, or the
Corridor Death Benefit. Option 2 provides a varying Death
Benefit which increases or decreases over time, depending on
the amount of premium paid and the investment performance of
the underlying funding options chosen.
Under both Option 1 and Option 2, the proceeds payable upon
death will be the Death Benefit, reduced by partial
surrenders and by the amount necessary to repay any loans in
full. Option 1 will be in effect unless Option 2 has been
elected in the application for the Policy or unless a change
has been allowed.
CHANGES IN DEATH BENEFIT OPTION
A Death Benefit Option change will be allowed upon the
Owner's written request to our Administrative Office in form
satisfactory to us, subject to the following conditions:
- The change will take effect on the Monthly Anniversary
Day (the day of the month as shown in the Policy
Specifications) or on the next Valuation Day following
the date of receipt of the request.
- There will be no change in the Surrender Charge, and
evidence of insurability may be required.
- No change in the Death Benefit Option may reduce the
Specified Amount below $100,000.
- For changes from Option 1 to Option 2, the new Specified
Amount will equal the Specified Amount less the
Accumulation Value at the time of the change.
- For changes from Option 2 to Option 1, the new Specified
Amount will equal the Specified Amount plus the
Accumulation Value at the time of the change.
13
<PAGE>
GUARANTEED DEATH BENEFIT PROVISION
The Guaranteed Death Benefit Provision assures that, as long
as the Guaranteed Initial Death Benefit Premium is paid, the
Death Benefit will not be less than the Initial Specified
Amount during the first five Policy Years even if the Net
Accumulation Value is insufficient to cover the current
Monthly Deductions, assuming there have been no loans or
partial surrenders.
Changes in Initial Specified Amount, partial surrenders, and
Death Benefit Option changes during the first five Policy
Years may affect the Guaranteed Death Benefit Premium. These
events and loans may also affect the Policy's ability to
remain in force.
PAYMENT OF DEATH BENEFIT
The Death Benefit is the amount payable to the Beneficiary
upon the death of the Insured in accordance with the Death
Benefit Option elected. Any outstanding loan amounts or
overdue deductions are deducted prior to payment of the
proceeds.
The Death Benefit under the Policy will be paid in a lump
sum within seven days after receipt at our Administrative
Office of due proof of the Insured's death (a certified copy
of the death certificate), unless the Owner or the
Beneficiary has elected that it be paid under one or more of
the Settlement Options (See "Settlement Options"). Payment
of the Death Benefit may be delayed if the Policy is being
contested.
While the Insured is living, the Owner may elect a
Settlement Option for the Beneficiary and deem it
irrevocable, and may revoke or change a prior election. The
Beneficiary may make or change an election within 90 days of
the death of the Insured, unless the Owner has made an
irrevocable election.
All or a part of the Death Benefit may be applied under one
or more of the Settlement Options, or such other options as
Lincoln Life may make available in the future.
If the Policy is assigned as collateral security, Lincoln
Life will pay any amount due the assignee in one lump sum.
Any excess Death Benefit due will be paid as elected.
The Death Benefit under the Policy at any point in time must
be at least the "Corridor Percentage" of the Accumulation
Value based on the Insured's attained age. The table of
Corridor Percentages is in Appendix 1.
CHANGES IN SPECIFIED AMOUNT
Changes in the Specified Amount of a Policy can be made by
submitting a written request to our Administrative Office in
form satisfactory to us.
Changes in the Specified Amount are subject to the following
conditions:
- Satisfactory evidence of insurability and a supplemental
application may be required for an increase in the
Specified Amount.
- An increase in the Specified Amount will increase the
Surrender Charge.
- As of the date of this Prospectus, the minimum allowable
increase in Specified Amount is $1,000.
- No decrease may reduce the Specified Amount to less than
$100,000.
- No decrease may reduce the Specified Amount below the
minimum required to maintain the Policy's status under
the Code as a life insurance policy.
14
<PAGE>
Decreases in Specified Amount will be effective on the
Monthly Anniversary Day on or next following receipt of the
request at our Administrative Office, if all requirements
have been met. Decreases in Specified Amount will be applied
to reduce existing Specified Amount in the following order:
first, the most recent increase in Specified Amount; then,
the next most recent increases in Specified Amount
successively; and finally, against the Specified Amount
provided at issue.
Increases in Specified Amount, if approved by Lincoln Life
and provided the Insured is living, will be effective on (i)
the Monthly Anniversary Day on or next following receipt of
the request at our Administrative Office and (ii) the
deduction from the Accumulation Value of the first month's
cost of insurance for the increase. If the Specified Amount
is increased, a new Surrender Charge applies for ten years
following any increase in Specified Amount. (See "Charges;
Fees -- Surrender Charge".)
PREMIUM PAYMENTS; TRANSFERS
PREMIUM PAYMENTS
The Policies provide for flexible premium payments. Premium
Payments are payable in the frequency and in the amount
selected by the Policy Owner. The initial Premium Payment is
due on the Issue Date and is payable in advance. The minimum
payment is the amount necessary to maintain a positive Net
Accumulation Value or Guaranteed Minimum Death Benefit. Each
subsequent Premium Payment must be at least $100. We reserve
the right to decline any application or Premium Payment.
After the initial Premium Payment, all Premium Payments must
be sent directly to our Administrative Office and will be
deemed received when actually received there.
The Policy Owner may elect to increase, decrease or change
the frequency of Premium Payments.
PLANNED PREMIUMS are Premium Payments scheduled when a
Policy is applied for. This is the amount for which we send
a premium reminder notice. They can be billed annually,
semiannually or quarterly. Pre-authorized automatic monthly
check payments may also be arranged.
ADDITIONAL PREMIUMS are any Premium Payments made ($100
minimum) in addition to Planned Premiums.
GUARANTEED INITIAL DEATH BENEFIT PREMIUM, if paid during
each of the first five Policy Years, enables the Policy to
remain in force regardless of investment performance,
assuming no surrenders or loans during that time. The
Guaranteed Initial Death Benefit Premium is stated in the
Policy Specifications. An increase in Specified Amount would
require a recalculation of the Guaranteed Initial Death
Benefit Premium. If this premium is not paid, or there are
partial surrenders or loans taken during the first five
Policy Years, the Policy will lapse during the first five
Policy Years if the Net Accumulation Value is less than the
next Monthly Deduction, just as it would after the first
five Policy Years at any time the Net Accumulation Value is
less than the next Monthly Deduction.
Payment of Planned Premiums or Additional Premiums (any
premium paid in addition to planned premiums) in any amount
will not, except as noted above, guarantee that the Policy
will remain in force. Conversely, failure to pay Planned
Premiums or Additional Premiums will not necessarily cause a
Policy to lapse (See "Guaranteed Death Benefit Provision").
15
<PAGE>
PREMIUM INCREASES. At any time, the Owner may increase
Planned Premiums, or pay Additional Premiums, but:
- Evidence of insurability may be required if the
Additional Premium or the new Planned Premium during the
current Policy Year would increase the difference between
the Death Benefit and the Accumulation Value. If
satisfactory evidence of insurability is requested and
not provided, we will refund the increase in premium
without interest and without participation of such
amounts in any underlying funding options.
- In no event may the total of all Premium Payments exceed
the then-current maximum premium limitations established
by federal law for a Policy to qualify as life insurance.
If, at any time, a Premium Payment would result in total
Premium Payments exceeding such maximum premium
limitation, we will only accept that portion of the
Premium Payment which will make total premiums equal the
maximum. Any part of the Premium Payment in excess of
that amount will be returned or applied as otherwise
agreed and no further Premium Payments will be accepted
until allowed by the then-current maximum premium
limitations prescribed by law.
- If there is any Policy indebtedness, any additional Net
Premium Payments will be used first as a loan repayment
with any excess applied as an additional Net Premium
Payment.
ALLOCATION OF NET PREMIUM PAYMENTS
The Net Premium Payment is the portion of a Premium Payment,
after deduction of 5.0% for the premium load, available for
allocation to the Funds you selected.
When you purchase a Policy, you must decide how to allocate
Net Premium Payments among the Sub-Accounts and the Fixed
Account. Allocation to any one Sub-Account or to the Fixed
Account must be in whole percentages. No allocation can be
made which would result in a Sub-Account Value of less than
$50 or a Fixed Account value of less than $2,500. For each
Sub-Account, the Net Premium Payments are converted into
Accumulation Units. The number of Accumulation Units
credited to the Policy is determined by dividing the Net
Premium Payment allocated to the Sub-Account by the value of
the Accumulation Unit for the Sub-Account.
During the Right-to-Examine Period, the Net Premium Payment
will be allocated to the Fixed Account, and interest
credited from the Issue Date if the Premium Payment was
received on or before the Issue Date. We will allocate the
initial Net Premium Payment directly to the Sub-Account(s)
you selected within three days after expiration of the
Right-to-Examine Period.
Unless directed otherwise by the Policy Owner, we will
allocate subsequent Net Premium Payments on the same basis
as the most recent previous Net Premium Payment. Such
allocation will occur as of the next Valuation Period after
each payment is received.
You may change the allocation for future Net Premium
Payments at any time free of charge, effective for Premium
Payments made more than one week after we receive the notice
of the new allocation at our Administrative Office. Any new
allocation is subject to the same requirements as the
initial allocation. We may, at our sole discretion, waive
minimum premium allocation requirements.
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<PAGE>
TRANSFERS
Before the Insured attains age 100, Policy values may, at
any time, be transferred ($500 minimum) from one Sub-Account
to another or from the Separate Account to the Fixed
Account. Within the 30 days after each Policy Anniversary,
you may also transfer a portion of the Fixed Account Value
to one or more Sub-Accounts, until the Insured attains age
100. Transfers from the Fixed Account are allowed in the
30-day period after a Policy Anniversary and will be
effective as of the next Valuation Day after a request is
received in good order at our Administrative Office. 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. Lincoln
Life may further limit transfers from the Fixed Account at
any time.
Subject to the above restrictions, up to 12 transfers may be
made in any Policy Year without charge, and any value
remaining in the Fixed Account or a Sub-Account after a
transfer must be at least $500. Transfers may be made in
writing or by telephone unless you have indicated in writing
in the application or otherwise that telephone transfers are
not to be permitted. To make a telephone transfer, you must
call our Administrative Office and provide, as
identification, your Policy Number and a requested portion
of your Social Security number. A customer service
representative will then come on the line and, upon
ascertaining that telephone transfers are permitted for that
Policy, take the transfer request, which will be processed
as of the next close of business and confirmed the day after
that. We disclaim all liability for losses resulting from
unauthorized or fraudulent telephone transactions, but
acknowledge that if we do not follow these procedures, which
it believes to be reasonable, we may be liable for such
losses.
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 a written request is received by us at
our Administrative Office. Transfer requests must be
received by us at our Administrative Office by the close of
the New York Stock Exchange (usually, 4:00 pm ET) on each
day the New York Stock Exchange is open, in order to be
effective that day. Any transfer made which causes the
remaining value of Accumulation Units for a Sub-Account to
be less than $500 will result in those remaining
Accumulation Units being cancelled and their aggregate value
reallocated proportionately among the other funding options
chosen. You should carefully consider current market
conditions and each Sub-Account's investment policies and
related risks before allocating money to the Sub-Accounts.
See "The Funds" in this Prospectus.
Lincoln Life, at its sole discretion, may waive minimum
balance requirements on the Sub-Accounts.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
You may elect to enroll in either of the following programs,
currently free of charge (though we reserve the right to
charge for them). However, both programs cannot be in effect
at the same time. Transfers under these programs do not
count against the 12 transfers per year without charge.
DOLLAR COST AVERAGING
Dollar Cost Averaging is a program which, if elected,
systematically allocates specified dollar amounts from the
Money Market Sub-Account to one or more of the Policy's
17
<PAGE>
other Sub-Accounts at regular intervals as you select. By
allocating on a regularly scheduled basis as opposed to
allocating the total amount at one particular time, you may
be less susceptible to the impact of market fluctuations.
Dollar cost averaging will not assure a profit or protect
against a declining market.
You may elect Dollar Cost Averaging by establishing a Money
Market Sub-Account value of at least $1,000. The minimum
amount per month to allocate is $100. Enrollment in this
program may occur at any time by calling our Administrative
Office or by providing the information requested on the
Dollar Cost Averaging election form to us, provided that
sufficient value is in the Money Market Sub-Account.
Transfers to the Fixed Account are not permitted under
Dollar Cost Averaging. We may, at our sole discretion, waive
Dollar Cost Averaging minimum deposit and transfer
requirements.
Dollar Cost Averaging will terminate when any of the
following occurs: (1) the number of designated transfers has
been completed; (2) the value of the Money Market Sub-
Account is insufficient to complete the next transfer; (3)
you request termination by telephone or in writing and such
request is received at least one week prior to the next
scheduled transfer date to take effect that month; or (4)
the Policy is surrendered.
AUTOMATIC REBALANCING
Automatic Rebalancing is an option which, if elected by the
Owner on the initial application, or thereafter by calling
our Administrative Office, 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). This pre-determined level will be
the allocation initially selected on the application, unless
subsequently changed. The Automatic Rebalancing allocation
may be changed at any time by submitting a written request
to Lincoln Life or by calling our Administrative Office.
If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts must be subject to
Automatic Rebalancing. The Fixed Account is not available
for Automatic Rebalancing.
You may select Automatic Rebalancing take place on either a
quarterly, semi-annual or annual basis. Once Automatic
Rebalancing is activated, any Sub-Account transfers executed
outside of the rebalancing option will terminate the
Automatic Rebalancing. Any subsequent premium payment or
withdrawal that modifies the net account balance within each
Sub-Account may also cause termination of Automatic
Rebalancing. Any such termination will be confirmed to the
Owner. You may terminate Automatic Rebalancing or re-enroll
at any time by calling or writing our Administrative Office.
CHARGES; FEES
Lincoln Life deducts the charges described below to cover
costs and expenses, services provided, and risks assumed
under the Policies. The amount of a charge may not
necessarily correspond to the costs associated with
providing the services or benefits indicated by the
designation of the charge or associated with the particular
Policy. For example, the Premium Load and Surrender Charge
may not fully cover all of the sales and distribution
expenses actually incurred by Lincoln Life, and proceeds
from other charges, including the mortality and expense risk
charge, may be used in part to cover such expenses.
18
<PAGE>
PREMIUM LOAD
We deduct 5.0% from each Premium Payment. This amount,
sometimes referred to as "premium load" covers certain
Policy-related state taxes 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".
MONTHLY DEDUCTIONS
We make a Monthly Deduction from the Net Accumulation Value
for administrative expenses of $15 during the first Policy
Year and, currently, $5 during subsequent Policy Years. This
charge is for items such as premium billing and collection,
policy value calculation, confirmations and periodic
reports, and will not exceed our costs. For subsequent
Policy Years, this monthly fee will never exceed $10.
We also make a Monthly Deduction from the Net Accumulation
Value for the Cost of Insurance and any charges for
supplemental riders. The Cost of Insurance compensates
Lincoln Life for the anticipated cost of paying Death
Benefits in excess of the Accumulation Value. The Cost of
Insurance depends on the attained age, risk class and gender
classification (in accordance with state law) of the Insured
and the current Net Amount at Risk.
The Cost of Insurance is determined by dividing the Death
Benefit at the beginning of the Policy month by 1.0032737,
subtracting the Accumulation Value at the beginning of the
Policy month, and multiplying the result (the Net Amount at
Risk) by the applicable Cost of Insurance Rate as determined
by Lincoln Life. The Guaranteed Maximum Cost of Insurance
Rates are in Appendix 2.
These Monthly Deductions are deducted proportionately from
the value of each funding option. This is accomplished for
the Sub-Accounts by canceling Accumulation Units and
withdrawing the value of the canceled Accumulation Units
from each funding option in the same proportion as their
respective values have to the Net Accumulation Value. The
Monthly Deductions are made on the Monthly Anniversary Day.
If the Policy's Surrender Value is insufficient to cover the
current Monthly Deduction, a 61-day Grace Period begins, and
you will be notified. We will send a notice at least 31 days
before the end of the Grace Period that the Policy will
lapse without value unless sufficient payment (described in
the notification letter) is received.
If the Insured is still living at age 100, no further
Monthly Deductions are taken and any Separate Account Value
is transferred to the Fixed Account. The Policy will then
remain in force until surrender or the Insured's death.
TRANSACTION FEE FOR EXCESS TRANSFERS
There will be a $25 transaction fee for each transfer
between funding options in excess of 12 during any Policy
Year.
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<PAGE>
MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
The purpose of the following table is to help purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by purchasers assuming that all Net Premium Payments are allocated
to the Separate Account. The tables reflect expenses of the individual Funds
underlying the Separate Sub-Accounts. The Mortality and Expense Risk Charge is
the currently charged rate of .80% during the first twelve Policy Years. It
currently declines to .55% per year thereafter and is guaranteed not to exceed
.90% per year.
