<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 14, 1998
1933 ACT REGISTRATION NO. 333-43107
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
PRE-EFFECTIVE AMENDMENT NO. 1 TO
REGISTRATION STATEMENT
ON
FORM S-6
FOR REGISTRATION UNDER THE SECURITIES ACT OF 1933
OF SECURITIES OF UNIT INVESTMENT TRUSTS
REGISTERED ON FORM N-8B-2
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE
SEPARATE ACCOUNT R
(EXACT NAME OF REGISTRANT)
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
(NAME OF DEPOSITOR)
1300 South Clinton Street, Fort Wayne, Indiana 46802
(ADDRESS OF DEPOSITOR'S PRINCIPAL EXECUTIVE OFFICES)
Depositor's Telephone Number, including Area Code
(219) 455-2000
<TABLE>
<S> <C>
Jack D. Hunter, Esquire COPY TO:
The Lincoln National Life Insurance George N. Gingold, Esquire
Company 197 King Philip Drive
200 East Berry Street West Hartford, CT
P.O. Box 1110 06117-1409
Fort Wayne, Indiana 46802
(NAME AND ADDRESS OF AGENT FOR
SERVICE)
</TABLE>
INDEFINITE NUMBER OF UNITS OF INTEREST IN VARIABLE LIFE INSURANCE CONTRACTS
(TITLE OF SECURITIES BEING REGISTERED)
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
shall determine.
<PAGE>
CROSS REFERENCE SHEET
(RECONCILIATION AND TIE)
REQUIRED BY INSTRUCTION 4 TO FORM S-6
<TABLE>
<CAPTION>
ITEM OF FORM
N-8B-2 LOCATION IN PROSPECTUS
- ----------------- --------------------------------------------------------------
<S> <C>
1 Cover Page Highlights
2 Cover Page
3 *
4 Distribution of Policies
5 Information about Lincoln Life and the Separate Account
6(a) Variable Account
6(b) *
9 Legal Proceedings
10(a)-(c) Right-to-Examine Period; Surrenders; Accumulation Value;
Reports to Policy Owners
10(d) Right to Exchange the Policy; Policy Loans; Surrenders;
Allocation of Net Premium Payments
10(e) Lapse and Reinstatement
10(f) Voting Rights
10(g)-(h) Substitution of Securities
10(i) Premium Payments; Transfers; Death Benefits; Payment of Death
Benefit Proceeds; Policy Values; Settlement Options
11 The Funds
12 The Funds
13 Charges; Fees
14 Issuance
15 Premium Payments; Transfers
16 Variable Account
17 Surrenders
18 Variable Account
19 Reports to Policy Owners
20 *
21 Policy Loans
22 *
23 Information about Lincoln Life and the Separate Account
24 Incontestability; Suicide; Misstatement of Age or Gender
25 Information about Lincoln Life and the Separate Account
26 Fund Participation Agreements
27 Variable Account
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ITEM OF FORM
N-8B-2 LOCATION IN PROSPECTUS
- ----------------- --------------------------------------------------------------
<S> <C>
28 Directors and Officers of Lincoln Life
29 Information about Lincoln Life and the Separate Account
30 *
31 *
32 *
33 *
34 *
35 *
37 *
38 Distribution of Policies
39 Distribution of Policies
40 *
41(a) Distribution of Policies
42 *
43 *
44 The Funds; Premium Payments
45 *
46 Surrenders
47 Variable Account; Surrenders, Transfers
48 *
49 *
50 Variable Account
51 Cover Page; Highlights; Premium Payments; Right to Exchange
the Policy
52 Substitution of Securities
53 Tax Matters
54 *
55 *
</TABLE>
* Not Applicable
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
HOME OFFICE LOCATION:
1300 SOUTH CLINTON STREET
P.O. BOX 1110
FORT WAYNE, INDIANA 46802
(800) 942-5500
ADMINISTRATOR MAILING ADDRESS:
900 COTTAGE GROVE ROAD, S-249
HARTFORD, CT 06152-2249
(800)552-9898
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THE FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
- --------------------------------------------------------------------------------
Through this prospectus, The Lincoln National Life Insurance Company ("LINCOLN
LIFE") offers a flexible premium variable life insurance contract ("POLICY")
which pays death benefits on the death of the second to die of the two Insureds
named in the Policy ("SECOND DEATH"). The Policy allows flexible premium
payments and a choice between two death benefit options. Applicants should
carefully consider whether such a "second-to-die" Policy, which pays a death
benefit only on the Second Death, is appropriate to their financial objectives.