FEE TABLE
<TABLE>
<CAPTION>
TOTAL FUND
TOTAL ANNUAL FUND OPERATING
OPERATING EXPENSES EXPENSES WITH
MANAGEMENT OTHER WITHOUT WAIVERS OR TOTAL WAIVERS WAIVERS AND
FUND FEES(1) 12(B)1 FEE EXPENSES REDUCTIONS AND REDUCTIONS REIMBURSEMENTS
---- ----------- ---------- -------- ------------------ -------------- --------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Capital
Appreciation Fund......... 0.62% N/A 0.11% 0.73% N/A 0.73%
AIM V.I. Diversified Income
Fund...................... 0.60 N/A 0.23 0.83 N/A 0.83
AIM V.I. Growth Fund....... 0.63 N/A 0.10 0.73 N/A 0.73
AIM V.I. Value Fund........ 0.61 N/A 0.15 0.76 N/A 0.76
Delaware Emerging Markets
Series -- Standard
Class(2a)................. 1.25 N/A 0.28 1.53 (0.06) 1.47
Delaware Small Cap Value
Series -- Standard
Class(2b)................. 0.75 N/A 0.10 0.85 N/A 0.85
Delaware Trend Series
Standard Class(2c)........ 0.75 N/A 0.07 0.82 N/A 0.82
Deutsche VIT Equity 500
Index Fund(3)............. 0.20 N/A 0.23 0.43 (0.13) 0.30
Fidelity VIP Equity-Income
Portfolio -- Initial
Class(4).................. 0.48 N/A 0.09 0.57 N/A 0.57
Fidelity VIP II Asset
Manager Portfolio --
Initial Class(4).......... 0.53 N/A 0.10 0.63 N/A 0.63
Fidelity VIP II Investment
Grade Bond Fund -- Initial
Class(4).................. 0.43 N/A 0.11 0.54 N/A 0.54
LN Money Market Fund....... 0.48 N/A 0.11 0.59 N/A 0.59
MFS Emerging Growth
Series(5)................. 0.75 N/A 0.09(1) 0.84 N/A 0.84
MFS Total Return
Series(5)................. 0.75 N/A 0.15(1) 0.90 N/A 0.90
MFS Utilities Series(5).... 0.75 N/A 0.16(1) 0.91 N/A 0.91
OCC Accum Trust Global
Equity Portfolio.......... 0.80 N/A 0.30 1.10 N/A 1.10
OCC Accum Trust Managed
Portfolio................. 0.77 N/A 0.06 0.83 N/A 0.83
Templeton Asset Strategy
Fund Class 1(6c).......... 0.60 N/A 0.18 0.78 N/A 0.78
Templeton Growth Securities
Fund Class 1(6a,b)........ 0.83 N/A 0.05 0.88 N/A 0.88
Templeton International
Securities Fund Class
1(6d)..................... 0.69 N/A 0.19 0.88 N/A 0.88
</TABLE>
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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) (a) 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.
(b) 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
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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.
(c) 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.
(3) 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. 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.
(4) 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:
Equity-Income 0.56% (initial); Asset Manager 0.62% (initial).
(5) 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
(6) (a) The fund administration fee is paid indirectly through the management
fee.
(b) 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%, Other Expenses
0.05%, and Total Fund Operating Expenses 0.85%.
(c) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton Global Asset Allocation Fund
effective 5/01/00. The shareholders of that fund had 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 0.60%, Other Expenses 0.14%, and Total Fund Operating
Expenses 0.74%.
(d) On 2/8/00, shareholders approved a merger and reorganization that
combined the fund with the Templeton International Equity Fund,
effective 5/01/00. The shareholders of that fund had 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%, Other Expenses 0.20%, and Total Fund Operating
Expenses 0.85%.
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SURRENDER CHARGE
Upon surrender of a Policy, a surrender charge may apply, as
described below. This charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs. (See "Appendix 3 -- Illustration of
Surrender Charges".)
The initial Surrender Charge, as specified in the Policy, is
based on the Initial Specified Amount and the amount of
Premium Payments during the first two Policy Years. Once
determined, the Surrender Charge will remain the same dollar
amount during the third through fifth Policy Years.
Thereafter, it declines monthly at a rate of 20% per year so
that after the end of the tenth Policy Year (assuming no
increases in the Specified Amount) the Surrender Charge will
be zero. Thus, the Surrender Charge at the end of the sixth
Policy Year would be 80% of the Surrender Charge at the end
of the fifth Policy Year, at the end of the seventh Policy
Year would be 60% of the Surrender Charge at the end of the
fifth Policy Year, and so forth. However, in no event will
the Surrender Charge exceed the maximum allowed by state or
federal law.
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. As of the date of this Prospectus, the minimum
allowable increase in Specified Amount is $1,000. Lincoln
Life 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 is imposed, allocated pro-rata
among the Sub-Accounts (and, where applicable, the Fixed
Account) from which the partial surrender proceeds are taken
unless the Owner instructs Lincoln Life otherwise.
The portion of the Surrender Charge applied to reimburse
Lincoln Life for sales and promotional expense is at most
28.5% of the sum of Premium Payments in the first two Policy
Years up to one Guideline Annual Premium, plus 8.5% of
Premium Payments in the first two Policy Years between one
and two times one Guideline Annual Premium plus 7.5% of
Premium Payments in the first two Policy Years in excess of
two times one Guideline Annual Premium. The portion
applicable to administrative expense is $6.00 per $1,000 of
Initial Specified Amount. Under certain circumstances
involving the payment of very large premiums during the
first two Policy Years, a lesser portion of the Surrender
Charge will be applied to reimburse us for sales and
promotional expense, if and to the extent required by state
law. Any surrenders may result in tax implications. (See
"Tax Issues".)
Based on its actuarial determination, Lincoln Life does not
anticipate that the Surrender Charge will cover all sales
and administrative expenses which Lincoln Life 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
This Policy is available for purchases by corporations and
other groups or sponsoring organizations on a Case basis.
Lincoln Life reserves 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 Lincoln Life believes to be relevant to
the expected reduction of its expenses. Some of these
reductions may be guaranteed and others may be subject to
withdrawal or modification by Lincoln Life on a uniform Case
basis. Reductions in these charges will not be unfairly
discriminatory against any person, including the affected
Policy Owners funded by Lincoln Life Flexible Premium
Variable Life Account M.
POLICY VALUES
ACCUMULATION VALUE
Once a Policy has been issued, each Net Premium Payment
allocated to a Sub-Account of the Separate Account is
credited in the form of Accumulation Units, representing the
Fund in which assets of that Sub-Account are invested. An
Accumulation Unit is a unit of measure used to calculate the
value of each Sub-Account. Each Net Premium Payment will be
credited to the Policy as of the end of the Valuation Period
in which it is received at our Administrative Office (or
portion thereof allocated to a particular Sub-Account). The
number of Accumulation Units credited is determined by
dividing the Net Premium Payment by the value of an
Accumulation Unit next computed after receipt. Since each
Sub-Account has a unique Accumulation Unit value, a Policy
Owner who has elected a combination of funding options will
have Accumulation Units credited from more than one source.
The Accumulation Value of a Policy is the sum of the Fixed
Account Value, Separate Account Value and Loan Account
Value. It is determined by: (a) multiplying the total number
of Accumulation Units credited to the Policy for each
applicable Sub-Account by its appropriate current
Accumulation Unit value; (b) if a combination of
Sub-Accounts is elected, totaling the resulting values; and
(c) adding any values attributable to the General Account
(i.e., the Fixed Account Value and the Loan Account Value).
The number of Accumulation Units credited to a Policy will
not be changed by any subsequent change in the value of an
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.
The Fixed Account Value reflects amounts allocated to the
General Account through payment of premiums or transfers
from the Separate Account. The Fixed Account Value is
guaranteed; however, there is no assurance that the Separate
Account Value of the Policy will equal or exceed the Net
Premium Payments allocated to the Separate Account.
You will be advised at least annually as to the number of
Accumulation Units which remain credited to the Policy, the
current Accumulation Unit values, the Separate Account
Value, the Fixed Account Value and the Loan Account Value.
Accumulation Value will be affected by Monthly Deductions.
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<PAGE>
VARIABLE ACCUMULATION UNIT VALUE
The Accumulation Unit value for each Sub-Account was or will
be arbitrarily established at the inception of the
Sub-Account. It may increase or decrease from Valuation
Period to Valuation Period. The Accumulation Unit value for
a Sub-Account for any later 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 (2) is divided by the number of
Sub-Account units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge plus any applicable daily administrative charge
multiplied by the number of calendar days in the Valuation
Period.
SURRENDER VALUE
The Surrender Value of a Policy is the amount the Owner can
receive in cash by surrendering the Policy. This equals the
Net Accumulation Value minus the applicable Surrender
Charge. All or part of the Surrender Value may be applied to
one or more of the Settlement Options. (See "Surrender
Charge.")
SURRENDERS
There may be adverse tax consequences associated with
surrenders from the Policy. (See "Tax Issues")
PARTIAL SURRENDERS
A partial surrender may be made at any time by written
request to our Administrative Office during the lifetime of
the Insured and while the Policy is in force. Such request
may also be made by telephone if telephone transfers have
been previously authorized in writing. A $25 transaction fee
is charged.
The amount of a partial surrender may not exceed 90% of the
Surrender Value at the end of the Valuation Period in which
the election becomes or would become effective, and may not
be less than $500.
For an Option 1 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value, Death Benefit,
and Specified Amount. The Specified Amount and Accumulation
Value will be reduced by equal amounts and will reduce any
past increases in the reverse order in which they occurred.
For an Option 2 Policy (See "Death Benefit"): A partial
surrender will reduce the Accumulation Value and the Death
Benefit, but it will not reduce the Specified Amount.
The Specified Amount remaining in force after a partial
surrender may not be less than $100,000. Any request for a
partial surrender that would reduce the Specified Amount
below this amount will not be granted. In addition, if,
following the partial surrender and
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<PAGE>
the corresponding decrease in the Specified Amount, the
Policy would not comply with the maximum premium limitations
required by federal tax law, the decrease may be limited to
the extent necessary to meet the federal tax law
requirements.
If, at the time of a partial surrender, the Net Accumulation
Value is attributable to more than one funding option, the
$25 transaction fee and the amount paid upon the surrender
will be taken proportionately from the values in each
funding option, unless you and we agree otherwise.
FULL SURRENDERS
A full surrender may be made at any time. We will pay the
Surrender Value next computed after receiving your written
request at our Administrative Office in a form satisfactory
to us. Payment of any amount from the Separate Account on a
full surrender will usually be made within seven calendar
days thereafter. If the owner makes a full surrender all
coverage under the policy will automatically terminate and
may not be reinstated.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the surrendered amount from the
Separate Account may be postponed when the New York Stock
Exchange is closed and for such other periods as the
Commission may require. Payment or transfer from the Fixed
Account may be deferred up to six months at our option. If
Lincoln Life exercises its right to defer such payment or
transfer, interest will be added as required by law.
LAPSE AND REINSTATEMENT
LAPSE OF A POLICY; EFFECT OF GUARANTEED DEATH BENEFIT
PROVISION
A Policy will not lapse during the five-year period after
its Issue Date regardless of investment performance if, on
each Monthly Anniversary Day within that period the sum of
premiums paid equals or exceeds the required amount of the
Guaranteed Initial Death Benefit Premium for that period,
assuming there have been no loans or partial surrenders. If
there have been any loans or partial surrenders, the Policy
may lapse unless there is sufficient Net Accumulation Value
to cover the Monthly Deduction.
After the five-year period expires, and depending on the
investment performance of the funding options, the Net
Accumulation Value may be insufficient to keep this Policy
in force, and payment of an additional premium may be
necessary.
If the guaranteed Death Benefit Provision is not in effect,
the Policy lapses and all coverage under the Policy
automatically terminates, if a Monthly Deduction is greater
than the Net Accumulation Value and no payment to cover the
Monthly Deduction is made within the Grace Period. We will
send you a lapse notice at least 31 days before the Grace
Period expires.
REINSTATEMENT OF A LAPSED POLICY
You can apply for reinstatement at any time during the
Insured's lifetime if the Policy was not surrendered for
cash. To reinstate a Policy, we will require satisfactory
evidence of insurability and an amount sufficient to pay for
the current Monthly Deduction plus two additional Monthly
Deductions.
If the Policy is reinstated within five years of the Issue
Date, all values including the Loan Account Value will be
reinstated to the point they were on the date of lapse.
However, the Guaranteed Initial Death Benefit Option will
not be reinstated.
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<PAGE>
If the Policy is reinstated after five years following the
Issue Date, it will be reinstated on the Monthly Anniversary
Day following our approval. The Accumulation Value at
reinstatement will be the Net Premium Payment then made less
the Monthly Deduction due that day.
If the Accumulation 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.
POLICY LOANS
A Policy loan requires that a loan agreement be executed and
that the Policy be assigned to us. The loan may be for any
amount up to 100% of the Surrender Value; however, we may
limit the amount of such loan so that total Policy
indebtedness will not exceed 90% of an amount equal to the
Accumulation Value less the Surrender Charge which would be
imposed on a full surrender. The minimum loan amount is
$500. If Policy values are held in more than one funding
option, withdrawals from each funding option will be made in
proportion to the assets in each funding option at the time
of the loan for transfer to the Loan Account, unless we are
instructed otherwise in writing at our Administrative
Office.
The Loan Account is where policy indebtedness (outstanding
loans and loan interest) accrues once it is transferred out
of the Fixed Account and the Sub-Accounts. The Loan Account
is part of Lincoln Life's General Account. The Loan Account
Value is equal to the sum of all outstanding loans and loan
interest.
Interest charged on loans is payable by you and will accrue
at an annual rate of 8%. Loan interest is payable once a
year in arrears on each policy anniversary, or earlier upon
full surrender or other payment of proceeds of a Policy. Any
interest not paid when due becomes part of the loan and the
interest will be withdrawn proportionately from the values
in each funding option.
We will credit interest on the Loan Account Value. During
the first ten Policy Years, our current practice is to
credit interest at an annual rate equal to the interest rate
charged on the loan minus 1% (guaranteed not to exceed 2%).
Beginning with the eleventh Policy Year, our current
practice is to credit interest at an annual rate equal to
the interest rate charged on the loan, less .25% annually
(guaranteed not to exceed 1%). In no case will the annual
credited interest rate be less than 6% in each of the first
ten Policy Years and 7% thereafter. Interest paid will be
allocated among the funding options according to current Net
Premium Payment allocations.
Repayments on the loan will be allocated among the funding
options according to current Net Premium Payment
allocations. The Loan Account Value will be reduced by the
amount of any loan repayment.
A Policy loan, whether or not repaid, will affect the
proceeds payable upon the Insured's death and the
Accumulation Value because the investment results of the
Separate Account or the Fixed Account will apply only to the
non-loaned portion of the Accumulation Value. The longer a
loan is outstanding, the greater the effect is likely to be.
Depending on the investment results of the Separate Account
or the Fixed Account while the loan is outstanding, 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 charge,
the Policy will terminate without value subject to the
conditions in the Grace Period provision.
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<PAGE>
If a Policy lapses while a loan is outstanding, adverse tax
consequences may result. (See "Tax Matters -- Policy
Proceeds.")
SETTLEMENT OPTIONS
Death Benefit proceeds in the form of Settlement Options are
payable by Lincoln Life at the Beneficiary's election upon
the Insured's death, or while the Insured is alive upon
election by the Owner of one of the Settlement Options.
Settlement Options are available if the Owner chooses to
surrender the Policy.
A written request may be made to elect, change, or revoke a
Settlement Option before payments begin under any Settlement
Option. This request must be in form satisfactory to us, and
will take effect upon its receipt at our Administrative
Office. The first payment under the Settlement Option
selected will become payable on the date proceeds are
settled under the option. Payments after the first payment
will be made 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.
FIRST OPTION -- Payments for the lifetime of the payee.
SECOND OPTION -- Payments for the lifetime of the payee,
guaranteed for 60, 120, 180, or 240 months;
THIRD OPTION -- Payment for a stated number of years, at
least five but no more than thirty;
FOURTH OPTION -- Payment of interest annually on the sum
left with us at a rate of at least 3% per year, and upon the
payee's death the amount on deposit will be paid.
ADDITIONAL OPTIONS -- Policy proceeds may also be settled
under any other method of settlement offered by us at the
time the request is made.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only where the
Insured is below the age of 80.
EFFECTIVE DATE OF COVERAGE
The effective date of this Policy will be the Issue Date,
provided the initial premium has been paid while the Insured
is alive and prior to any change in the health and
insurability of the Insured as represented in the
application.
SHORT-TERM RIGHT TO CANCEL THE POLICY
A Policy may be returned for cancellation and a full refund
of premium within 10 days after the Policy is received,
unless otherwise stipulated by state law requirements,
within 10 days after we mail or personally deliver a Notice
of Withdrawal Right to you, or within 45 days after the
application for the Policy is signed, whichever occurs
latest. The Initial Premium Payment made when the Policy is
issued will be held in the Fixed Account and not allocated
to the Separate Account even if you may have so directed
until three business days following the expiration of the
Right-to-Examine Period. If you return the Policy for
cancellation in a timely fashion, the refund of premiums
paid, without interest, will usually occur within seven days
of notice of cancellation, although a refund of premiums
paid by check may be delayed until the check clears.
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<PAGE>
POLICY OWNER
The Owner on the Date of Issue will be the person designated
in the Policy Specifications as having all ownership rights
under the Policy.
The Insured is the person on whose life the Policy is
issued. While the Insured is living, all rights in this
Policy are vested in the Policy Owner named in the
application or as subsequently changed, subject to
assignment, if any.
You may name a new Policy Owner while the Insured is living.
Any such change in ownership must be in a written form
satisfactory to us and recorded at our Administrative
Office. Once recorded, the change will be effective as of
the date signed; however, the change will not affect any
payment made or action we take before it was recorded. We
may require that the Policy be submitted for endorsement
before making a change.
If the Policy Owner is other than the Insured, names no
contingent Policy Owner and dies before the Insured, the
Policy Owner's rights in this Policy belong to the Policy
Owner's estate.
BENEFICIARY
The Beneficiary(ies) shall be as named in the application or
as subsequently changed, subject to assignment, if any.
You may name a new Beneficiary while the Insured is living.
Any change must be in a written form satisfactory to us and
recorded at our Administrative Office. Once recorded, the
change will be effective as of the date signed; however, the
change will not affect any payment made or action taken by
us before it was recorded.
If any Beneficiary predeceases the Insured, that
Beneficiary's interest passes to any surviving
Beneficiary(ies), unless otherwise provided. Multiple
Beneficiaries will be paid in equal shares, unless otherwise
provided. If no named Beneficiary survives the Insured, the
death proceeds shall be paid to you or your executor(s),
administrator(s) or assigns.
ASSIGNMENT
While the Insured is living, you may assign your rights in
the Policy. The assignment must be in writing, signed by you
and recorded at our Administrative Office. No assignment
will affect any payment made or action taken by us before it
was recorded. We are not responsible for any assignment not
submitted for recording, or for the sufficiency or validity
of any assignment. The assignment will be subject to any
indebtedness owed to us before it was recorded.
RIGHT TO EXCHANGE FOR A FIXED BENEFIT POLICY
You may, within the first two Policy Years, exchange the
Policy for a permanent life insurance policy then being
offered by us. The benefits for the new policy will not vary
with the investment experience of a separate account. The
exchange must be elected within 24 months from the Issue
Date. No evidence of insurability will be required.
The Policy Owner, the Insured and the Beneficiary under the
new policy will be the same as those under the exchanged
Policy on the effective date of the exchange. The
Accumulation Value under the new Policy will be equal to the
Accumulation Value under the old Policy on the date the
exchange request is received. The new policy will have a
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<PAGE>
Death Benefit on the exchange date not more than the Death
Benefit of the original Policy immediately prior to the
exchange date. If the Accumulation Value is insufficient to
support the Death Benefit, you will be required to make
additional Premium Payments in order to effect the exchange.
The new policy will have the Issue Date and Issue Age as of
the exchange date. The initial Specified Amount and any
increases in Specified Amount will have the same rate class
as those of the original Policy. Any indebtedness may be
transferred to the new policy.
The exchange may be subject to an equitable adjustment in
rates and values to reflect variances, if any, in the rates
and values between the two Policies. After adjustment, if
any excess is owed you, we will pay the excess in cash. The
exchange may be subject to federal income tax withholding.
INCONTESTABILITY
We will not contest payment of the death proceeds based on
the Initial Specified Amount after the Policy has been in
force during the Insured's lifetime for two years from the
Issue Date. For any increase in Specified Amount requiring
evidence of insurability, we will not contest payment of the
death proceeds based on such an increase after it has been
in force during the Insured's lifetime for two years from
its effective date.
MISSTATEMENT OF AGE OR SEX
The Issue Age is the age of the Insured, to the nearest
birthday, on the Issue Date, the date on which the Policy
becomes effective. This date is shown on the Policy
Specifications.
If the age or sex of the Insured has been misstated, the
affected benefits will be adjusted. The amount of the Death
Benefit will be 1. multiplied by 2. and then the result
added to 3. where:
1. is the Net Amount at Risk (Death Benefit minus
outstanding loans, if any, minus the Accumulation Value)
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 sex 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, while sane or insane, within
two years from the Issue Date, we will pay no more than the
sum of the premiums paid, less any indebtedness and the
amount of any partial surrenders. If the Insured dies by
suicide, while sane or insane, within two years from the
date an application is accepted for an increase in the
Specified Amount, we will pay no more than a refund of the
monthly charges for the cost of such additional benefit.
NONPARTICIPATING POLICIES
These are nonparticipating Policies on which no dividends
are payable. These Policies do not share in our profits or
surplus earnings.
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RIDERS
A Waiver of Monthly Deduction Rider may be added to the
Policy. Under this rider, Lincoln Life 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 for any riders
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
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.
30
<PAGE>
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.
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.
31
<PAGE>
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.
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
32
<PAGE>
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 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.
OTHER MATTERS
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.
33
<PAGE>
<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 Company,
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
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 Company. Chairman, Chief
One Reinsurance Place Executive Officer, President and Director
1700 Magnavox Way [10/96 -- present], Formerly: Senior Vice
Fort Wayne, IN 46802 President [10/95 -- 10/96]
</TABLE>
34
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
---------------------------------- ------------------------------------------
<S> <C>
KEITH J. RYAN Vice President, Controller and Chief
VICE PRESIDENT, Accounting Officer [1/96-present] The
CONTROLLER AND Lincoln National Life Insurance Co.
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 Co. Formerly: Vice
Hartford, CT 06103 President [3/93 -- 1/96] Employers Health
Insurance Company.
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
PRINCIPAL UNDERWRITER
Lincoln Life intends to offer the Policies 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. 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 life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Financial
Advisors, Corp. (a registered broker-dealer affiliated with
Lincoln Life) or other broker-dealers. Gross first year
commissions paid by Lincoln Life, including expense
reimbursement allowances, on the sale of these Policies are
not more than 95% of Premium Payments. Gross renewal
commissions paid by Lincoln Life will not exceed 10% of
Premium Payments. The local agency receives additional
compensation on the first year required premium and all
additional premiums. In some situations, the local agency
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 Lincoln
Life's resources, which include certain charges made under
the Policy.
35
<PAGE>
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. We must inform the Policy 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 Policy Owners or if it renders our
operations hazardous to the public. If you object, the
Policy may be converted to a substantially comparable fixed
benefit life insurance policy offered by us on the life of
the Insured. You have 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
Lincoln Life does presently and will, from time to time,
offer other variable annuity contracts and 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 our financial condition
as of the end of such year. Regulation by the Insurance
Department includes periodic examination to determine our
contract liabilities and reserves so that the Insurance
Department may certify the items are correct. 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.
REPORTS TO POLICY OWNERS
Lincoln Life maintains Policy records and will mail to each
Policy 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 the Fixed Account and in each
Sub-Account of the Separate Account, and any Loan Account
Value.
Policy Owners will also be sent annual reports containing
financial statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Policy Owners will receive statements of
significant transactions, such as changes in Specified
Amount, changes in Death Benefit Option, changes in future
premium allocation, transfers among Sub-Accounts, Premium
Payments, loans, loan repayments, reinstatement and
termination.
ADVERTISING
We are also 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 our financial strength or claims-paying
ability. 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 Lincoln Life or
the Policies. Furthermore,
36
<PAGE>
we may occasionally include in advertisements comparisons of
currently taxable and tax deferred investment programs,
based on selected tax brackets, or discussions of
alternative investment vehicles and general economic
conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
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 any 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.
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.
37
<PAGE>
APPENDIX 1
CORRIDOR PERCENTAGES
<TABLE>
<CAPTION>
INSURED'S CORRIDOR INSURED'S CORRIDOR
ATTAINED AGE PERCENTAGE ATTAINED AGE PERCENTAGE
------------ ---------- ------------ ----------
<S> <C> <C> <C>
0-40 250% 70 115%
41 243 71 113
42 236 72 111
43 229 73 109
44 222 74 107
----- ---- -----
45 215 75 105
46 209 76 105
47 203 77 105
48 197 78 105
49 191 79 105
----- ---- -----
50 185 80 105
51 178 81 105
52 171 82 105
53 164 83 105
54 157 84 105
----- ---- -----
55 150 85 105
56 146 86 105
57 142 87 105
58 138 88 105
59 134 89 105
----- ---- -----
60 130 90 105
61 128 91 104
62 126 92 103
63 124 93 102
64 122 94 101
----- ---- -----
65 120 95 100
66 119 96 100
67 118 97 100
68 117 98 100
69 116 99 100
----- ---- -----
</TABLE>
38
<PAGE>
APPENDIX 2
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>
39
<PAGE>
APPENDIX 3
ILLUSTRATION OF SURRENDER CHARGES
The Surrender Charge is calculated as (a) times (b), where
(a) is the sum of (i) a Deferred Sales Charge and (ii) a
Deferred Administrative Charge and (b) is the applicable
Surrender Charge Grading Factor. If the Specified Amount is
increased, a new Surrender Charge will be applicable, in
addition to any existing Surrender Charge.
Below are examples of Surrender Charge calculations, one
involving a level Specified Amount and one involving an
increase in the Specified Amount, followed by Definitions
and Tables used in the calculations.
EXAMPLE 1: A male nonsmoker, age 35, purchases a Policy with
a Specified Amount of $100,000 and a scheduled annual
premium of $1100. He now wants to surrender the Policy at
the end of the sixth Policy Year.
The Surrender Charge computed is as follows:
Sum of the premiums paid through the end of the second
Policy Year = $2200.00
Guideline Annual Premium Amount (Male, Age 35, $100,000
Specified Amount) = $1195.63
Surrender Charge =
<TABLE>
<S> <C>
(.285X$1195.63) + (.085X($2200-$1195.63)) = $340.75 + $85.37
= $ 426.12(i)
$6.00 per $1000 of Specified Amount $ 600.00(ii)
--------
$1026.12(a)
</TABLE>
The total Surrender Charge is $1026.12(a), times the
surrender charge grading factor,(b): ($1026.12 X 80%) =
$820.90.
EXAMPLE 2: A female nonsmoker, age 45, purchases a Policy
with an Initial Specified Amount of $200,000 and a scheduled
annual premium of $1500. She pays the scheduled annual
premium for the first five Policy Years. At the start of the
sixth Policy Year, she increases the Specified Amount to
$250,000 and continues to pay the scheduled annual premium
of $1500. She now wants to surrender the Policy at the end
of the eighth Policy Year. Separate Surrender Charges must
be calculated for the Initial Specified Amount and for the
increase in Specified Amount.
The Surrender Charges are computed as follows:
For the Initial Specified Amount,
Sum of the premiums paid through the end of the second
Policy Year = $3000.00
Guideline Annual Premium Amount (Female, Age 45, $200,000
Specified Amount = $2966.81
<TABLE>
<S> <C>
Surrender Charge for Initial Specified Amount =
(.285X$2966.81) +(.085X($3000.00-$2966.81)) = $845.54 +
$2.82 = $ 848.36(i)
$6.00 per $1000 of Initial Specified Amount $1200.00(ii)
--------
$2048.36(a)
</TABLE>
The total Surrender Charge for the Initial Specified Amount
is $2048.36,(a), times the applicable surrender charge
grading factor,(b): ($2048.36 X 40%) = $819.34.
40
<PAGE>
For the increase in Specified Amount;
Sum of the premiums in the first two years following the
increase in Specified Amount, applicable to the increase in
Specified Amount =
($1500 X 2) X ($50,000 / $250,000) = $600.00.
Guideline Annual Premium Amount (Female, Age 50, $50,000
Specified Amount) = $993.68.
<TABLE>
<S> <C>
Surrender Charge for the increase in Specified Amount =
(.285 X $600.00) $ 171.00(i)
$6.00 per $1000 of increase in Specified Amount $ 300.00(ii)
--------
$ 471.00(a)
</TABLE>
The total Surrender Charge for the increase in the Specified
Amount is $471.00,(a), times the applicable surrender charge
grading factor,(b): ($471.00 X 100%) = $471.00
The overall Surrender Charge for the Policy is ($819.34 +
$471.00) = $1290.34.
DEFINITIONS AND TABLES
(a)(i) The Deferred Sales Charge is based on the actual
premium paid and the applicable Guideline Annual
Premium Amount, and is calculated assuming the
following:
<TABLE>
<S> <C>
DURING POLICY YEAR:
1 and 2 28.5% of the sum of the premiums paid up to an amount
equal to the Guideline Annual Premium Amount,* plus
8.5% of the sum of the premiums paid between one and
two times the Guideline Annual Premium Amount, plus
7.5% of the sum of the premiums paid in excess of two
times the Guideline Annual Premium Amount.
3 through 10 same dollar amount as of the end of Policy Year 2.
</TABLE>
In no event will the Deferred Sales Charge exceed the
maximum permitted under federal or state law.
(ii) The Deferred Administrative Charge is $6.00 per
$1,000 of Specified Amount.
(b) SURRENDER CHARGE GRADING FACTORS
<TABLE>
<S> <C>
Policy Years** 1-5 100%
Policy Year 6 80%
Policy Year 7 60%
Policy Year 8 40%
Policy Year 9 20%
Policy Year 10 0%
</TABLE>
If a Surrender Charge becomes effective at other than the
end of a Policy Year, any applicable Surrender Charge
grading factor will be applied on a pro rata basis as of
such effective date.
* Guideline Annual Premium Amount is the level annual
amount that would be payable through the latest maturity
date permitted under the Policy but not less than 20
years after date of issue or (if earlier) age 95 for the
future benefits under the Policy, subject to the
following provisions: (A) the payments were fixed by the
Life Insurer as to both timing and amount; and (B) the
payments were based on the 1980 Commissioners Standard
Ordinary Mortality Table, net investment earnings at the
greater of an annual effective of 5% or rate or rates
guaranteed at issue of the policy, the sales load under
the policy, and the fees and charges specified in the
policy. A new Guideline Annual Premium Amount is
determined for each increase in Specified Amount under
the policy; in such event, "Policy Years" are measured
from the effective date(s) of such increase(s).
** Number of Policy Years elapsed since the Date of Issue or
since the effective date(s) of any increase(s) in
Specified Amount.
41
<PAGE>
APPENDIX 4
ILLUSTRATIONS OF ACCUMULATION VALUES, SURRENDER VALUES,
AND DEATH BENEFITS
The illustrations in this Prospectus have been prepared to
help show how values under the Policies change with
investment performance. The illustrations show how
Accumulation Values, Surrender Values and Death Benefits
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 Benefits 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 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 current mortality and expense risk charges are
equivalent to an annual effective rate of 0.80% of the daily
net asset value of the Separate Account. On each Policy
Anniversary beginning with the 13th, the mortality and
expense risk charge is reduced to 0.55% on an annual basis
of the daily net assets of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. 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 0.80% 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 guaranteed 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
constant annual rates of -1.68%, 4.26% and 10.21%.
The illustrations also reflect the fact that Lincoln Life
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 standard. Policies issued on a
substandard basis would result in lower Accumulation Values
and Death Benefits than those illustrated.
The illustrations also reflect the fact that Lincoln Life
deducts a premium load from each Premium Payment. Current
and guaranteed values reflect a deduction of 5.0% of each
Premium Payment.
The Surrender Values shown in the illustrations reflect the
fact that Lincoln Life will deduct a Surrender Charge from
the Policy's Accumulation Value for any Policy surrendered
in full during the first ten years.
In addition, the illustrations reflect the fact that Lincoln
Life deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is $15 per month in the first year. Current
values reflect a current monthly administrative expense
charge of $5 in renewal years, and guaranteed values reflect
the $10 maximum monthly administrative charge under the
Policy in renewal years.
Upon request, Lincoln Life will furnish a comparable
illustration based on the proposed insured's age, gender
classification, smoking classification, risk classification
and premium payment requested.
42
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 45
PREFERRED -- $6,576 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
PREMIUMS
ACCUMULATED SURRENDER VALUE
AT DEATH BENEFIT TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
END OF 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
POLICY YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- -------- -------- -------- -------- ------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 6,905 500,000 500,000 500,000 3,739 4,033 4,329 0 0
2 14,155 500,000 500,000 500,000 7,311 8,133 8,994 1,306 2,128
3 21,767 500,000 500,000 500,000 10,647 12,230 13,956 4,642 6,225
4 29,761 500,000 500,000 500,000 13,743 16,317 19,241 7,738 10,312
5 38,153 500,000 500,000 500,000 16,579 20,373 24,863 10,574 14,368
6 46,966 500,000 500,000 500,000 19,148 24,385 30,851 14,344 19,581
7 56,219 500,000 500,000 500,000 21,412 28,312 37,206 17,809 24,709
8 65,935 500,000 500,000 500,000 23,344 32,121 43,943 20,942 29,719
9 76,136 500,000 500,000 500,000 24,906 35,769 51,072 23,705 34,568
10 86,848 500,000 500,000 500,000 26,058 39,205 58,600 26,058 39,205
15 148,996 500,000 500,000 500,000 24,755 51,917 103,491 24,755 51,917
20 228,314 500,000 500,000 500,000 7,229 51,307 164,869 7,229 51,307
25 329,546 0 500,000 500,000 0 20,650 252,858 0 20,650
30 458,747 0 0 500,000 0 0 397,809 0 0
<S> <C>
END OF
POLICY YEAR GROSS 12%
-- --------
1 0
2 2,989
3 7,951
4 13,236
5 18,858
6 26,047
7 33,603
8 41,541
9 49,871
10 58,600
15 103,491
20 164,869
25 252,858
30 397,809
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Expense Data" at pages 20-21 of
this Prospectus.
43
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 45
PREFERRED -- $6,576 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 6,905 500,000 500,000 500,000 4,552 4,873 5,194
2 14,155 500,000 500,000 500,000 9,067 9,996 10,965
3 21,767 500,000 500,000 500,000 13,404 15,236 17,224
4 29,761 500,000 500,000 500,000 17,591 20,625 24,051
5 38,153 500,000 500,000 500,000 21,656 26,196 31,535
6 46,966 500,000 500,000 500,000 25,624 31,985 39,774
7 56,219 500,000 500,000 500,000 29,474 37,978 48,825
8 65,935 500,000 500,000 500,000 33,093 44,071 58,664
9 76,136 500,000 500,000 500,000 36,648 50,435 69,541
10 86,848 500,000 500,000 500,000 40,071 57,016 81,505
15 148,996 500,000 500,000 500,000 53,086 91,607 160,940
20 228,314 500,000 500,000 500,000 58,168 128,923 290,734
25 329,546 500,000 500,000 594,583 55,611 171,143 512,572
30 458,747 500,000 500,000 942,899 38,079 216,205 881,214
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ---------
<S> <C> <C> <C>
1 0 0 319
2 3,072 4,001 4,970
3 7,409 9,241 11,229
4 11,596 14,630 18,056
5 15,661 20,201 25,540
6 20,828 27,189 34,978
7 25,877 34,381 45,228
8 30,695 41,673 56,266
9 35,449 49,236 68,342
10 40,071 57,016 81,505
15 53,086 91,607 160,940
20 58,168 128,923 290,734
25 55,611 171,143 512,572
30 38,079 216,205 881,214
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Expense
Data" at pages 20-21 of this Prospectus.