The Policy is funded through one or more of twenty different mutual funds
("FUNDS"), available through Lincoln Life's Separate Account, and Lincoln Life's
fixed option, the Fixed Account. The performance and values of the Funds are not
guaranteed or otherwise assured by Lincoln Life. The Fixed Account, which
credits at least 4% per year interest on principal, is an obligation of, and
guaranteed by, Lincoln Life. This Prospectus describes only the Separate Account
options unless the Fixed Account is specifically mentioned.
The Policy's value and (depending on the death benefit option selected) the
Death Benefit Proceeds may vary with the investment return on the Owner's
funding options. Policy values may be used to continue the Policy in force,
borrowed in part, withdrawn in part or, subject to a surrender charge,
surrendered in full. After the Second Death, the Beneficiary may choose among
settlement options equivalent to the Death Benefit Proceeds, or receive the
Death Benefit Proceeds in a lump sum.
Each of the Funds available through the Separate Account has its own investment
objective. The funding options available in the Separate Account 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. Value Fund
BT INSURANCE FUNDS TRUST
BT Equity 500 Index Fund
DELAWARE GROUP PREMIUM FUND, INC.
Emerging Markets Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND
Equity-Income Portfolio
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio
Investment Grade Bond Portfolio
LINCOLN NATIONAL MONEY MARKET FUND, INC.
Money Market Fund
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
OCC ACCUMULATION TRUST
Global Equity Portfolio
Managed Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton Asset Allocation Fund Class 1
Templeton International Fund Class 1
Templeton Stock Fund Class 1
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.
THIS PROSPECTUS IS VALID ONLY WHEN ACCOMPANIED BY THE CURRENT PROSPECTUSES OF
THE FUNDS AVAILABLE AS INVESTMENT OPTIONS THROUGH THE SEPARATE ACCOUNT UNDER THE
POLICY OFFERED BY THIS PROSPECTUS. ALL PROSPECTUSES SHOULD BE READ CAREFULLY TO
UNDERSTAND THE POLICY AND RETAINED FOR FUTURE REFERENCE.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION, NOR HAS THE COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY
OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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, 1998
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
CONTENTS PAGE
<S> <C>
DEFINITIONS..................................... 3
HIGHLIGHTS...................................... 5
PURPOSE OF POLICY............................. 5
INITIAL CHOICES TO BE MADE.................... 5
LEVEL OR VARYING DEATH BENEFIT................ 6
PREMIUM PAYMENTS.............................. 6
SELECTION OF UNDERLYING INVESTMENTS........... 6
CHARGES AND FEES.............................. 6
INFORMATION ABOUT LINCOLN LIFE AND THE SEPARATE
ACCOUNT........................................ 7
PURPOSE OF THE POLICY........................... 8
Personal Circumstances........................ 8
Market, Interest Rate and Credit Risk
Exposure................................... 8
Replacements.................................. 8
APPLICATION..................................... 9
OWNERSHIP....................................... 9
BENEFICIARY..................................... 10
INSUREDS........................................ 10
THE CONTRACT.................................... 10
Policy Specifications......................... 10
PREMIUM FEATURES................................ 10
Additional Premiums; Planned Premiums......... 11
Limits on Right to Make Payments of
Additional and Planned Premiums............ 11
Premium Load; Net Premium Payment........... 11
RIGHT-TO-EXAMINE PERIOD......................... 11
TRANSFERS AND ALLOCATION AMONG ACCOUNTS......... 12
Allocation of Net Premium Payments............ 12
Transfers..................................... 12
Optional Sub-Account Allocation Programs...... 13
Dollar Cost Averaging....................... 13
Automatic Rebalancing....................... 13
INVESTMENT OPTIONS.............................. 13
Fixed Account................................. 13
Variable Account.............................. 14
POLICY VALUES................................... 14
Accumulation Value............................ 15
Variable Account Value........................ 15
Variable Accumulation Unit Value............ 15
Accumulation Units.......................... 15
Fixed Account and Loan Account Value.......... 16
Net Accumulation Value........................ 16
FUNDS........................................... 16
Substitution of Securities.................... 20
Voting Rights................................. 20
Fund Participation Agreements................. 20
CHARGES AND FEES................................ 20
Deductions Made Monthly....................... 20