44
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 55
PREFERRED -- $10,465 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
PREMIUMS
ACCUMULATED SURRENDER VALUE
AT DEATH BENEFIT TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
END OF 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
POLICY YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- -------- -------- -------- -------- ------- ------- ------ ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 10,988 500,000 500,000 500,000 4,498 4,921 5,347 0 0
2 22,526 500,000 500,000 500,000 8,547 9,673 10,856 577 1,703
3 34,640 500,000 500,000 500,000 12,076 14,173 16,473 4,106 6,203
4 47,361 500,000 500,000 500,000 15,063 18,383 22,187 7,093 10,413
5 60,717 500,000 500,000 500,000 17,478 22,257 27,983 9,508 14,287
6 74,741 500,000 500,000 500,000 19,265 25,722 33,821 12,889 19,346
7 89,466 500,000 500,000 500,000 20,359 28,690 39,649 15,577 23,908
8 104,928 500,000 500,000 500,000 20,673 31,049 45,393 17,485 27,861
9 121,163 500,000 500,000 500,000 20,100 32,663 50,958 18,506 31,069
10 138,209 500,000 500,000 500,000 18,537 33,391 56,245 18,537 33,391
15 237,111 0 500,000 500,000 0 18,113 74,694 0 18,133
20 363,337 0 0 500,000 0 0 58,366 0 0
25 524,437 0 0 0 0 0 0 0 0
30 730,047 0 0 0 0 0 0 0 0
<S> <C>
END OF
POLICY YEAR GROSS 12%
-- -------
1 0
2 2,886
3 8,503
4 14,217
5 20,013
6 27,445
7 34,867
8 42,205
9 49,364
10 56,245
15 74,694
20 58,366
25 0
30 0
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Expense Data" at pages 20-21 of
this Prospectus.
45
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
MALE NONSMOKER ISSUE AGE 55
PREFERRED -- $10,465 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 10,988 500,000 500,000 500,000 7,075 7,580 8,087
2 22,526 500,000 500,000 500,000 13,861 15,314 16,831
3 34,640 500,000 500,000 500,000 20,272 23,117 26,209
4 47,361 500,000 500,000 500,000 26,402 31,089 36,393
5 60,717 500,000 500,000 500,000 32,210 39,194 47,429
6 74,741 500,000 500,000 500,000 37,832 47,579 59,557
7 89,466 500,000 500,000 500,000 43,296 56,286 72,928
8 104,928 500,000 500,000 500,000 48,584 65,313 87,669
9 121,163 500,000 500,000 500,000 53,537 74,523 103,786
10 138,209 500,000 500,000 500,000 58,080 83,856 121,381
15 237,111 500,000 500,000 500,000 74,329 133,079 240,424
20 363,337 500,000 500,000 500,000 74,728 184,873 443,862
25 524,437 500,000 500,000 834,837 43,148 232,413 795,083
30 730,047 0 500,000 1,434,246 0 276,787 1,365,949
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 1,090 1,595 2,102
2 5,901 7,354 8,871
3 12,312 15,157 18,249
4 18,442 23,129 28,433
5 24,250 31,234 39,469
6 31,464 41,211 53,189
7 38,520 51,510 68,152
8 45,400 62,129 84,485
9 51,945 72,931 102,194
10 58,080 83,856 121,381
15 74,329 133,079 240,424
20 74,728 184,873 443,862
25 43,148 232,413 795,083
30 0 276,787 1,365,949
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Expense
Data" at pages 20-21 of this Prospectus.
46
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 45
PREFERRED -- $5,242 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
PREMIUMS
ACCUMULATED SURRENDER VALUE
AT DEATH BENEFIT TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
END OF 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
POLICY YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- -------- -------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,504 500,000 500,000 500,000 2,973 3,208 3,443 0 0
2 11,283 500,000 500,000 500,000 5,850 6,505 7,190 485 1,140
3 17,352 500,000 500,000 500,000 8,567 9,831 11,207 3,202 4,466
4 23,723 500,000 500,000 500,000 11,114 13,173 15,509 5,749 7,808
5 30,414 500,000 500,000 500,000 13,485 16,525 20,119 8,120 11,160
6 37,438 500,000 500,000 500,000 15,669 19,874 25,059 11,377 15,582
7 44,814 500,000 500,000 500,000 17,660 23,213 30,356 14,441 19,994
8 52,559 500,000 500,000 500,000 19,443 26,525 36,033 17,297 24,379
9 60,691 500,000 500,000 500,000 20,993 29,781 42,109 19,920 28,708
10 69,230 500,000 500,000 500,000 22,310 32,978 48,627 22,310 32,978
15 118,771 500,000 500,000 500,000 25,433 47,987 89,931 25,433 47,987
20 181,998 500,000 500,000 500,000 21,132 59,449 152,250 21,132 59,449
25 262,695 500,000 500,000 500,000 1,943 58,787 246,940 1,943 58,787
30 365,686 0 500,000 500,000 0 32,109 403,276 0 32,109
<S> <C>
END OF
POLICY YEAR GROSS 12%
-- --------
1 0
2 1,825
3 5,842
4 10,144
5 14,754
6 20,767
7 27,137
8 33,887
9 41,036
10 48,627
15 89,931
20 152,250
25 246,940
30 403,276
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Expense Data" at pages 20-21 of
this Prospectus.
47
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 45
PREFERRED -- $5,242 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 5,504 500,000 500,000 500,000 3,645 3,901 4,157
2 11,283 500,000 500,000 500,000 7,310 8,054 8,829
3 17,352 500,000 500,000 500,000 10,877 12,348 13,943
4 23,723 500,000 500,000 500,000 14,348 16,791 19,548
5 30,414 500,000 500,000 500,000 17,724 21,391 25,697
6 37,438 500,000 500,000 500,000 20,962 26,107 32,399
7 44,814 500,000 500,000 500,000 24,062 30,947 39,716
8 52,559 500,000 500,000 500,000 27,029 35,919 47,717
9 60,691 500,000 500,000 500,000 29,912 41,077 56,524
10 69,230 500,000 500,000 500,000 32,713 46,433 66,226
15 118,771 500,000 500,000 500,000 44,491 75,674 131,539
20 181,998 500,000 500,000 500,000 51,174 108,472 237,960
25 262,695 500,000 500,000 500,000 53,593 146,997 417,469
30 365,686 500,000 500,000 770,434 49,311 191,765 720,032
<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 1,955 2,699 3,474
3 5,522 6,993 8,588
4 8,993 11,436 14,193
5 12,369 16,036 20,342
6 16,678 21,823 28,115
7 20,849 27,734 36,503
8 24,887 33,777 45,575
9 28,841 40,006 55,453
10 32,713 46,433 66,226
15 44,491 75,674 131,539
20 51,174 108,472 237,960
25 53,593 146,997 417,469
30 49,311 191,765 720,032
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Expense
Data" at pages 20-21 of this Prospectus.
48
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 55
PREFERRED -- $8,225 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
PREMIUMS
ACCUMULATED SURRENDER VALUE
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
-- -------- -------- -------- -------- ------- -------- -------- ------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 8,636 500,000 500,000 500,000 4,043 4,391 4,742 0 0
2 17,704 500,000 500,000 500,000 7,873 8,824 9,821 1,073 2,024
3 27,226 500,000 500,000 500,000 11,445 13,251 15,226 4,645 6,451
4 37,223 500,000 500,000 500,000 14,774 17,688 21,008 7,974 10,888
5 47,721 500,000 500,000 500,000 17,851 22,125 27,201 11,051 15,325
6 58,743 500,000 500,000 500,000 20,653 26,535 33,827 15,213 21,095
7 70,316 500,000 500,000 500,000 23,123 30,861 40,878 19,043 26,781
8 82,468 500,000 500,000 500,000 25,187 35,023 48,333 22,467 32,303
9 95,228 500,000 500,000 500,000 26,743 38,911 56,141 25,383 37,551
10 108,626 500,000 500,000 500,000 27,718 42,439 64,282 27,718 42,439
15 186,358 500,000 500,000 500,000 22,774 52,948 111,181 22,774 52,948
20 285,566 0 500,000 500,000 0 41,478 171,077 0 41,478
25 412,183 0 0 500,000 0 0 241,140 0 0
30 573,782 0 0 500,000 0 0 331,895 0 0
<S> <C>
END OF
POLICY
YEAR GROSS 12%
-- --------
1 0
2 3,021
3 8,426
4 14,208
5 20,401
6 28,387
7 36,798
8 45,613
9 54,781
10 64,282
15 111,181
20 171,077
25 241,140
30 331,895
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, Accumulation
Values and Surrender Values would be less than
those illustrated.
Assumes no policy loans or partial surrenders
have been made. Guaranteed cost of insurance
rates, 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 guaranteed
mortality and expense risk charges and
(2) assumed Fund total expenses of 0.80% per
year. See "Expense Data" at pages 20-21 of
this Prospectus.
49
<PAGE>
FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE
POLICY
FEMALE NONSMOKER ISSUE AGE 55
PREFERRED -- $8,225 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 8,636 500,000 500,000 500,000 5,722 6,124 6,528
2 17,704 500,000 500,000 500,000 11,291 12,454 13,667
3 27,226 500,000 500,000 500,000 16,612 18,900 21,384
4 37,223 500,000 500,000 500,000 21,750 25,532 29,806
5 47,721 500,000 500,000 500,000 26,675 32,328 38,980
6 58,743 500,000 500,000 500,000 31,478 39,386 49,081
7 70,316 500,000 500,000 500,000 36,165 46,726 60,217
8 82,468 500,000 500,000 500,000 40,734 54,359 72,500
9 95,228 500,000 500,000 500,000 45,072 62,186 85,944
10 108,626 500,000 500,000 500,000 49,143 70,182 100,651
15 186,358 500,000 500,000 500,000 65,719 113,700 200,316
20 285,566 500,000 500,000 500,000 74,524 163,746 367,908
25 412,183 500,000 500,000 688,180 65,584 215,687 655,410
30 573,782 500,000 500,000 1,184,469 21,798 265,203 1,128,066
<CAPTION>
END OF SURRENDER VALUE
POLICY ANNUAL INVESTMENT RETURN OF
YEAR GROSS 0% GROSS 6% GROSS 12%
- --------------------- -------- -------- ----------
<S> <C> <C> <C>
1 377 779 1,183
2 4,501 5,664 6,877
3 9,822 12,110 14,594
4 14,960 18,742 23,016
5 19,885 25,538 32,190
6 26,046 33,954 43,649
7 32,091 42,652 56,143
8 38,018 51,643 69,784
9 43,714 60,828 84,586
10 49,143 70,182 100,651
15 65,719 113,700 200,316
20 74,524 163,746 367,908
25 65,584 215,687 655,410
30 21,798 265,203 1,128,066
</TABLE>
All Amounts are in Dollars
If Premiums are paid more frequently than
annually, the Death Benefits, 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 current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Expense
Data" at pages 20-21 of this Prospectus.
50
<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 on 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 on 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>
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 on 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 on 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 R
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 R
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 Equity 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 Opportunities 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.
[LOGO]
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
Fort Wayne, Indiana
January 31, 2000
S-32
<PAGE>
PROSPECTUS 2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT M
<TABLE>
<S> <C>
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
</TABLE>
- --------------------------------------------------------------------------------
A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
- --------------------------------------------------------------------------------
This Prospectus describes LVULCV, 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 include: flexible premium payments; a choice of one of
two death benefit options; 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 Sub-accounts of our Flexible Premium
Variable Life Account M ("Separate Account"). Each Sub-account 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, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- ----
<S> <C>
HIGHLIGHTS............................ 3
Initial Choices To Be Made.......... 3
Level or Varying Death Benefit...... 3
Amount of Premium Payments.......... 4
Selection of Funding Vehicles....... 4
Charges and Fees.................... 5
Changes in Specified Amount......... 5
LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT.................. 6
BUYING VARIABLE LIFE INSURANCE........ 7
Replacements........................ 8
APPLICATION........................... 8
OWNERSHIP............................. 9
BENEFICIARY........................... 9
THE POLICY............................ 9
Policy Specifications............... 10
PREMIUM FEATURES...................... 10
Planned Premiums Additional
Premiums........................... 10
Limits on Right to Make Payments
of Additional and Planned
Premiums......................... 10
Premium Load; Net Premium
Payment.......................... 11
RIGHT-TO-EXAMINE PERIOD............... 11
TRANSFERS AND ALLOCATION AMONG
ACCOUNTS............................. 11
Allocation of Net Premium
Payments........................... 11
Transfers........................... 11
Optional Sub-Account Allocation
Programs........................... 12
Dollar Cost Averaging............. 12
Automatic Rebalancing............. 13
POLICY VALUES......................... 13
Accumulation Value.................. 13
Separate Account Value.............. 14
Variable Accumulation Unit
Value............................ 14
Variable Accumulation Units....... 14
Fixed Account and Loan Account
Value.............................. 14
Net Accumulation Value.............. 15
FUNDS................................. 15
Substitution of Securities.......... 20
Voting Rights....................... 20
Fund Participation Agreements....... 21
CHARGES AND FEES...................... 21
Deductions from Premium Payments.... 21
Deductions Made Monthly............. 21
Monthly Deduction................. 21
Cost of Insurance Charge.......... 22
Mortality and Expense Risk Charge... 22
Fund Expenses....................... 22
Surrender Charges................... 26
Reduction of Charges -- Purchases on
a Case Basis....................... 26
Transaction Fee for Excess
Transfers.......................... 27
DEATH BENEFITS........................ 27
Death Benefit Options............... 27
Changes in Death Benefit Options and
Specified Amount................... 28
</TABLE>
<TABLE>
<CAPTION>
CONTENTS PAGE
- -------- ----
<S> <C>
Federal Income Tax Definition of
Life Insurance..................... 28
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............... 34
Issuance............................ 34
Date of Coverage.................... 34
Incontestability.................... 34
Misstatement of Age or Gender....... 34
Suicide............................. 34
Nonparticipating Policies........... 34
Riders.............................. 34
TAX ISSUES............................ 35
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..................... 42
ADVERTISING........................... 42
LEGAL PROCEEDINGS..................... 42
EXPERTS............................... 43
REGISTRATION STATEMENT................ 43
APPENDIX 1: GUARANTEED MAXIMUM COST OF
INSURANCE RATES...................... 44
APPENDIX 2: ILLUSTRATION OF SURRENDER
CHARGES.............................. 45
APPENDIX 3: CORRIDOR PERCENTAGES...... 47
APPENDIX 4: ILLUSTRATIONS OF
ACCUMULATION VALUES, SURRENDER VALUES
AND DEATH BENEFIT PROCEEDS........... 48
FINANCIAL STATEMENTS..................
Separate Account.................... M-1
Lincoln Life........................ S-1
</TABLE>
2
<PAGE>
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 three 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.
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 (The
Specified Amount may be found on the Policy's Specification
Page); or
3
<PAGE>
2) the "Corridor Death Benefit", which is the death benefit
calculated as a percentage of the Accumulation Value. (The
"Net Accumulation Value" is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts).
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 when
the Insured died; or
2) the Corridor Death Benefit.
See page 27.
This policy contains a "No Lapse Provision". This means that
the Policy will not lapse 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 to maturity even though your
Net Accumulation Value is insufficient to pay your current
Monthly Deductions. Availability of the No Lapse Provision
may vary in some states. Loans or Partial Surrenders may
jeopardize the No Lapse Provision. See page 32.
If you have borrowed against your Policy or surrendered a
portion of your Policy, your Initial Death Benefit will be
reduced by the Loan Account balance 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 10.
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 22)
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, 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 11.
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 fund(s) 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.
4
<PAGE>
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 15.
You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium payments put into the Fixed Account:
- become part of Lincoln Life's 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 Lincoln Life's discretion.
For additional information on the Fixed Account, see
page 7.
CHARGES AND FEES
We deduct a premium charge of 5% from each Premium Payment.
We make Monthly Deductions for administrative expenses
(currently, $15 per month for the first Policy Year and $5
per month afterwards, guaranteed not to exceed $10 after the
first Policy Year) along with the Cost of Insurance and any
riders that are placed on your Policy. We make daily charges
against the Separate Account for mortality and expense risk.
This charge is guaranteed at an annual rate of 0.75% for
Policy Years 1-10, 0.35% for Policy Years 11-20 and 0.20%
for Policy Years 21 and beyond.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on page 23 shows you the current expense
levels for each Fund.
Each Policy Year you may make 12 transfers between funding
options without charge. Beyond 12, a $25 fee may apply.
You may borrow within described limits against the Policy.
You may surrender the Policy totally or withdraw part of its
value.
The Surrender Charge is the amount retained by us if you
totally surrender your Policy in up to the first 15 Policy
Years. We charge you $25, but not more than 2% of the amount
withdrawn, each time you request a partial surrender of your
Policy. The length of the surrender charge period varies
based on the age at the date of issue or of increase in
Specified Amount. See page 26.
If you borrow against your Policy, interest will be charged
to the Loan Account Value. The annual interest rate is 8%.
Lincoln Life will credit interest on the Loan Account Value.
For the first 10 Policy Years, interest will be credited at
an annual rate equal to the interest rate charged minus 1%.
For Policy Years 11 and beyond, the interest credited will
be the annual interest rate charged. See page 30.
Charges and fees may be reduced in some circumstances where
Policies are purchased by corporations and other groups or
sponsoring organizations on a case basis. See page 26.
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount, chosen by the Policy Owner, 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.
5
<PAGE>
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)
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, and 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 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
6
<PAGE>
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 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
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.
And any investment income and realized capital gains within
a fund are automatically
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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 TAX ISSUES), 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 4) 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. The Owner 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 an
application on a form provided by Lincoln Life.
A completed application identifies the prospective Insured
and provides sufficient information about the prospective
insured to permit Lincoln Life to begin underwriting the
risks under the Policy. We require a medical history and
examination of the Insured. Lincoln Life may decline to
provide insurance, or it 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.
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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 the Beneficiary 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 Lincoln Life.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
and is the person who will 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.
Multiple Beneficiaries will be paid in equal shares, unless
otherwise specified to Lincoln Life.
Except when Lincoln Life has acknowledged an assignment of
the Policy or an agreement not to change the Beneficiary,
the Owner may change the Beneficiary at any time while the
Insured is living. Any request for a change in the
Beneficiary must be in a written form satisfactory to
Lincoln Life and submitted to Lincoln Life. Unless the Owner
has reserved the right to change the Beneficiary, such a
request must be signed by both the Owner and the
Beneficiary. When Lincoln Life has 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 Lincoln
Life as to any payment made or action taken by Lincoln Life
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 Lincoln Life.
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.
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. 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.
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On issuance, a life insurance contract ("Policy") will be
delivered to the Owner. The Owner should 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 Lincoln Life's books and records. Mere possession
of the Policy does not imply ownership rights. If the Owner
loses the Policy, Lincoln Life will issue a replacement on
request. Lincoln Life may impose a Policy replacement 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.
PREMIUM FEATURES
The Owner 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. (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
been surrendered, there are certain changes under the
Policy. Lincoln Life will no longer accept Premium Payments.
Lincoln Life will make no further monthly deductions. Policy
Values held in the Separate Account will be transferred to
the Fixed Account. Lincoln Life will no longer transfer
amounts to the Sub-Accounts. The Policy will remain in force
until surrender or the Insured's Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the Applicant chooses to pay
Lincoln Life 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. Additional
Premiums will be credited only when actually received by
Lincoln Life. 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.
LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
The Owner may increase Planned Premiums, or pay Additional
Premiums, subject to the following limitations and Lincoln
Life's right to limit the amount or frequency of Additional
Premiums.
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Lincoln Life 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 Lincoln Life is unwilling to
accept the risk, the increase in premium will be refunded
without interest and without participation of such amounts
in any underlying investment.
Lincoln Life may also decline 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. The
excess amount would be returned.
PREMIUM LOAD; NET PREMIUM PAYMENT
Lincoln Life deducts 5% from each Premium Payment. This
amount, sometimes referred to as "premium load," covers
certain Policy-related state tax and federal income tax
liabilities and a portion of the sales expenses incurred by
Lincoln Life. The Premium Payment, net of the premium load,
is called the "Net Premium Payment."
RIGHT-TO-EXAMINE PERIOD
If the Owner mails or delivers 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) and
notice of surrender rights to the Owner, ("Right-to-Examine
Period") Lincoln Life will refund to the Owner all Premium
Payments.
Any Premium Payments received by Lincoln Life 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. An Owner may change the allocation of Net
Premium Payments among the Fixed and Variable Sub-Accounts
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. Lincoln Life,
at its sole discretion, may waive minimum balance
requirements on the Sub-Accounts.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the Insured
reaches Age 100. The Owner should carefully consider current
market conditions and each Sub-Account's investment policies
and related risks before allocating money to the
Sub-Accounts.
Transfer of amounts from one Sub-Account to another or from
the Sub-Accounts to the Fixed Account are possible at any
time. Within 30 days after each anniversary of the Date of
Issue, the Owner may transfer up to 20% of the Fixed Account
Value (as of the preceding anniversary of the Date of Issue)
to one or more Sub-Accounts. The
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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 a Sub-Account after a
transfer must be at least $100. Lincoln Life reserves the
right to impose a minimum transfer amount and a charge for
each transfer request in excess of 12 requests in any Policy
Year. Lincoln Life may further limit transfers from the
Fixed Account at any time.
Transfers must be made in proper written form, unless the
Owner has given written authorization to Lincoln Life to
accept telephone transactions. Authorization to engage in
telephone transactions and permitted telephone transactions
must be made in accordance with the procedures 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
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, currently
without charge, but may participate in only one program at
any time.
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, an Owner may reduce
exposure to market volatility. Dollar Cost Averaging will
not assure a profit or protect against a declining market.
If the Owner elects 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 a request from the Owner 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. Lincoln Life may, in its sole
discretion, waive Dollar Cost Averaging minimum deposit and
transfer requirements.
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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.
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 changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner 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 upon receipt by the
Administrative Office of a 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
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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.
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 (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 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 Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees the Fixed Account Value.
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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.
FUNDS
Each of the Sub-Accounts of the Separate Account 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
Advisers, 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
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<PAGE>
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 by 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
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 -- Service Class
Fidelity VIP High Income -- 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, STE 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 Street, Denver, CO
80206-4928.
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 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.
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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 Inc., 605 Third
Avenue, 2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
The investment advisory fees charged the Funds by their
advisers are shown listed under "Fund Expenses" in 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: Seeks to
make your investment grow over time by investing primarily
in stocks of smaller companies located around the world that
typically have market capitalization 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: Seeks to make you 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: 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.
17
<PAGE>
BARON CAPITAL ASSET FUND -- INSURANCE SHARES: Seeks 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.
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 of the United
States.
DEUTSCHE VIT EQUITY 500 FUND: Seeks to replicate as closely
as possible the performance of the Standard & Poor's 500
Composite Price Index, before the deduction of the Fund
expenses.
DEUTSCHE VIT SMALL CAP INDEX FUND: Seeks 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 common 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
capital appreciation by investing primarily in securities of
companies whose value the advisor believes is not fully
recognized by the public.
18
<PAGE>
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: Seeks 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: Seeks long-term growth of capital in a
manner consistent with the preservation of capital by
investing primarily in common stocks of companies of any
size throughout the world. The Portfolio normally invests in
insurers from at least 5 different countries, including the
U.S. The Portfolio may at times invest in fewer than five
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.
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 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: Seeks
long-term total return consistent with preservation of
capital. The fund allocates its assets among several
categories of equity and fixed-income securities, both of
U.S. and foreign 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: Seeks to achieve
long-term capital appreciation, by investing in 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).
19
<PAGE>
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 stock 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.
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 Fund's investment
advisor.
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. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments. The right to
select among Funds will be limited by the terms and
conditions imposed by Lincoln Life (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 the judgment of
Lincoln Life, 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, Lincoln Life 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
Lincoln Life 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.
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.
20
<PAGE>
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.
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
Lincoln Life deducts charges in connection with the Policy
to compensate it for providing the insurance benefit set
forth in the Policy, administering the Policy, assuming
certain risks in connection with the Policy and for
incurring expenses associated with the distribution of the
Policy.
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.
DEDUCTIONS MADE MONTHLY
We make various expense deductions monthly. The Monthly
Deductions, including 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 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Separate Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Insured's Death.
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $15 until the
first Policy Anniversary and, currently, $5 thereafter
(guaranteed not to exceed $10 after the first Policy Year).
21
<PAGE>
These charges compensate Lincoln Life 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 Lincoln Life 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, although 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 multiplying the result (the "Net Amount at
Risk") by the applicable Cost of Insurance Rate as
determined by Lincoln Life. The Guaranteed Maximum Cost of
Insurance Rates are in Appendix 1.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than 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 0.75% in Policy Years 1-10, 0.35% in Policy
Years 11-20 and 0.20% in Policy Years 21 and beyond.
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.
22
<PAGE>
PORTFOLIO EXPENSE TABLE
<TABLE>
<CAPTION>
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
--------------------------- ----------- -------- -------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
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)............... 1.25% 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 .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%
</TABLE>
---------------------------------------------------
(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. Some advisors pay higher fees
than others.
(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%
23
<PAGE>
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 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,
24
<PAGE>
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 ton
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, effective
5/01/00. The shareholders of that fund had 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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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
length of the Surrender Charge period varies based on the
Age of the Insured on the date of issue or date of increase
in Specified Amount as follows:
<TABLE>
<CAPTION>
AGE SURRENDER CHARGE PERIOD
---------- -----------------------
<S> <C>
0-50 15 years
51 14 years
52 13 years
53 12 years
54 11 years
55+ 10 years
</TABLE>
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 2.
The surrender charge under a Policy is proportional to the
face amount of the Policy. Expressed 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 2 for issue ages 45 and 55.
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. Lincoln Life 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, Lincoln Life does 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 which
Lincoln Life 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 the general account of Lincoln Life, which
supports insurance and annuity obligations.
REDUCTION OF CHARGES -- PURCHASES ON A CASE BASIS
This Policy is available for purchases by corporations and
other groups or sponsoring organizations on a Case basis.
Lincoln Life reserves the right to reduce premium loads
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<PAGE>
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 Lincoln Life believes to be relevant to
the expected reduction of its expenses. Some of these
reductions may be guaranteed and others may be subject to
withdrawal or modification by Lincoln Life on a uniform Case
basis. Reductions in these charges will not be unfairly
discriminatory against any person, including the affected
Policy Owners funded by Lincoln Life Flexible Premium
Variable Life Account M.
TRANSACTION FEE FOR EXCESS TRANSFERS
Lincoln Life reserves 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 (in each case) any
indebtedness under the Policy. In the case of Death Benefit
Option 1, the Specified Amount is reduced by the amount of
any partial 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 3 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 unless the Minimum Death Benefit exceeds the
Specified Amount. (See DEATH BENEFITS, Federal Income Tax
Definition of Life Insurance).
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<PAGE>
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. 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 Option 1. Owners who prefer to have
favorable investment experience reflected in increased
insurance coverage should select 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 Lincoln Life.
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.
Lincoln Life may at its discretion decline any request for a
change between Death Benefit Options or increase in the
Specified Amount. Lincoln Life may at its discretion 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 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
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<PAGE>
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 3.
NOTICE OF DEATH OF INSURED
Due Proof of Death must be furnished to Lincoln Life at the
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 Lincoln
Life.
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.
The Owner may elect or change a Settlement Option while the
insured is alive. If the Owner has 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, Lincoln
Life will pay any amount due the assignee in one lump sum.
Any remaining Death Benefit Proceeds will be paid as
elected.
A request to elect, change, or revoke a Settlement Option
must be received in proper written form by the
Administrative Office 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. Payments after the
first payment will be made 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.
The second Settlement Option is an annuity for the
lifetime of the payee, with monthly payments guaranteed
for 60, 120, 180, or 240 months.
Under the third Settlement Option, Lincoln Life makes
monthly payments for a stated number of years, at least
five but no more than thirty.
Under the fourth Settlement Option, Lincoln Life pays at
least 3% interest annually on the sum left on deposit,
and pays the amount on deposit on the payee's death.
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<PAGE>
Any other Settlement Option offered by Lincoln Life at the
time of election may also be selected.
POLICY LIQUIDITY
The accumulated value of the Policy is available for loans
or withdrawals. Subject to certain limitations, the Owner
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
The Owner may at any time borrow in the aggregate up to 100%
of the Surrender Value at the time a Policy Loan is made.
Lincoln Life 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. The Owner
must execute a loan agreement and assign the Policy to
Lincoln Life 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
in advance, 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.
Lincoln Life credits interest to the Loan Account Value of
7% in Policy Years 1-10 and 8% thereafter, so the net cost
of a Policy Loan is 1% in years 1-10 and 0% thereafter.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, transfers from each for loans and
loan interest will be made in proportion to the assets in
each Sub-Account at that time, unless Lincoln Life is
instructed otherwise in proper written form at the
Administrative Office. 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, whether or not repaid, affects the proceeds
payable upon the Death and the Accumulation Value. The
longer a Policy Loan is outstanding, the greater the effect
is likely to be. While 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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<PAGE>
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 telephone
transactions have been authorized by the Owner. 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, the partial surrender will
not be permitted by Lincoln Life. 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 Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or your assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. 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 the Owner
can receive in a lump sum by surrendering the Policy. The
Surrender Value is the Net Accumulation Value 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 4.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any of the
Sub-Accounts will generally be made within seven days.
Payment or transfer from the Fixed Account may be deferred
up to six months at Lincoln Life's option. If Lincoln Life
exercises its right to
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<PAGE>
defer any payment from the Fixed Account, interest will
accrue and be paid as required by law from the date the
recipient would otherwise have been entitled to receive the
payment.
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. The assignment must be in proper written form,
signed by you and recorded at the Administrative Office. No
assignment will affect, or prejudice Lincoln Life as to, any
payment made or action taken by Lincoln Life before it was
recorded. Lincoln Life is not responsible for any assignment
not submitted for recording, nor is Lincoln Life responsible
for the sufficiency or validity of any assignment. Any
assignment is subject to any indebtedness owed to Lincoln
Life at the time the assignment is recorded and any interest
accrued on such indebtedness after recordation of any
assignment.
Once recorded, the assignment remains effective until
released by the assignee in proper written form. So long as
an effective assignment remains outstanding, the Owner will
not be permitted to take any action with respect to the
Policy without the consent of the assignee in proper written
form.
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 Lincoln Life as to, any payment made or action
taken by Lincoln Life before it was recorded. Lincoln Life
may require that the Policy be submitted to it 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, unless the No Lapse Provision is
in effect, the Policy is subject to lapse and automatic
termination of all coverage under the Policy. 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 Lincoln Life has 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, Lincoln Life
will send a written notice to the Owner 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
Lincoln Life 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.
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<PAGE>
The No Lapse Premium is the cumulative premium required to
have been paid by each Monthly Anniversary Day to prevent
the Policy from lapsing. If this Policy has a No Lapse
Premium shown on the specifications, this policy will not
lapse 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 (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 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 to Lincoln Life and it agrees to accept the risk,
(d) Lincoln Life receives 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 Lincoln Life approves the application for
reinstatement. Surrender Charges will be reinstated as of
the Policy Year in which the Policy lapsed.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
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 Lincoln Life,
received at the Administrative Office.
TELEPHONE TRANSACTION PRIVILEGES
Telephone transactions are permitted only if authorized in
proper written form by the applicant or Owner. To effect a
permitted telephone transaction, the Owner or his or her
authorized representative must call the Administrative
Office and provide, as identification, his or her policy
number, a requested portion of his or her Social Security
number, and such other information as Lincoln Life may
require to authenticate the authority of the caller. If
permitted and adequately authenticated, a customer service
representative will accept the telephone transaction
request. Lincoln Life disclaims all liability for losses
resulting from unauthorized or fraudulent telephone
transactions, but acknowledges that if it does not follow
these procedures, which it believes to be reasonable, it may
be liable for such losses.
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<PAGE>
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 80.
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided the
Insured is alive and prior to any change in the health and
insurability of the Insured as represented in the
application.
INCONTESTABILITY
Lincoln Life 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. For any increase in
Specified Amount requiring evidence of insurability, Lincoln
Life will not contest payment of the Death Benefit Proceeds
based on such an increase after it has been in force for two
years from its 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, while sane or insane, within
two years from the Date of Issue, Lincoln Life will pay no
more than the sum of the premiums paid, less any
indebtedness and the amount of any partial surrenders. If
the Insured dies by suicide, while sane or insane, within
two years from the date an application is accepted for an
increase in the Specified Amount, Lincoln Life will pay no
more than a refund of the monthly charges for the cost of
such additional benefit.
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, Lincoln Life 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 for any other
riders that become part of the Policy.
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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
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
35
<PAGE>
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.
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
36
<PAGE>
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.
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.
37
<PAGE>
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 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. The Owner should consult with his or her
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 --
EXECUTIVE VICE present] 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.
40
<PAGE>
The Policy may be sold by individuals, who in addition to
being appointed as life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Financial
Advisors, Corp. (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 Lincoln Life's resources, which
include sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life 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 Lincoln Life's
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 Lincoln Life 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.
Lincoln Life 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
Lincoln Life from time to time offers other variable annuity
contracts and variable life insurance policies with benefits
which vary in accordance with the investment experience of a
separate account of Lincoln Life.
STATE REGULATION
Lincoln Life is 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 the operation of Lincoln Life for the preceding
year and its financial condition as of the end of such year.
Regulation by the Insurance Department includes periodic
examination to determine Lincoln Life's contract liabilities
and reserves so that the Insurance Department may certify
the items are correct. Lincoln Life's books and accounts are
subject to review by the Insurance Department at all times
and a full examination of its 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.
41
<PAGE>
REPORTS TO OWNERS
Lincoln Life maintains 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.
Owners will also be sent annual reports containing financial
statements for the Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive 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 also 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. Lincoln Life may advertise
these ratings from time to time. In addition, Lincoln Life
may include in certain advertisements, endorsements in the
form of a list of organizations, individuals or other
parties which recommend Lincoln Life or the Policies.
Furthermore, Lincoln Life may occasionally include in
advertisements comparisons of currently taxable and tax
deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
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 any 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.
42
<PAGE>
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.
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
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>
44
<PAGE>
APPENDIX 2
ILLUSTRATION OF SURRENDER CHARGES
The initial Surrender Charge is calculated as (a) times (b),
plus (c), with that result not to exceed (d), where
(a) is 1.25;
(b) is the curtate net level premium for the Specified
Amount of insurance, calculated using the 1980
Commissioners Standard Ordinary mortality table and 4%
interest;
(c) is $10 per $1000 of Specified Amount; and
(d) is $50 per $1000 of Specified Amount.
The Surrender Charge decreases from its initial amount to
zero over a period of at most 15 years. If the insured's Age
at issue is 55 or greater, then the Surrender Charge
decreases to zero over a period of ten years. In general
terms, the initial Surrender Charge is amortized in
proportion to a twenty year life contingent annuity due,
with a further reduction in the final years of the surrender
charge period. In formulas, the Surrender Charge a point in
time "t" years after issue is (a) times (b) times (c), where
(a) is the initial Surrender Charge;
(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; and
(c) is a durational factor depending on the issue Age and
policy year "t". Values are shown below for issue Age 50
or less, and for issue Age 55 or more. Values for Ages
51 through 54 fall in between these values.
<TABLE>
<CAPTION>
AGE 50 AGES 55
T OR LESS OR MORE
- ------- -------
<S> <C> <C>
7 or less 100% 75%
8 100% 50%
9 100% 25%
10 100% 0%
11 80% 0%
12 60% 0%
13 40% 0%
14 20% 0%
15 or more 0% 0%
</TABLE>
EXAMPLE 1: A male, Age 45, purchases a policy with a
Specified Amount of $100,000.
The initial Surrender Charge is computed as follows:
net level premium = 1987.66
$10 per $1000 of Specified Amount = $1000
$50 per $1000 of Specified Amount = $5000
initial Surrender Charge = 1.25 X $1987.66 + 1000 =
$3,484.57, which is less than $5000.