Monthly Deduction........................... 21
Cost of Insurance Charge.................... 21
Mortality and Expense Risk Charge and Fund
Expenses..................................... 22
Surrender Charges........................... 24
<CAPTION>
CONTENTS PAGE
<S> <C>
Transaction Fee for Excess Transfers.......... 24
DEATH BENEFITS.................................. 24
Death Benefit Options......................... 24
Changes in Death Benefit Options and Specified
Amount....................................... 25
Federal Income Tax Definition of Life
Insurance.................................... 26
NOTICE OF DEATH OF INSUREDS..................... 26
PAYMENT OF DEATH BENEFIT PROCEEDS............... 26
SETTLEMENT OPTIONS.............................. 27
POLICY LIQUIDITY................................ 27
Policy Loans.................................. 27
Partial Surrender............................. 28
Surrender of the Policy....................... 29
Surrender Value............................. 29
Deferral of Payment and Transfers............. 29
ASSIGNMENT; CHANGE OF OWNERSHIP................. 29
LAPSE AND REINSTATEMENT......................... 30
Lapse of a Policy............................. 30
No Lapse Provision.......................... 30
Reinstatement of a Lapsed Policy.............. 30
COMMUNICATIONS WITH LINCOLN LIFE................ 31
Proper Written Form........................... 31
Telephone Transaction Privileges.............. 31
OTHER POLICY PROVISIONS......................... 31
Issuance...................................... 31
Date of Coverage.............................. 31
Right to Exchange the Policy.................. 31
Incontestability.............................. 32
Misstatement of Age or Gender................. 32
Suicide....................................... 32
Nonparticipating Policies..................... 33
TAX ISSUES...................................... 33
Tax Treatment of Death Benefit................ 33
Federal Income Tax Considerations............. 33
Taxation of Lincoln Life...................... 34
Other Considerations.......................... 34
FAIR VALUE OF THE POLICY........................ 34
DIRECTORS AND OFFICERS OF LINCOLN LIFE.......... 35
DISTRIBUTION OF POLICIES........................ 36
CHANGES OF INVESTMENT POLICY.................... 36
OTHER CONTRACTS ISSUED BY LINCOLN LIFE.......... 37
STATE REGULATION................................ 37
REPORTS TO OWNERS............................... 37
ADVERTISING..................................... 37
YEAR 2000 ISSUES................................ 38
LEGAL PROCEEDINGS............................... 39
EXPERTS......................................... 39
REGISTRATION STATEMENT.......................... 39
Appendix 1...................................... 40
Illustration of Accumulation Values, Surrender
Values, and Death Benefits................... 40
Financial Statements............................ S-1
</TABLE>
2
<PAGE>
DEFINITIONS
ACCUMULATION VALUE: The sum of the Fixed Account Value,
Variable Account Value and the Loan Account Value.
ADMINISTRATIVE OFFICE: The administrative office of The
Lincoln National Life Insurance Company, whose mailing
address is 900 Cottage Grove Road, S-249, Hartford, CT
06152-2249.
AGE: The age of the subject person at her or his nearest
birthday.
BENEFICIARY: The person designated by the applicant or Owner
to receive any Death Benefit Proceeds payable under the
Policy.
CODE: The Internal Revenue Code of 1986, as amended.
COMMISSION: The Securities and Exchange Commission.
CORRIDOR DEATH BENEFIT: The Death Benefit calculated as a
percentage of the Accumulation Value rather than by
reference to the Specified Amount to satisfy the Internal
Revenue Service definition of "life insurance."
COST OF INSURANCE: The portion of the Monthly Deduction
designed to compensate Lincoln Life (defined below) for the
anticipated cost of paying Death Benefits in excess of the
Accumulation Value, not including riders, supplemental
benefits or monthly expense charges.
DATE OF ISSUE: The date on which Lincoln Life begins life
insurance coverage under a Policy.
DEATH BENEFIT OPTION: Either of two methods for determining
the Death Benefit Proceeds.
DEATH BENEFIT PROCEEDS: The amount payable to the
Beneficiary upon the Second Death (defined below), in
accordance with the Death Benefit Option elected, before
deduction of the amount necessary to repay any loans in
full, and overdue deductions.
EFFECTIVE DATE: The date on which the initial premium is
applied to the Policy.
FIXED ACCOUNT: The account under which principal is
guaranteed and interest is credited at a rate of not less
than 4% per year. Fixed Account assets are general assets of
Lincoln Life held in Lincoln Life's General Account.
FIXED ACCOUNT VALUE: The portion of the Accumulation Value,
other than the Loan Account Value, held in Lincoln Life's
General Account.