45
<PAGE>
This amount decreased to zero over 15 years as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY DURATIONAL SURRENDER
ISSUE CHARGE RATIO FACTOR CHARGE
----- --------- ------- ---------- ---------
<S> <C> <C> <C> <C>
0 $3,484.57 1.00000 100% 3,484.57
1 $3,484.57 0.96609 100% 3,366.42
2 $3,484.57 0.93101 100% 3,244.18
3 $3,484.57 0.89471 100% 3,117.68
4 $3,484.57 0.85711 100% 2,986.67
5 $3,484.57 0.81818 100% 2,850.99
6 $3,484.57 0.77782 100% 2,710.36
7 $3,484.57 0.73600 100% 2,564.64
8 $3,484.57 0.69265 100% 2,413.59
9 $3,484.57 0.64769 100% 2,256.93
10 $3,484.57 0.60104 100% 2,094.38
11 $3,484.57 0.55257 80% 1,540.37
12 $3,484.57 0.50212 60% 1,049.80
13 $3,484.57 0.44952 40% 626.55
14 $3,484.57 0.39456 20% 274.97
15 $3,484.57 0.33701 0% 0.00
</TABLE>
EXAMPLE 2: A female, Age 55, purchases a policy with a
Specified Amount of $200,000.
The initial Surrender Charge is computed as follows:
net level premium = $4,996.55
$10 per $1000 of Specified Amount = $2,000
$50 per $1000 of Specified Amount = $10,000
initial Surrender Charge = 1.25 X $4996.55 + 2000 =
$8,245.68, which is less than $10,000.
This amount decreased to zero over 10 years as follows:
<TABLE>
<CAPTION>
YEARS INITIAL
AFTER SURRENDER ANNUITY DURATIONAL SURRENDER
ISSUE CHARGE RATIO FACTOR CHARGE
----- --------- ------- ---------- ---------
<S> <C> <C> <C> <C>
0 $8,245.68 1.00000 100% 8,245.68
1 $8,245.68 0.96649 100% 7,969.40
2 $8,245.68 0.93185 100% 7,683.73
3 $8,245.68 0.89596 100% 7,387.80
4 $8,245.68 0.85871 100% 7,080.67
5 $8,245.68 0.82003 100% 6,761.74
6 $8,245.68 0.77986 100% 6,430.50
7 $8,245.68 0.73818 75% 4,565.07
8 $8,245.68 0.69496 50% 2,885.22
9 $8,245.68 0.65022 25% 1,340.37
10 $8,245.68 0.60387 0% 0.00
</TABLE>
46
<PAGE>
APPENDIX 3
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>
47
<PAGE>
APPENDIX 4
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 0.75% of the daily
net asset value of the Separate Account in years 1-10, 0.35%
in years 11-20 and 0.20% in years 21 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
-1.56%, 4.40% and 10.35% for years 1-10, -1.17%, 4.81% and
10.79% in years 11-20, and -1.02%, 4.97% and 10.96% in years
21 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 $15 per month in
the first year. Current values reflect a current flat dollar
monthly administrative expense charge of $5 (and guaranteed
values, $10) in subsequent Policy Years.
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.
48
<PAGE>
MALE AGE 45 NONSMOKER
PREFERRED -- $5,396 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
PREMIUMS
ACCUMULATED TOTAL ACCUMULATION VALUE SURRENDER VALUE
END AT DEATH BENEFIT ANNUAL INVESTMENT RETURN ANNUAL INVESTMENT RETURN
OF 5% ANNUAL INVESTMENT RETURN OF OF OF
POLICY INTEREST GROSS GROSS GROSS GROSS GROSS GROSS GROSS
YEAR PER YEAR GROSS 0% GROSS 6% 12% 0% 6% 12% 0% 6% 12%
-- -------- -------- -------- -------- ------- ------- -------- ------- ------- --------
1 5,666 500,000 500,000 500,000 3,447 3,701 3,955 0 0 0
2 11,615 500,000 500,000 500,000 5,984 6,682 7,413 0 0 0
3 17,861 500,000 500,000 500,000 8,299 9,610 11,042 0 0 0
4 24,420 500,000 500,000 500,000 10,387 12,473 14,853 0 0 177
5 31,306 500,000 500,000 500,000 12,228 15,247 18,844 0 1,238 4,835
6 38,537 500,000 500,000 500,000 13,811 17,915 23,024 493 4,597 9,706
7 46,130 500,000 500,000 500,000 15,097 20,430 27,374 2,495 7,828 14,772
8 54,102 500,000 500,000 500,000 16,057 22,752 31,884 4,197 10,892 20,024
9 62,473 500,000 500,000 500,000 16,651 24,833 36,533 5,561 13,743 25,443
10 71,262 500,000 500,000 500,000 16,836 26,612 41,296 6,544 16,321 31,004
15 122,257 500,000 500,000 500,000 10,938 30,070 67,992 10,938 30,070 67,992
20 187,341 0 500,000 500,000 0 16,073 96,586 0 6,073 96,586
25 270,407 0 0 500,000 0 0 120,730 0 0 120,730
30 376,421 0 0 500,000 0 0 122,105 0 0 122,105
</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.
49
<PAGE>
MALE AGE 45 NONSMOKER
PREFERRED -- $5,396 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 5,666 500,000 500,000 500,000 3,447 3,701 3,955 0 0 0
2 11,615 500,000 500,000 500,000 6,871 7,598 8,356 0 0 0
3 17,861 500,000 500,000 500,000 10,139 11,562 13,107 0 0 0
4 24,420 500,000 500,000 500,000 13,279 15,623 18,274 0 947 3,598
5 31,306 500,000 500,000 500,000 16,317 19,812 23,930 2,307 5,803 9,920
6 38,537 500,000 500,000 500,000 19,279 24,162 30,153 5,961 10,844 16,835
7 46,130 500,000 500,000 500,000 22,145 28,658 36,983 9,543 16,056 24,381
8 54,102 500,000 500,000 500,000 24,803 33,192 44,369 12,943 21,332 32,509
9 62,473 500,000 500,000 500,000 27,416 37,931 52,541 16,326 26,841 41,451
10 71,262 500,000 500,000 500,000 29,919 42,819 61,516 19,628 32,527 51,225
15 122,257 500,000 500,000 500,000 40,320 69,763 122,944 40,320 69,763 122,944
20 187,341 500,000 500,000 500,000 46,993 101,131 224,857 46,993 101,131 224,857
25 270,407 500,000 500,000 500,000 50,188 139,743 402,074 50,188 139,743 402,074
30 376,421 500,000 500,000 755,782 43,660 182,859 706,338 43,660 182,859 706,338
</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.
50
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $9,184 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,643 500,000 500,000 500,000 5,873 6,306 6,740 0 0 0
2 19,768 500,000 500,000 500,000 8,778 9,927 11,134 0 0 0
3 30,400 500,000 500,000 500,000 11,173 13,240 15,512 0 0 0
4 41,563 500,000 500,000 500,000 13,030 16,197 19,848 0 0 0
5 53,284 500,000 500,000 500,000 14,318 18,747 24,106 0 0 3,950
6 65,591 500,000 500,000 500,000 14,976 20,807 28,221 0 1,637 9,051
7 78,514 500,000 500,000 500,000 14,934 22,280 32,115 1,318 8,664 18,499
8 92,083 500,000 500,000 500,000 14,100 23,041 35,678 5,545 14,486 27,124
9 106,330 500,000 500,000 500,000 12,361 22,938 38,775 8,353 18,931 34,767
10 121,290 500,000 500,000 500,000 9,604 21,812 41,256 9,604 21,812 41,256
15 208,084 0 0 500,000 0 0 39,330 0 0 39,330
20 318,858 0 0 0 0 0 0 0 0 0
25 460,236 0 0 0 0 0 0 0 0 0
30 640,675 0 0 0 0 0 0 0 0 0
</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.
51
<PAGE>
MALE AGE 55 NONSMOKER
PREFERRED -- $9,184 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- ---------- -------- -------- ---------- -------- -------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 9,643 500,000 500,000 500,000 5,873 6,306 6,740 0 0 0
2 19,768 500,000 500,000 500,000 11,485 12,718 14,005 0 0 0
3 30,400 500,000 500,000 500,000 16,747 19,147 21,758 0 0 0
4 41,563 500,000 500,000 500,000 21,755 25,693 30,154 641 4,578 9,040
5 53,284 500,000 500,000 500,000 26,467 32,316 39,221 6,311 12,160 19,065
6 65,591 500,000 500,000 500,000 31,021 39,159 49,178 11,850 19,989 30,007
7 78,514 500,000 500,000 500,000 35,442 46,262 60,153 21,826 32,646 46,537
8 92,083 500,000 500,000 500,000 39,713 53,620 72,246 31,159 45,066 63,691
9 106,330 500,000 500,000 500,000 43,678 61,091 85,431 39,670 57,084 81,424
10 121,290 500,000 500,000 500,000 47,264 68,613 99,775 47,264 68,613 99,775
15 208,084 500,000 500,000 500,000 61,104 109,864 199,266 61,104 109,864 199,266
20 318,858 500,000 500,000 500,000 64,002 154,726 368,268 64,002 154,726 368,268
25 460,236 500,000 500,000 704,375 45,823 199,876 670,833 45,823 199,876 670,833
30 640,675 0 500,000 1,236,622 0 246,534 1,177,735 0 246,534 1,177,735
</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.
52
<PAGE>
FEMALE AGE 45 NONSMOKER
PREFERRED -- $4,391 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,611 500,000 500,000 500,000 2,848 3,056 3,265 0 0 0
2 9,452 500,000 500,000 500,000 4,996 5,570 6,172 0 0 0
3 14,535 500,000 500,000 500,000 6,996 8,079 9,262 0 0 0
4 19,872 500,000 500,000 500,000 8,837 10,569 12,543 0 0 20
5 25,477 500,000 500,000 500,000 10,512 13,031 16,026 0 1,074 4,069
6 31,361 500,000 500,000 500,000 12,009 15,449 19,720 638 4,079 8,350
7 37,540 500,000 500,000 500,000 13,322 17,814 23,641 2,561 7,053 12,880
8 44,028 500,000 500,000 500,000 14,434 20,105 27,797 4,306 9,977 17,669
9 50,840 500,000 500,000 500,000 15,320 22,291 32,187 5,851 12,821 22,718
10 57,992 500,000 500,000 500,000 15,977 24,363 36,837 7,192 15,578 28,052
15 99,491 500,000 500,000 500,000 16,209 33,499 66,556 16,209 33,499 66,556
20 152,456 500,000 500,000 500,000 8,886 37,309 109,847 8,886 37,309 109,847
25 220,053 0 500,000 500,000 0 25,910 172,663 0 25,910 172,663
30 306,326 0 0 500,000 0 0 269,279 0 0 269,279
</TABLE>
Amount 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.
53
<PAGE>
FEMALE AGE 45 NONSMOKER
PREFERRED -- $4,391 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 4,611 500,000 500,000 500,000 2,848 3,056 3,265 0 0 0
2 9,452 500,000 500,000 500,000 5,695 6,292 6,915 0 0 0
3 14,535 500,000 500,000 500,000 8,460 9,632 10,905 0 0 0
4 19,872 500,000 500,000 500,000 11,143 13,082 15,272 0 559 2,750
5 25,477 500,000 500,000 500,000 13,749 16,648 20,058 1,792 4,691 8,101
6 31,361 500,000 500,000 500,000 16,229 20,287 25,258 4,859 8,917 13,888
7 37,540 500,000 500,000 500,000 18,588 24,005 30,919 7,827 13,244 20,158
8 44,028 500,000 500,000 500,000 20,829 27,809 37,094 10,701 17,681 26,966
9 50,840 500,000 500,000 500,000 23,001 31,751 43,888 13,532 22,282 34,419
10 57,992 500,000 500,000 500,000 25,107 35,841 51,371 16,322 27,056 42,586
15 99,491 500,000 500,000 500,000 34,831 59,380 103,510 34,831 59,380 103,510
20 152,456 500,000 500,000 500,000 42,183 87,543 190,039 42,183 87,543 190,039
25 220,053 500,000 500,000 500,000 47,750 123,064 339,163 47,750 123,064 339,163
30 306,326 500,000 500,000 636,737 48,704 165,579 595,081 48,704 165,579 595,081
</TABLE>
Amount 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.
54
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $7,260 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- --------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,623 500,000 500,000 500,000 4,819 5,166 5,515 0 0 0
2 15,627 500,000 500,000 500,000 7,805 8,750 9,740 0 0 0
3 24,032 500,000 500,000 500,000 10,545 12,291 14,202 0 0 0
4 32,857 500,000 500,000 500,000 13,052 15,799 18,943 0 0 1,499
5 42,123 500,000 500,000 500,000 15,315 19,262 23,983 0 2,604 7,325
6 51,852 500,000 500,000 500,000 17,311 22,651 29,332 1,469 6,809 13,490
7 62,068 500,000 500,000 500,000 18,981 25,904 34,966 7,734 14,657 23,719
8 72,794 500,000 500,000 500,000 20,247 28,934 40,844 13,189 21,875 33,785
9 84,057 500,000 500,000 500,000 21,006 31,625 46,894 17,704 28,323 43,592
10 95,883 500,000 500,000 500,000 21,181 33,882 53,069 21,181 33,882 53,069
15 164,496 500,000 500,000 500,000 12,484 37,517 87,684 12,484 37,517 87,684
20 252,066 0 500,000 500,000 0 15,388 124,838 0 15,388 124,838
25 363,830 0 0 500,000 0 0 145,464 0 0 145,464
30 506,473 0 0 500,000 0 0 95,062 0 0 95,062
</TABLE>
Amount 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.
55
<PAGE>
FEMALE AGE 55 NONSMOKER
PREFERRED -- $7,260 ANNUAL PREMIUM
FACE AMOUNT $500,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- -------- -------- ---------- -------- -------- --------- -------- -------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 7,623 500,000 500,000 500,000 4,819 5,166 5,515 0 0 0
2 15,627 500,000 500,000 500,000 9,466 10,462 11,503 0 0 0
3 24,032 500,000 500,000 500,000 13,884 15,833 17,952 0 0 0
4 32,857 500,000 500,000 500,000 18,138 21,346 24,980 694 3,904 7,536
5 42,123 500,000 500,000 500,000 22,199 26,982 32,620 5,541 10,324 15,962
6 51,852 500,000 500,000 500,000 26,158 32,834 41,032 10,316 16,992 25,190
7 62,068 500,000 500,000 500,000 30,022 38,921 50,308 18,776 27,674 39,062
8 72,794 500,000 500,000 500,000 33,789 45,251 60,542 26,731 38,192 53,483
9 84,057 500,000 500,000 500,000 37,344 51,722 71,724 34,042 48,420 68,422
10 95,883 500,000 500,000 500,000 40,654 58,307 83,931 40,654 58,307 83,931
15 164,496 500,000 500,000 500,000 55,084 95,594 168,935 55,084 95,594 168,935
20 252,066 500,000 500,000 500,000 64,351 139,748 312,471 64,351 139,748 312,471
25 363,830 500,000 500,000 592,552 61,706 188,993 564,336 61,706 188,993 564,336
30 506,473 500,000 500,000 1,040,042 36,023 240,083 990,516 36,023 240,083 990,516
</TABLE>
Amount 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.