FUND(S): One or more of 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. Value Fund; BT
Insurance Funds Trust -- BT Equity 500 Index Fund; Delaware
Group Premium Fund, Inc. -- Emerging Markets Series, Small
Cap Value Series, Trend Series; Fidelity Variable Insurance
Products Fund -- Equity-Income Portfolio; Fidelity Variable
Insurance Products Fund II -- Asset Manager Portfolio,
Investment Grade Bond Portfolio; Lincoln National Money
Market Fund, Inc. -- Money Market Fund;
MFS-Registered Trademark- Variable Insurance Trust -- MFS
Emerging Growth Series, MFS Total Return Series, MFS
Utilities Series; OCC Accumulation Trust -- Global Equity
Portfolio, Managed Portfolio; Templeton Variable Products
Series Fund (Class 1) -- Templeton Asset Allocation Fund,
Templeton International Fund, Templeton Stock Fund; Each of
them is an open-end management investment company (mutual
fund) whose shares are available to fund a Variable
Sub-Account under the Policy.
3
<PAGE>
GRACE PERIOD: The 61-day period following a Monthly
Anniversary Day on which the Policy's Net Accumulation Value
is insufficient to cover the current Monthly Deduction.
Lincoln Life will send notice at least 31 days before the
end of the Grace Period that the Policy will lapse without
value unless a sufficient payment (described in the
notification letter) is received by Lincoln Life.
HOME OFFICE: The Headquarters of The Lincoln National Life
Insurance Company, located at 1300 South Clinton Street,
Fort Wayne, Indiana 46802.
INITIAL SPECIFIED AMOUNT: The amount (at least $250,000),
originally chosen by the applicant, initially equal to the
Death Benefit. The Specified Amount may be increased or
decreased as described in this Prospectus.
INSURED: Each of the two persons whose lives are insured by
the Policy. Any Death Benefit is payable only on the Second
Death of the Insureds.
LINCOLN LIFE: The Lincoln National Life Insurance Company.
LOAN ACCOUNT: The account in which Policy indebtedness
(outstanding loans and interest) accrues once it is
transferred out of the Fixed and Variable Sub-Accounts.
LOAN ACCOUNT VALUE: The value of the Loan Account.
MONTHLY ANNIVERSARY DAY: The day of the month (as shown in
the Policy Specifications) when Lincoln Life makes the
Monthly Deduction, or the next Valuation Day if that day is
not a Valuation Day or is nonexistent for that month.
MONTHLY DEDUCTION: The monthly deduction made from Net
Accumulation Value; this deduction includes the cost of
insurance, an administrative expense charge, and charges for
supplemental riders or benefits, if applicable.
NET ACCUMULATION VALUE: The Accumulation Value less the Loan
Account Value.
NET AMOUNT AT RISK: The Death Benefit minus the Accumulation
Value.
NET PREMIUM PAYMENT: The portion of a Premium Payment, after
deduction of 8.0% for the premium load, available for
allocation to the Fixed and Variable Sub-Accounts.
NO LAPSE PREMIUM: The cumulative premium required to have
been paid by each Monthly Anniversary Day to prevent the
Policy from lapsing.
OWNER: The person or persons (including non-natural
persons), holding legal ownership rights to the Policy so
long as one or both Insureds are living.
PLANNED PREMIUMS: 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
Lincoln Life sends a premium reminder notice.
POLICY: The life insurance contract described in this
Prospectus.
POLICY ANNIVERSARY: The day of the year the Policy was
issued, or the next Valuation Day if that day is not a
Valuation Day or is nonexistent for that year.
POLICY YEAR: Each twelve-month period, beginning on the Date
of Issue, during which the Policy is in effect.
PREMIUM PAYMENT: A premium payment made to Lincoln Life
under the Policy.
RIGHT-TO-EXAMINE PERIOD: The period of time, generally 10
days unless otherwise stipulated by state law requirements,
beginning when the Policy is delivered to the Owner, during
which the Owner may return the Policy and receive a refund
of premiums paid.
SECOND DEATH: The Death of the second of the two Insureds to
die.
4
<PAGE>
SEPARATE ACCOUNT: Lincoln Life Flexible Premium Variable
Life Account R. Assets maintained in the Separate Account
are kept separate from the general assets of Lincoln Life
and are not subject to the general liabilities of Lincoln
Life.
SETTLEMENT OPTION(S): Several ways in which the Beneficiary
may receive Death Benefit Proceeds, or in which the Owner
may choose to receive payments upon surrender of the Policy.
SUB-ACCOUNTS: The investment options available under this
Policy, including Fixed and Variable Sub-Accounts.
SURRENDER CHARGE: The amount retained by Lincoln Life upon
the full surrender of the Policy.
SURRENDER VALUE: The amount an Owner can receive in cash by
surrendering the Policy. This equals the Net Accumulation
Value minus the applicable Surrender Charge. All of the
Surrender Value may be applied to one or more of the
Settlement Options.
VALUATION DAY: Every day on which Accumulation Units are
valued; that is any day on which the New York Stock Exchange
is open, except any day on which trading on the Exchange is
restricted, or on which an emergency exists, as determined
by the Commission, so that valuation or disposal of
securities is not practicable.
VALUATION PERIOD: The period of time beginning on the day
following a Valuation Day and ending on the next Valuation
Day. A Valuation Period may be more than one day in length.
VARIABLE ACCOUNT: The aggregate of the Variable Sub-Accounts
of Lincoln Life Flexible Premium Variable Life Account R
each invested in shares of a Fund. The Variable Account is
also the Separate Account.
VARIABLE ACCOUNT VALUE: The portion of the Accumulation
Value attributable to the Variable Account.
VARIABLE ACCUMULATION UNIT: A unit of measure used to
calculate the value of a Variable Sub-Account.
HIGHLIGHTS
The Policy is a flexible premium variable life insurance
policy. Its values may be accumulated on a fixed, variable
or combination basis. The Policy's provisions may vary in
some states.
PURPOSE OF POLICY
The Policy insures two Insureds. The Death Benefit under the
Policy is payable only on the Second Death of the two
Insureds. The Policy is appropriate when the Owner desires
to provide Death Benefits only after the Second Death. For
example, the Policy may be suitable to insure a dual income
couple who desire to provide support for their dependents in
the event both should die, or when a couple desires to
provide liquidity to their heirs on the Second Death. It
would not be suitable when the need for a source of
replacement income or liquidity will occur after the death
of only a single Insured.
INITIAL CHOICES TO BE MADE
The Owner (initially, the applicant) has at least three
important choices under the Policy. The Owner selects:
1)One of the two Death Benefit Options;
2)The amount and frequency of Premium Payments; and
5
<PAGE>
3)The allocation of Net Premium Payments to underlying
investments.
LEVEL OR VARYING DEATH BENEFIT
There are two death benefit options (each a "DEATH BENEFIT
OPTION"). The amount payable under each is determined as of
the date of the Second Death. The Death Benefit Proceeds are
the greater of the amount payable under (a) the Death
Benefit Option selected and (b) the Corridor Death Benefit
(see page 24). Death Benefit Option 1 provides a death
benefit of the Specified Amount. Death Benefit Option 2
provides a death benefit of the Specified Amount plus the
Accumulation Value as of the end of the Valuation Period in
which Lincoln Life receives Due Proof of Death of both
Insureds. (SEE DEATH BENEFITS, DEATH BENEFIT OPTIONS.) If
the applicant fails to designate a Death Benefit Option,
Death Benefit Option 1 applies.
It is sometimes possible to change the Death Benefit Option
or the Specified Amount. (SEE DEATH BENEFIT, CHANGES IN
DEATH BENEFIT OPTIONS AND SPECIFIED AMOUNT).
PREMIUM PAYMENTS
The Policy provides for flexible Premium Payments. The Owner
may make an initial Premium Payment, elect a premium payment
plan under which periodic reminder notices will be sent for
Planned Premiums, or make fixed or varying Premium Payments
from time to time, or some combination of these. To the
extent that the Net Accumulation Value is insufficient to
pay required deductions (including the Cost of Insurance), a
Premium Payment will be required to continue the Policy in
force and a premium notice will be sent. If a Premium
Payment required to continue the Policy in force is not
received in a timely manner, the Policy will lapse. If the
Policy lapses it may be reinstated under certain
circumstances. The Policy will not lapse if, on each Monthly
Anniversary, the Owner has met the No Lapse Premium
requirement. (SEE LAPSE AND REINSTATEMENT, NO LAPSE
PROVISION) Premium Payments are refundable during the Right-
to-Examine Period. The right of the Owner to make Premium
Payments may be limited by Lincoln Life in certain
circumstances and may be limited by applicable tax laws.
SELECTION OF UNDERLYING INVESTMENTS
The Owner allocates the Net Premium Payments among the
Variable Sub-Accounts in the Separate Account, each of which
invests only in shares of a particular Fund, and the Fixed
Account. The initial Premium Payment is allocated to the
Sub-Accounts after the end of the Right-to-Examine Period
(See RIGHT TO EXAMINE PERIOD). Allocations to each Fixed and
Variable Sub-Account must be in whole percentages. At this
time, no more than 18 Sub-Accounts may be opened during the
life of the Policy. Lincoln Life may increase the maximum
number of Sub-Accounts in the future. The values of the
Variable Sub-Accounts are not guaranteed and will vary with
the investment performance of the Funds chosen by the Owner.