56
<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 AVIS
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I. GROWTH
APPRECIATION INCOME GROWTH EQUITY VALUE CLASS 2
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 48,320
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
Total Investments 119,525,864 3,565,893 460,855 11,039,437 208,717 14,096,870 48,320
Dividend Receivable 613 -- -- -- -- -- --
Total Assets 119,526,477 3,565,893 460,855 11,039,437 208,717 14,096,870 48,320
Liability--
Payable to The Lincoln
National Life Insurance
Company 2,520 77 10 231 4 294 1
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
NET ASSETS $119,523,957 $ 3,565,816 $ 460,845 $11,039,206 $ 208,713 $ 14,096,576 $ 48,319
------------------------------ =========== ============ ========== =========== ============= ============= ==========
Percent of net assets 100.00% 2.98% 0.39% 9.24% 0.17% 11.79% 0.04%
------------------------------ =========== ============ ========== =========== ============= ============= ==========
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 3,628
Unit value $ -- $ -- $ 12.764 $ 14.131 $ 12.221 $ 13.316
------------------------------ ------------ ---------- ----------- ------------- ------------- ----------
-- -- 57,790 4,725 89,399 48,319
------------------------------ ------------ ---------- ----------- ------------- ------------- ----------
NET ASSETS $ 3,565,816 $ 460,845 $11,039,206 $ 208,713 $ 14,096,576 $ 48,319
------------------------------ ============ ========== =========== ============= ============= ==========
<CAPTION>
AVIS AVIS
GROWTH & GLOBAL SMALL BARON BT
INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
------------------------------
Assets
Investments at
Market--Affiliated (Cost
$27,626,132) $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$79,563,067) 1,295 1,188 299,299 613,120
------------------------------ ---------- -------------- ---------- ------------
Total Investments 1,295 1,188 299,299 613,120
Dividend Receivable -- -- -- --
Total Assets 1,295 1,188 299,299 613,120
Liability--
Payable to The Lincoln
National Life Insurance
Company -- -- 6 13
------------------------------ ---------- -------------- ---------- ------------
NET ASSETS $ 1,295 $ 1,188 $ 299,293 $ 613,107
------------------------------ ========== ============== ========== ============
Percent of net assets 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 118 89 388 697
Unit value $ 10.929 $ 13.363 $ 12.715 $ 11.888
------------------------------ ---------- -------------- ---------- ------------
1,295 1,188 4,934 8,283
------------------------------ ---------- -------------- ---------- ------------
NET ASSETS $ 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 DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 $ 3,653,313
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 3,653,313
Dividend Receivable -- -- 613 -- -- -- -- --
Total Assets 20,110,936 500,139 191,886 69,176 742,896 2,351,982 8,850 3,653,313
Liability--
Payable to The Lincoln
National Life Insurance
Company 425 10 4 1 16 49 -- 76
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
NET ASSETS $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850 $ 3,653,237
------------------------------ ========== ========== ========== =========== ========== ========== ========== ===========
Percent of net assets 16.83% 0.42% 0.16% 0.06% 0.62% 1.97% 0.01% 3.06%
------------------------------ ========== ========== ========== =========== ========== ========== ========== ===========
Net assets are represented by:
VUL I Policies:
Units in accumulation period 812,687 -- -- -- 25,318 180,810 -- 96,178
Unit value $ 13.296 $ -- $ -- $ -- $ 11.369 $ 9.193 $ -- $ 18.637
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
10,805,740 -- -- -- 287,864 1,662,059 1,792,471
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
LVUL Policies:
Units in accumulation period 838,894 43,587 20,103 7,464 36,700 72,822 861 118,467
Unit value $ 11.021 $ 11.416 $ 9.441 $ 9.141 $ 12.100 $ 9.460 $ 9.199 $ 15.583
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
9,245,783 497,587 189,840 68,231 444,060 688,931 7,925 1,846,123
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
VUL-DB Policies:
Units in accumulation period 5,036 206 201 89 881 89 89 1,055
Unit value $ 11.714 $ 12.326 $ 10.178 $ 10.623 $ 12.442 $ 10.612 $ 10.415 $ 13.884
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
58,988 2,542 2,042 944 10,956 943 925 14,643
------------------------------ ---------- ---------- ---------- ----------- ---------- ---------- ---------- -----------
NET ASSETS $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850 $ 3,653,237
------------------------------ ========== ========== ========== =========== ========== ========== ========== ===========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II
EQUITY- ASSET CONTRAFUND
INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------
Assets
Investments at
Market--Affiliated (Cost
$27,626,132) $ -- $ -- $ --
Investments at
Market--Unaffiliated (Cost
$79,563,067) 4,515,096 897,427 2,371,632
------------------------------ ----------- ---------- -------------
Total Investments 4,515,096 897,427 2,371,632
Dividend Receivable -- -- --
Total Assets 4,515,096 897,427 2,371,632
Liability--
Payable to The Lincoln
National Life Insurance
Company 98 20 48
------------------------------ ----------- ---------- -------------
NET ASSETS $ 4,514,998 $ 897,407 $ 2,371,584
------------------------------ =========== ========== =============
Percent of net assets 3.78% 0.75% 1.98%
------------------------------ =========== ========== =============
Net assets are represented by:
VUL I Policies:
Units in accumulation period 418,199 76,685 --
Unit value $ 10.796 $ 11.702 $ --
------------------------------ ----------- ---------- -------------
4,514,998 897,407 --
------------------------------ ----------- ---------- -------------
LVUL Policies:
Units in accumulation period -- -- 202,869
Unit value $ -- $ -- $ 11.466
------------------------------ ----------- ---------- -------------
-- -- 2,326,180
------------------------------ ----------- ---------- -------------
VUL-DB Policies:
Units in accumulation period -- -- 3,748
Unit value $ -- $ -- $ 12.114
------------------------------ ----------- ---------- -------------
-- -- 45,404
------------------------------ ----------- ---------- -------------
NET ASSETS $ 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 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>
--------------------------------------------------------------------------------------------------------------------------
Assets
Investments at
Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $ 2,250,443 $ 2,307,707 $ 214,504
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 2,307,707 214,504
Dividend Receivable -- -- -- -- -- -- --
Total Assets 2,312,798 1,485,092 3,009,790 4,092,079 2,250,443 2,307,707 214,504
Liability--
Payable to The Lincoln
National Life Insurance
Company 51 30 62 83 47 48 4
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
NET ASSETS $2,312,747 $ 1,485,062 $ 3,009,728 $ 4,091,996 $ 2,250,396 $ 2,307,659 $ 214,500
------------------------------ ========= ============= =========== =========== =========== ============ ==========
Percent of net assets 1.93% 1.24% 2.52% 3.42% 1.88% 1.93% 0.18%
------------------------------ ========= ============= =========== =========== =========== ============ ==========
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 21,553
Unit value $ -- $ 10.053 $ 11.377 $ 15.087 $ 9.958 $ 12.919 $ 9.830
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
-- 1,479,343 2,979,633 3,999,093 2,243,617 2,239,337 211,878
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
VUL-DB Policies:
Units in accumulation period -- 524 2,543 6,434 678 5,298 232
Unit value $ -- $ 10.908 $ 11.833 $ 14.440 $ 10.001 $ 12.895 $ 11.319
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
-- 5,719 30,095 92,903 6,779 68,322 2,622
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
NET ASSETS $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>
------------------------------
Assets
Investments at
Market--Affiliated
(Cost $27,626,132) $ 119,502 $16,394,196 $ 578,429 $ --
Investments at
Market--Unaffiliated
(Cost $79,563,067) -- -- -- 8,932,616
------------------------------ ---------- ----------- ---------- ----------
Total Investments 119,502 16,394,196 578,429 8,932,616
Dividend Receivable -- -- -- --
Total Assets 119,502 16,394,196 578,429 8,932,616
Liability--
Payable to The Lincoln
National Life Insurance
Company 2 355 12 185
------------------------------ ---------- ----------- ---------- ----------
NET ASSETS $ 119,500 $16,393,841 $ 578,417 $8,932,431
------------------------------ ========== =========== ========== ==========
Percent of net assets 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 10,961 862,204 51,662 354,598
Unit value $ 10.812 $ 10.273 $ 11.176 $ 16.498
------------------------------ ---------- ----------- ---------- ----------
118,507 8,857,709 577,361 5,850,136
------------------------------ ---------- ----------- ---------- ----------
VUL-DB Policies:
Units in accumulation period 89 168,723 89 2,996
Unit value $ 11.177 $ 10.086 $ 11.886 $ 16.049
------------------------------ ---------- ----------- ---------- ----------
993 1,701,747 1,056 48,077
------------------------------ ---------- ----------- ---------- ----------
NET ASSETS $ 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 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>
----------------------------------------------------------------------------------------------------------------------
Assets
Investments at
Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $79,563,067) 2,620,778 1,874,323 689,832 180,986 586,589 832,378 305,090
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Total Investments 2,620,778 1,874,323 689,832 180,986 586,589 832,378 305,090
Dividend Receivable -- -- -- -- -- -- --
Total Assets 2,620,778 1,874,323 689,832 180,986 586,589 832,378 305,090
Liability--
Payable to The Lincoln
National Life Insurance
Company 56 40 14 4 13 18 7
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
NET ASSETS $2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360 $ 305,083
------------------------------ ========= ========= ========== ========== ============ ============ ==========
Percent of net assets 2.19% 1.57% 0.58% 0.15% 0.49% 0.70% 0.26%
------------------------------ ========= ========= ========== ========== ============ ============ ==========
Net assets are represented by:
VUL I Policies:
Units in accumulation period 176,952 91,206 -- -- 47,556 81,740 25,362
Unit value $ 10.623 $ 14.003 $ -- $ -- $ 12.334 $ 10.183 $ 12.029
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
1,879,685 1,277,133 -- -- 586,576 832,360 305,083
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
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 $ 305,083
------------------------------ ========= ========= ========== ========== ============ ============ ==========
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON INTERNATIONAL TEMPLETON STOCK
INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
------------------------------
Assets
Investments at
Market--Affiliated
(Cost $27,626,132) $ -- $ -- $ -- $ --
Investments at
Market--Unaffiliated
(Cost $79,563,067) 3,106,566 1,308,007 509,120 67,325
------------------------------ ------------- ------------- ---------- ----------
Total Investments 3,106,566 1,308,007 509,120 67,325
Dividend Receivable -- -- -- --
Total Assets 3,106,566 1,308,007 509,120 67,325
Liability--
Payable to The Lincoln
National Life Insurance
Company 67 27 11 1
------------------------------ ------------- ------------- ---------- ----------
NET ASSETS $ 3,106,499 $ 1,307,980 $ 509,109 $ 67,324
------------------------------ ============= ============= ========== ==========
Percent of net assets 2.60% 1.09% 0.43% 0.06%
------------------------------ ============= ============= ========== ==========
Net assets are represented by:
VUL I Policies:
Units in accumulation period 263,418 -- 42,937 --
Unit value $ 11.793 $ -- $ 11.857 $ --
------------------------------ ------------- ------------- ---------- ----------
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 $ 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. AVIS
CAPITAL DIVERSIFIED AIM V.I. INTERNATIONAL AIM V.I. GROWTH
APPRECIATION INCOME GROWTH EQUITY VALUE CLASS 2
COMBINED 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 $ 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 1,059
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) (8)
------------------------------ ---------- ------------ ---------- ---------- ------------- ------------ ----------
NET INVESTMENT INCOME (LOSS) 1,398,689 61,457 25,770 329,960 4,102 165,113 1,051
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 2
Net change in unrealized
appreciation or
depreciation on
investments 11,833,812 894,541 (32,495) 1,409,677 33,598 1,487,488 622
------------------------------ ---------- ------------ ---------- ---------- ------------- ------------ ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 12,362,433 952,230 (33,843) 1,492,022 33,880 1,581,569 624
------------------------------ ---------- ------------ ---------- ---------- ------------- ------------ ----------
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 $ 1,675
------------------------------ ========== ============ ========== ========== ============= ============ ==========
<CAPTION>
AVIS AVIS BT
GROWTH & GLOBAL SMALL BARON EAFE
INCOME CAPITALIZATION CAPITAL EQUITY
CLASS 2 CLASS 2 ASSET INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
------------------------------
Period From June 18, 1998 to D
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
Gain (Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- --
Net change in unrealized
appreciation or
depreciation on
investments -- -- -- --
------------------------------ ---------- -------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS -- -- -- --
------------------------------ ---------- -------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
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 211 107 11 17,927
Mortality and expense
guarantees:
VUL I -- -- -- --
LVUL -- -- (263) (654)
VUL-DB (2) (2) (2) (3)
------------------------------ ---------- -------------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 214 105 (253) 26,866
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments (1) 6 (623) 2,214
Net change in unrealized
appreciation or
depreciation on
investments (100) 195 29,918 39,201
------------------------------ ---------- -------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (101) 201 29,295 41,415
------------------------------ ---------- -------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 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 DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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) -- (225)
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 28,782 -- -- -- (17) (247) -- (225)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 3,674 -- -- -- (75) 946 -- 593
Net change in unrealized
appreciation or
depreciation on
investments 111,040 -- -- -- (512) 19,663 -- 30,739
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 114,714 -- -- -- (587) 20,609 -- 31,332
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 143,496 $ -- $ -- $ -- $ (604) $ 20,362 $ -- $ 31,107
------------------------------ ========= ========== ========== ========== ========== ========== ========== ==========
Year Ended December 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ 125,411 $ 4,719 $ 4,476 $ -- $ 747 $ 7,394 $ -- $ 46
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) -- (7,115)
LVUL (12,968) (508) (308) (57) (395) (600) (15) (1,652)
VUL-DB (13) (2) (2) (2) (6) (2) (2) (5)
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 113,974 17,719 4,166 (59) (700) 866 (17) (8,726)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 121,178 614 (227) 140 618 (14,536) (19) 22,249
Net change in unrealized
appreciation or
depreciation on
investments 1,738,936 38,073 (3,867) 812 106,630 (17,712) 47 899,442
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 1,860,114 38,687 (4,094) 952 107,248 (32,248) 28 921,691
------------------------------ --------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $1,974,088 $ 56,406 $ 72 $ 893 $ 106,548 $ (31,382) $ 11 $ 912,965
------------------------------ ========= ========== ========== ========== ========== ========== ========== ==========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II
EQUITY- ASSET CONTRAFUND
INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------
Period From June 18, 1998 to D
Net Investment Income (Loss):
Dividends from investment
income $ -- $ -- $ --
Dividends from net realized
gains on investments -- -- --
Mortality and expense
guarantees - VUL I (881) (73) --
------------------------------ ---------- ---------- -------------
NET INVESTMENT INCOME (LOSS) (881) (73) --
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 1,374 362 --
Net change in unrealized
appreciation or
depreciation on
investments 48,819 4,003 --
------------------------------ ---------- ---------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 50,193 4,365 --
------------------------------ ---------- ---------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 49,312 $ 4,292 $ --
------------------------------ ========== ========== =============
Year Ended December 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ 18,261 $ 4,204 $ --
Dividends from net realized
gains on investments 40,365 5,324 --
Mortality and expense
guarantees:
VUL I (23,929) (3,903) --
LVUL -- -- (3,052)
VUL-DB -- -- (8)
------------------------------ ---------- ---------- -------------
NET INVESTMENT INCOME (LOSS) 34,697 5,625 (3,060)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 5,664 1,235 8,471
Net change in unrealized
appreciation or
depreciation on
investments (12,316) 55,916 213,827
------------------------------ ---------- ---------- -------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (6,652) 57,151 222,298
------------------------------ ---------- ---------- -------------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 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 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>
-----------------------------------------------------------------------------------------------------------------------
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 $ -- $ 297
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) (153)
VUL-DB -- (2) (11) (14) (3) (13) (2)
------------------------------ ---------- ------------- ---------- ---------- ---------- ------------ ----------
NET INVESTMENT INCOME (LOSS) 16,673 (1,671) 27,542 (4,071) 19,985 (2,240) 142
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments (6,618) (2,551) 15,984 13,553 (144) 24,904 519
Net change in unrealized
appreciation or
depreciation on
investments (28,284) 35,718 187,623 718,343 (45,375) 209,924 7,477
------------------------------ ---------- ------------- ---------- ---------- ---------- ------------ ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (34,902) 33,167 203,607 731,896 (45,519) 234,828 7,996
------------------------------ ---------- ------------- ---------- ---------- ---------- ------------ ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ (18,229) $ 31,496 $ 231,149 $ 727,825 $ (25,534) $ 232,588 $ 8,138
------------------------------ ========== ============= ========== ========== ========== ============ ==========
<CAPTION>
LN
GLOBAL LN LN MFS
ASSET MONEY SOCIAL EMERGING
ALLOCATION MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
------------------------------
Period From June 18, 1998 to D
Net Investment Income (Loss):
Dividends from investment
income $ -- $ 19,001 $ -- $ --
Dividends from net realized
gains on investments -- -- -- --
Mortality and expense
guarantees - VUL I -- (3,216) -- (252)
------------------------------ ---------- ---------- ---------- -----------
NET INVESTMENT INCOME (LOSS) -- 15,785 -- (252)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments -- -- -- 592
Net change in unrealized
appreciation or
depreciation on
investments -- -- -- 41,059
------------------------------ ---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (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
income $ 374 $ 293,414 $ 1,906 $ --
Dividends from net realized
gains on investments -- -- -- --
Mortality and expense
guarantees:
VUL I -- (34,391) -- (10,782)
LVUL (133) (13,538) (1,071) (8,916)
VUL-DB (2) (135) (2) (10)
------------------------------ ---------- ---------- ---------- -----------
NET INVESTMENT INCOME (LOSS) 239 245,350 833 (19,708)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 12 -- 2,621 61,460
Net change in unrealized
appreciation or
depreciation on
investments 6,950 -- 41,921 2,881,313
------------------------------ ---------- ---------- ---------- -----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 6,962 -- 44,542 2,942,773
------------------------------ ---------- ---------- ---------- -----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 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 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>
----------------------------------------------------------------------------------------------------------------------
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) (45)
------------------------------ ---------- ---------- ---------- ---------- ------------ ------------ ----------
NET INVESTMENT INCOME (LOSS) (451) (319) -- -- 4,602 (138) (45)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 599 600 -- -- 660 85 234
Net change in unrealized
appreciation or
depreciation on
investments 18,520 15,337 -- -- 1,012 4,808 2,272