CHARGES AND FEES
There is a 8.0% premium load on all Premium Payments. (SEE
PREMIUM PAYMENTS, PREMIUM LOAD).
Monthly Deductions are made for the Cost of Insurance and
any riders. (SEE CERTAIN FEES AND CHARGES, COST OF INSURANCE
CHARGE).
Monthly Deductions (a flat dollar fee of $12.50 per month
during the first Policy Year and, currently $5 per month
thereafter) and a charge of $0.09 per $1000 of Specified
Amount for the first 20 years of the Policy are made to
compensate Lincoln Life for
6
<PAGE>
administrative expenses associated with Policy issue and
ongoing Policy maintenance. An additional monthly charge of
$0.01 per $1,000 of Specified Amount will also be imposed if
the No Lapse Provision is selected and remains in effect.
(SEE CERTAIN FEES AND CHARGES, MONTHLY DEDUCTION).
Daily deductions from each Variable Sub-Account are made for
the mortality and expense risk. The current rate of
deduction, stated as an annual percentage of the value of
the Variable Sub-Account, is 0.80%. (SEE CERTAIN FEES AND
CHARGES, MORTALITY AND EXPENSE RISK CHARGE).
Investment results for each Variable Sub-Account are
affected by each Fund's daily charge for management fees;
these charges vary by Fund and are shown on pages 22-23 of
this Prospectus.
A transaction fee of $25 is imposed for partial surrenders.
(SEE POLICY LIQUIDITY, PARTIAL SURRENDERS).
Lincoln Life reserves the right to impose a $25 charge for
each request for transfers among Fixed and Variable
Sub-Accounts in excess of 12 requests in any Policy Year.
(SEE CERTAIN FEES AND CHARGES, TRANSACTION FEE FOR EXCESS
TRANSFERS).
A surrender charge is deducted from proceeds (excluding
Death Benefit Proceeds) payable to the Owner when the Policy
is surrendered before the fifteenth anniversary of the Date
of Issue or, with respect to any increase in Specified
Amount, before the fifteenth anniversary of the increase.
(SEE POLICY LIQUIDITY, SURRENDER CHARGES).
Interest is charged on Policy loans. (SEE POLICY LIQUIDITY,
POLICY LOANS).
INFORMATION ABOUT LINCOLN LIFE AND THE SEPARATE ACCOUNT
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY. Lincoln Life is
a stock life insurance company incorporated under the laws
of Indiana on June 12, 1905. Lincoln Life is principally
engaged in offering life insurance policies and annuity
contracts, and ranks among the largest United States stock
life insurance companies in terms of assets and life
insurance in force. Lincoln Life is also one of the leading
life reinsurers in the United States. Lincoln Life is
licensed in all states (except New York) and the District of
Columbia, Guam and the Virgin Islands.
Lincoln Life is wholly owned by Lincoln National Corporation
("LNC"), a publicly held insurance holding company
incorporated under Indiana law on January 5, 1968. The
principal offices of both Lincoln Life and LNC are located
at 1300 South Clinton Street, Fort Wayne, Indiana 46802.
Through subsidiaries, LNC engages primarily in the
businesses of insurance and financial services.
Administrative services necessary for the operation of the
Variable Account and the Policies are currently provided by
Lincoln Life. Lincoln Life is the principal underwriter for
the Policies.
Lincoln Life Flexible Premium Variable Life Account R
("SEPARATE ACCOUNT") is a separate account of Lincoln Life.
Under Indiana insurance law, the income, gains and losses
from separate account assets are credited to or charged
against the account, without regard to other income, gains
or losses of Lincoln Life. Lincoln Life owns the assets in
the Separate Account, although the Separate Account assets
are available first to satisfy the obligations of Lincoln
Life with respect to the Policies. Lincoln Life does not
guarantee the Separate Account's investment performance.
Net Premium Payments allocated to the Separate Account will
be invested in Fund shares at net asset value. Monies
necessary to fund deductions, charges, transfers and
7
<PAGE>
surrenders from the Separate Account are raised by selling
Fund shares at net asset value. On each Valuation Day, the
Separate Account will purchase or redeem Fund shares based
on a netting of all transactions in each Variable
Sub-Account for that day.
The Separate Account is registered with the Commission as a
unit investment trust under the Investment Company Act of
1940 ("1940 ACT"). Registration under the 1940 Act does not
involve supervision by the Commission of the Separate
Account or Lincoln Life's management or investment practices
or policies. Lincoln Life has other separate accounts, some
of which are so registered. The other registered separate
accounts hold assets that support different variable annuity
contracts and variable life insurance policies of Lincoln
Life.
PURPOSE OF THE POLICY
PERSONAL CIRCUMSTANCES
The Policy generally provides a greater death benefit for
the same amount of premium, or the same death benefit for a
lower premium, than would a policy on the life of only one
of the Insureds. This is possible because the probability of
two deaths within a given period of time is less than the
probability of a single death. This Policy may be
appropriate in any situation in which death benefit proceeds
are not required until after the death of both Insureds. For
example, a husband and wife who plan to use the marital
deduction for estate tax purposes on the first death would
not ordinarily need liquidity to pay estate taxes until
after the Second Death. The Policy would also be appropriate
in the case of a dual income couple, in which each has
significant earning capacity, whose dependents will need
replacement funds to provide support only after the Second
Death. Such funds could be used to pay for a variety of
needs of dependents, including support, medical treatment,
and education.
Applicants should consult with their professional advisors
concerning the appropriateness of the Policy in their
circumstances, and as to whether all appropriate legal, tax
and financial factors have been taken into consideration.
MARKET, INTEREST RATE AND CREDIT RISK EXPOSURE
The use of variable life insurance rather than traditional
life insurance provides greater opportunities and
corresponding risks. If Death Benefit Option 2 is chosen,
favorable investment performance may increase death
benefits, by increasing the Net Accumulation Value, or
reduce the amount of required premium payments, by funding
the cost of insurance with before-tax Policy Value
accumulations. On the other hand, unfavorable investment
performance may cause a relative decline in death benefits
if Death Benefit Option 2 is chosen, or increase the amount
of premium payments required to avoid lapse. Such premium
payments could be required at times when the Owner's
resources most constrain his or her ability to pay them.
Through selection among the underlying investments, an Owner
may decide the degree of risk exposure best suited to the
Owner's particular needs and circumstances. An applicant who
is averse to market and interest rate risk, or wishes to
provide a fixed amount of liquidity upon the Second Death,
should strongly consider the purchase of a non-variable
second-to-die life insurance policy. Lincoln Life will
provide information about such a policy on request to the
Administrative Office.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, a number of matters should be considered
by the applicant. First, the applicant should consider
whether any
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commission will be paid to an agent or any other person with
respect to the replacement. Second, the applicant should
consider whether coverages and comparable values are
available from the Policy, as compared to his or her
existing policy. For example, the Insureds may no longer be
insurable, or the contestability period may have elapsed
with respect to the underlying 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 complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. A medical history and examination of each of the
Insureds is required. Lincoln Life may decline to provide
insurance on the lives of the Insureds or, if it agrees to
provide insurance, it may place one or both Insureds 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
gender of the Insureds.
The applicant will select the Beneficiary or Beneficiaries
who are to receive Death Benefit Proceeds payable on the
Second Death, 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. The applicant must also
determine 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 Insureds are 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 lives of each of the Insureds
under applicable state law. The Owner may be either or both
of the Insureds, or any other natural person or non-natural
person. The Owner owns and exercises the rights under the
Policy prior to the Second Death.
The Owner is the person who is ordinarily entitled to
exercise the rights under the Policy so long as either of
the Insureds 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 is a person other than the last surviving
Insured, and that Owner dies before the Second Death, the
Owner's rights in the Policy will belong to the Owner's
estate, unless otherwise specified to Lincoln Life.
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BENEFICIARY
The person or persons named in the application as
"BENEFICIARY" are the Beneficiaries 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
either of the Insureds 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. On recordation, the change of Beneficiary will
be effective as of the date of signature or, if there is no
such date, the date of recordation. 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 Second Death, the
Beneficiary's potential interest shall pass to any surviving
Beneficiaries, unless otherwise specified to Lincoln Life.
If no named Beneficiary survives the Second Death, any Death
Benefit Proceeds will be paid to the Owner or the Owner's
executor, administrator or assigns.
INSUREDS
There are two Insureds under the Policy. At the Date of
Issue of the Policy the Owner must have an insurable
interest in each of the Insureds. On the Second Death, a
Death Benefit is payable under the Policy.