------------------------------ ---------- ---------- ---------- ---------- ------------ ------------ ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 19,119 15,937 -- -- 1,672 4,893 2,506
------------------------------ ---------- ---------- ---------- ---------- ------------ ------------ ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 18,668 $ 15,618 $ -- $ -- $ 6,274 $ 4,755 $ 2,461
------------------------------ ========== ========== ========== ========== ============ ============ ==========
Year Ended December 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ 23,209 $ 7,124 $ -- $ -- $ 7,695 $ 3,979 $ 1,857
Dividends from net realized
gains on investments 43,039 35,818 -- -- 80,398 8,929 10,335
Mortality and expense
guarantees:
VUL I (11,122) (6,403) -- -- (2,314) (4,000) (1,295)
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 10,897
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 48
Net change in unrealized
appreciation or
depreciation on
investments (24,617) 281,617 159,991 4,883 (20,051) (1,286) 23,978
------------------------------ ---------- ---------- ---------- ---------- ------------ ------------ ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS (23,586) 301,831 167,194 2,826 (14,492) (435) 24,026
------------------------------ ---------- ---------- ---------- ---------- ------------ ------------ ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 30,421 $ 337,514 $ 166,418 $ 2,388 $ 71,287 $ 8,473 $ 34,923
------------------------------ ========== ========== ========== ========== ============ ============ ==========
<CAPTION>
TEMPLETON TEMPLETON
TEMPLETON INTERNATIONAL TEMPLETON STOCK
INTERNATIONAL CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
------------------------------
Period From June 18, 1998 to D
Net Investment Income (Loss):
Dividends from investment
income $ -- $ -- $ -- $ --
Dividends from net realized
gains on investments -- -- -- --
Mortality and expense
guarantees - VUL I (582) -- (108) --
------------------------------ ------------- ------------- ---------- ----------
NET INVESTMENT INCOME (LOSS) (582) -- (108) --
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments (357) -- (71) --
Net change in unrealized
appreciation or
depreciation on
investments 21,136 -- 2,721 --
------------------------------ ------------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 20,779 -- 2,650 --
------------------------------ ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 20,197 $ -- $ 2,542 $ --
------------------------------ ============= ============= ========== ==========
Year Ended December 31, 1999
Net Investment Income (Loss):
Dividends from investment
income $ 32,375 $ -- $ 3,072 $ --
Dividends from net realized
gains on investments 112,459 -- 14,216 --
Mortality and expense
guarantees:
VUL I (16,129) -- (2,335) --
LVUL -- (906) -- (68)
VUL-DB -- 3 -- (2)
------------------------------ ------------- ------------- ---------- ----------
NET INVESTMENT INCOME (LOSS) 128,705 (903) 14,953 (70)
Net Realized and Unrealized
Gain (Loss) on Investments:
Net realized gain (loss) on
investments 6,081 (86) (193) 196
Net change in unrealized
appreciation or
depreciation on
investments 348,831 86,846 69,824 5,753
------------------------------ ------------- ------------- ---------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON INVESTMENTS 354,912 86,760 69,631 5,949
------------------------------ ------------- ------------- ---------- ----------
NET INCREASE (DECREASE) IN NET
ASSETS RESULTING FROM
OPERATIONS $ 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 AVIS
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I. GROWTH
APPRECIATION INCOME GROWTH EQUITY VALUE CLASS 2
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 1,051
Net realized gain (loss) on
investments 528,621 57,689 (1,348) 82,345 282 94,081 2
Net change in unrealized
appreciation or
depreciation on
investments 11,833,812 894,541 (32,495) 1,409,677 33,598 1,487,488 622
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
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 1,675
Change From Unit Transactions:
Participant purchases 139,928,307 2,409,008 354,673 9,187,445 178,708 12,407,218 49,345
Participant withdrawals (48,553,197) (324,017) (66,027) (901,664) (7,977) (1,112,168) (2,701)
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
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 46,644
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
Total Increase In Net Assets 105,136,232 3,098,678 280,573 10,107,763 208,713 13,041,732 48,319
------------------------------ ----------- ------------ ---------- ----------- ------------- ------------- ----------
Net Assets At December 31,
1999 $119,523,957 $ 3,565,816 $ 460,845 $11,039,206 $ 208,713 $ 14,096,576 $ 48,319
------------------------------ =========== ============ ========== =========== ============= ============= ==========
<CAPTION>
AVIS AVIS
GROWTH & GLOBAL SMALL BARON BT
INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <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) 214 105 (253) 26,866
Net realized gain (loss) on
investments (1) 6 (623) 2,214
Net change in unrealized
appreciation or
depreciation on
investments (100) 195 29,918 39,201
------------------------------ ---------- -------------- ---------- ------------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 113 306 29,042 68,281
Change From Unit Transactions:
Participant purchases 1,320 991 295,372 582,674
Participant withdrawals (138) (109) (25,121) (37,848)
------------------------------ ---------- -------------- ---------- ------------
Net Increase In Net Assets
Resulting From Unit
Transactions 1,182 882 270,251 544,826
------------------------------ ---------- -------------- ---------- ------------
Total Increase In Net Assets 1,295 1,188 299,293 613,107
------------------------------ ---------- -------------- ---------- ------------
Net Assets At December 31,
1999 $ 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 DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C> <C> <C> <C> <C>
-------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 28,782 $ -- $ -- $ -- $ (17) $ (247) $ -- $ (225)
Net realized gain (loss) on
investments 3,674 -- -- -- (75) 946 -- 593
Net change in unrealized
appreciation or
depreciation on
investments 111,040 -- -- -- (512) 19,663 -- 30,739
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 143,496 -- -- -- (604) 20,362 -- 31,107
Change From Unit Transactions:
Participant purchases 2,738,345 -- -- -- 15,958 278,003 -- 316,822
Participant withdrawals (53,631) -- -- -- (1,610) (18,198) -- (10,588)
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net Increase In Net Assets
Resulting From Unit
Transactions 2,684,714 -- -- -- 14,348 259,805 -- 306,234
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total Increase In Net Assets 2,828,210 -- -- -- 13,744 280,167 -- 337,341
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net Assets At December 31,
1998 2,828,210 -- -- -- 13,744 280,167 -- 337,341
Changes From Operations:
Net investment income (loss) 113,974 17,719 4,166 (59) (700) 866 (17) (8,726)
Net realized gain (loss) on
investments 121,178 614 (227) 140 618 (14,536) (19) 22,249
Net change in unrealized
appreciation or
depreciation on
investments 1,738,936 38,073 (3,867) 812 106,630 (17,712) 47 899,442
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 1,974,088 56,406 72 893 106,548 (31,382) 11 912,965
Change From Unit Transactions:
Participant purchases 16,329,550 459,957 202,822 70,663 667,277 2,370,132 9,578 2,605,257
Participant withdrawals (1,021,337) (16,234) (11,012) (2,381) (44,689) (266,984) (739) (202,326)
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
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 2,402,931
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Total Increase In Net Assets 17,282,301 500,129 191,882 69,175 729,136 2,071,766 8,850 3,315,896
------------------------------ ---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Net Assets At December 31,
1999 $20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850 $ 3,653,237
------------------------------ ========== ========== ========== ========== ========== ========== ========== ===========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II
EQUITY- ASSET CONTRAFUND
INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
------------------------------
Changes From Operations:
Net investment income (loss) $ (881) $ (73) $ --
Net realized gain (loss) on
investments 1,374 362 --
Net change in unrealized
appreciation or
depreciation on
investments 48,819 4,003 --
------------------------------ ----------- ---------- -------------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 49,312 4,292 --
Change From Unit Transactions:
Participant purchases 874,010 86,282 --
Participant withdrawals (59,221) (9,144) --
------------------------------ ----------- ---------- -------------
Net Increase In Net Assets
Resulting From Unit
Transactions 814,789 77,138 --
------------------------------ ----------- ---------- -------------
Total Increase In Net Assets 864,101 81,430 --
------------------------------ ----------- ---------- -------------
Net Assets At December 31,
1998 864,101 81,430 --
Changes From Operations:
Net investment income (loss) 34,697 5,625 (3,060)
Net realized gain (loss) on
investments 5,664 1,235 8,471
Net change in unrealized
appreciation or
depreciation on
investments (12,316) 55,916 213,827
------------------------------ ----------- ---------- -------------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 28,045 62,776 219,238
Change From Unit Transactions:
Participant purchases 4,049,302 844,190 2,269,529
Participant withdrawals (426,450) (90,989) (117,183)
------------------------------ ----------- ---------- -------------
Net Increase In Net Assets
Resulting From Unit
Transactions 3,622,852 753,201 2,152,346
------------------------------ ----------- ---------- -------------
Total Increase In Net Assets 3,650,897 815,977 2,371,584
------------------------------ ----------- ---------- -------------
Net Assets At December 31,
1999 $ 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 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>
--------------------------------------------------------------------------------------------------------------------------
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) 142
Net realized gain (loss) on
investments (6,618) (2,551) 15,984 13,553 (144) 24,904 519
Net change in unrealized
appreciation or
depreciation on
investments (28,284) 35,718 187,623 718,343 (45,375) 209,924 7,477
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations (18,229) 31,496 231,149 727,825 (25,534) 232,588 8,138
Change From Unit Transactions:
Participant purchases 2,084,025 1,526,114 2,965,963 3,562,159 2,337,796 2,171,761 214,187
Participant withdrawals (202,400) (72,548) (187,384) (197,988) (61,866) (96,690) (7,825)
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 1,881,625 1,453,566 2,778,579 3,364,171 2,275,930 2,075,071 206,362
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
Total Increase In Net Assets 1,863,396 1,485,062 3,009,728 4,091,996 2,250,396 2,307,659 214,500
------------------------------ --------- ------------- ----------- ----------- ----------- ------------ ----------
Net Assets At December 31,
1999 $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>
------------------------------
Changes From Operations:
Net investment income (loss) $ -- $ 15,785 $ -- $ (252)
Net realized gain (loss) on
investments -- -- -- 592
Net change in unrealized
appreciation or
depreciation on
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) 239 245,350 833 (19,708)
Net realized gain (loss) on
investments 12 -- 2,621 61,460
Net change in unrealized
appreciation or
depreciation on
investments 6,950 -- 41,921 2,881,313
------------------------------ ---------- ------------ ---------- ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 7,201 245,350 45,375 2,923,065
Change From Unit Transactions:
Participant purchases 117,417 52,799,689 556,555 6,133,471
Participant withdrawals (5,118) (41,249,576) (23,513) (454,888)
------------------------------ ---------- ------------ ---------- ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 112,299 11,550,113 533,042 5,678,583
------------------------------ ---------- ------------ ---------- ----------
Total Increase In Net Assets 119,500 11,795,463 578,417 8,601,648
------------------------------ ---------- ------------ ---------- ----------
Net Assets At December 31,
1999 $ 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 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>
----------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (451) $ (319) $ -- $ -- $ 4,602 $ (138) $ (45)
Net realized gain (loss) on
investments 599 600 -- -- 660 85 234
Net change in unrealized
appreciation or
depreciation on
investments 18,520 15,337 -- -- 1,012 4,808 2,272
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 18,668 15,618 -- -- 6,274 4,755 2,461
Change From Unit Transactions:
Participant purchases 608,312 323,546 -- -- 96,433 188,146 37,943
Participant withdrawals (24,996) (11,122) -- -- (5,799) (9,805) (3,417)
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 583,316 312,424 -- -- 90,634 178,341 34,526
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Total Increase In Net Assets 601,984 328,042 -- -- 96,908 183,096 36,987
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Assets At December 31,
1998 601,984 328,042 -- -- 96,908 183,096 36,987
Changes From Operations:
Net investment income (loss) 54,007 35,683 (776) (438) 85,779 8,908 10,897
Net realized gain (loss) on
investments 1,031 20,214 7,203 (2,057) 5,559 851 48
Net change in unrealized
appreciation or
depreciation on
investments (24,617) 281,617 159,991 4,883 (20,051) (1,286) 23,978
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 30,421 337,514 166,418 2,388 71,287 8,473 34,923
Change From Unit Transactions:
Participant purchases 2,244,107 1,371,422 540,452 320,403 475,911 731,060 274,773
Participant withdrawals (255,790) (162,695) (17,052) (141,809) (57,530) (90,269) (41,600)
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 1,988,317 1,208,727 523,400 178,594 418,381 640,791 233,173
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Total Increase In Net Assets 2,018,738 1,546,241 689,818 180,982 489,668 649,264 268,096
------------------------------ --------- --------- ---------- ---------- ------------ ------------ ----------
Net Assets At December 31,
1999 $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>
------------------------------
Changes From Operations:
Net investment income (loss) $ (582) $ -- $ (108) $ --
Net realized gain (loss) on
investments (357) -- (71) --
Net change in unrealized
appreciation or
depreciation on
investments 21,136 -- 2,721 --
------------------------------ ------------- ------------- ---------- ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 20,197 -- 2,542 --
Change From Unit Transactions:
Participant purchases 643,263 -- 100,433 --
Participant withdrawals (35,182) -- (7,747) --
------------------------------ ------------- ------------- ---------- ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 608,081 -- 92,686 --
------------------------------ ------------- ------------- ---------- ----------
Total Increase In Net Assets 628,278 -- 95,228 --
------------------------------ ------------- ------------- ---------- ----------
Net Assets At December 31,
1998 628,278 -- 95,228 --
Changes From Operations:
Net investment income (loss) 128,705 (903) 14,953 (70)
Net realized gain (loss) on
investments 6,081 (86) (193) 196
Net change in unrealized
appreciation or
depreciation on
investments 348,831 86,846 69,824 5,753
------------------------------ ------------- ------------- ---------- ----------
Net Increase (Decrease) In Net
Assets Resulting From
Operations 483,617 85,857 84,584 5,879
Change From Unit Transactions:
Participant purchases 2,425,159 1,275,318 387,649 67,905
Participant withdrawals (430,555) (53,195) (58,352) (6,460)
------------------------------ ------------- ------------- ---------- ----------
Net Increase In Net Assets
Resulting From Unit
Transactions 1,994,604 1,222,123 329,297 61,445
------------------------------ ------------- ------------- ---------- ----------
Total Increase In Net Assets 2,478,221 1,307,980 413,881 67,324
------------------------------ ------------- ------------- ---------- ----------
Net Assets At December 31,
1999 $ 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 AVIS
CAPITAL DIVERSIFIED V.I. INTERNATIONAL V.I. GROWTH
APPRECIATION INCOME GROWTH EQUITY VALUE CLASS 2
COMBINED SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 $ 46,644
Accumulated net investment
income (loss) 1,544,225 70,443 34,801 374,756 4,102 202,466 1,051
Accumulated net realized
gain (loss) on
investments 541,756 58,261 (1,579) 83,349 282 96,583 2
Net unrealized appreciation
(depreciation) on
investments 12,336,665 939,072 (39,688) 1,480,422 33,598 1,556,547 622
----------- ------------ ---------- ----------- ------------- ------------- ----------
$119,523,957 $ 3,565,816 $ 460,845 $11,039,206 $ 208,713 $ 14,096,576 $ 48,319
=========== ============ ========== =========== ============= ============= ==========
<CAPTION>
AVIS AVIS
GROWTH & GLOBAL SMALL BARON BT
INCOME CAPITALIZATION CAPITAL EAFE
CLASS 2 CLASS 2 ASSET EQUITY INDEX
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C> <C>
- ---------------------------
Unit Transactions:
Accumulation units $ 1,182 $ 882 $ 270,251 $ 544,826
Accumulated net investment
income (loss) 214 105 (253) 26,866
Accumulated net realized
gain (loss) on
investments (1) 6 (623) 2,214
Net unrealized appreciation
(depreciation) on
investments (100) 195 29,918 39,201
---------- -------------- ---------- ------------
$ 1,295 $ 1,188 $ 299,293 $ 613,107
========== ============== ========== ============
</TABLE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE
BT BT DELAWARE DELAWARE PREMIUM PREMIUM DELAWARE DELAWARE
EQUITY SMALL PREMIUM PREMIUM EMERGING SMALL PREMIUM PREMIUM
500 INDEX CAP INDEX DELCHESTER DEVON MARKETS CAP VALUE REIT TREND
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 $ 2,709,165
Accumulated net investment
income (loss) 142,756 17,719 4,166 (59) (717) 619 (17) (8,951)
Accumulated net realized
gain (loss) on
investments 124,852 614 (227) 140 543 (13,590) (19) 22,842
Net unrealized appreciation
(depreciation) on
investments 1,849,976 38,073 (3,867) 812 106,118 1,951 47 930,181
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
$20,110,511 $ 500,129 $ 191,882 $ 69,175 $ 742,880 $2,351,933 $ 8,850 $ 3,653,237
========== ========== ========== ========== ========== ========== ========== ===========
<CAPTION>
FIDELITY FIDELITY FIDELITY
VIP VIP II VIP II
EQUITY- ASSET CONTRAFUND
INCOME MANAGER SERVICE CLASS
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------
Unit Transactions:
Accumulation units $ 4,437,641 $ 830,339 $ 2,152,346
Accumulated net investment
income (loss) 33,816 5,552 (3,060)
Accumulated net realized
gain (loss) on
investments 7,038 1,597 8,471
Net unrealized appreciation
(depreciation) on
investments 36,503 59,919 213,827
----------- ---------- -------------
$ 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 LN
VIP II GROWTH ASPEN SERIES LN LN GLOBAL
INVESTMENT OPPORTUNITIES SERIES WORLDWIDE LN CAPITAL EQUITY- ASSET
GRADE BOND SERVICE CLASS BALANCED GROWTH BOND APPRECIATION INCOME ALLOCATION
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 $ 112,299
Accumulated net investment
income (loss) 16,212 (1,671) 27,542 (4,071) 19,985 (2,240) 142 239
Accumulated net realized
gain (loss) on
investments (6,546) (2,551) 15,984 13,553 (144) 24,904 519 12
Net unrealized appreciation
(depreciation) on
investments (23,190) 35,718 187,623 718,343 (45,375) 209,924 7,477 6,950
--------- ------------- ----------- ----------- ----------- ------------ ---------- ----------
$2,312,747 $ 1,485,062 $ 3,009,728 $ 4,091,996 $ 2,250,396 $ 2,307,659 $ 214,500 $ 119,500
========= ============= =========== =========== =========== ============ ========== ==========
<CAPTION>
LN LN MFS
MONEY SOCIAL EMERGING
MARKET AWARENESS GROWTH
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------
Unit Transactions:
Accumulation units $16,132,706 $ 533,042 $5,967,967
Accumulated net investment
income (loss) 261,135 833 (19,960)
Accumulated net realized
gain (loss) on
investments -- 2,621 62,052
Net unrealized appreciation
(depreciation) on
investments -- 41,921 2,922,372
----------- ---------- ----------
$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 TEMPLETON
RETURN UTILITIES GROWTH PARTNERS EQUITY MANAGED ALLOCATION INTERNATIONAL
SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <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 $ 2,602,685
Accumulated net investment
income (loss) 53,556 35,364 (776) (438) 90,381 8,770 10,852 128,123
Accumulated net realized
gain (loss) on
investments 1,630 20,814 7,203 (2,057) 6,219 936 282 5,724
Net unrealized appreciation
(depreciation) on
investments (6,097) 296,954 159,991 4,883 (19,039) 3,522 26,250 369,967
--------- --------- ---------- ---------- ------------ ------------ ---------- -------------
$2,620,722 $1,874,283 $ 689,818 $ 180,982 $ 586,576 $ 832,360 $ 305,083 $ 3,106,499
========= ========= ========== ========== ============ ============ ========== =============
<CAPTION>
TEMPLETON TEMPLETON
INTERNATIONAL TEMPLETON STOCK
CLASS 2 STOCK CLASS 2
SUBACCOUNT SUBACCOUNT SUBACCOUNT
<S> <C> <C> <C>
- ---------------------------
Unit Transactions:
Accumulation units $ 1,222,123 $ 421,983 $ 61,445
Accumulated net investment
income (loss) (903) 14,845 (70)
Accumulated net realized
gain (loss) on
investments (86) (264) 196
Net unrealized appreciation
(depreciation) on
investments 86,846 72,545 5,753
------------- ---------- ----------
$ 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 Equity 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 Opportunities 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
Fort Wayne, Indiana
January 31, 2000
S-32