THE CONTRACT
On issuance, a life insurance contract ("POLICY") will be
delivered to the Owner. The Policy sets forth the terms of
the Policy, as applicable to the Owner, and should be
reviewed by the Owner on receipt 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 the books and
records of Lincoln Life. Possession of the Policy does not
represent ownership or the right to exercise the incidents
of ownership with respect to the Policy. If the Owner loses
the form of 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, in which is set forth certain
information applicable to the specific Policy. This
information includes the identity of the Owner, the Date of
Issue, the Initial Specified Amount, the Death Benefit
Option selected, the Insureds, the issue Ages, the
Beneficiary, the initial Premium Payment, the Surrender
Charges, Expense Charges and Fees, Guarantee Maximum Cost of
Insurance Rates, and the No Lapse Premium if the No Lapse
Provision has been selected.
PREMIUM FEATURES
The Policy permits flexible premium payments, meaning that
the frequency and the amount of Premium Payments may be
selected by the Owner. After the Initial Premium Payment is
paid there is no minimum premium required, unless to
maintain the No Lapse Provision. (See LAPSE AND
REINSTATEMENT NO LAPSE PROVISION). The initial Premium
Payment is due on the Effective Date and must be equal to or
exceed the amount necessary to provide for two Monthly
Deductions or, if selected, the No Lapse Premium.
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If at least one of the Insureds is still living when the
younger Insured attains or would have attained 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 Variable Account will
be transferred to the Fixed Account. Lincoln Life will no
longer transfer amounts to Variable Sub-Accounts. The Policy
will remain in force until surrender or the Second Death.
ADDITIONAL PREMIUMS; PLANNED PREMIUMS
Any later 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 with an annual,
semiannual, or quarterly frequency ("PLANNED PREMIUMS").
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.
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 8.0% 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
The Owner may return the Policy to Lincoln Life for
cancellation as follows. If the Owner mails or delivers the
Policy to the Administrative Office on or before 10 days (20
to 30 days in some states) after delivery of the Policy 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 Account, and will be allocated to the Sub-Accounts
designated by the Owner at the end of a Right-to-Examine
Period. If the Policy
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is returned for cancellation within the Right-to-Examine
Period, any Premium Payments will be returned within seven
days, although any 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 and
Variable Sub-Accounts may be set forth in the application.
An Owner may change the allocation of future Net Premium
Payments at any time. In any allocation, the amount
allocated to any Sub-Account must be in whole percentages.
No allocation can be made which would result in a
Sub-Account Value of less than $50. Lincoln Life, at its
sole discretion, may waive minimum balance requirements on
the Sub-Accounts. At the present time, no more than 18
Sub-Accounts may be opened during the life of the Policy.
Lincoln Life may increase the number of Sub-Accounts in the
future.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the younger
Insured reaches or would have reached 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. See pages 17-22 of
this Prospectus.
Transfer of amounts of at least $500 from one Variable
Sub-Account to another or from the Variable 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
Variable Sub-Accounts. 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 $500. Lincoln
Life reserves the right to impose 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
effected as of that day. Otherwise, requests will be
effective as of the next Valuation Day.
Any transfer among the Variable 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 Variable
Sub-Account or the Fixed Account to be less than $500 will
result in those remaining Accumulation Units being canceled
and their aggregate value reallocated proportionately among
the other Variable Sub-Accounts and the Fixed Account to
which Policy values are then allocated.
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OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, 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
on a monthly or quarterly basis. 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. An election to Dollar Cost Average is
subject to the 18 Sub-Account Limitation described under
ALLOCATION OF NET PREMIUM PAYMENTS.
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.
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) 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.
Currently, there is no charge for Dollar Cost Averaging, but
Lincoln Life reserves the right to impose a charge.
AUTOMATIC REBALANCING
Automatic Rebalancing periodically restores to a
pre-determined level the percentage of Policy value
allocated to each Variable 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 Variable
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.
Currently, there is no current charge for Automatic
Rebalancing, but Lincoln Life reserves the right to impose a
charge.
INVESTMENT OPTIONS
FIXED ACCOUNT
The "FIXED ACCOUNT" is funded by the general assets of
Lincoln Life not allocated to any separate account. The
Fixed Account is part of Lincoln Life's General Account and
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is subject to Lincoln Life's general liabilities. Amounts
held in the Fixed Account will be credited with interest at
rates determined from time to time by Lincoln Life, but not
less than 4% per year.
Interests in the Fixed Account have not been registered
under the Securities Act of 1933 (the "1933 ACT"), and
neither the Fixed Account nor Lincoln Life's General Account
has been registered under the 1940 Act. Therefore, neither
the Fixed Account nor any interest therein is generally
subject to regulation under the provisions of the 1933 Act
or the 1940 Act. Accordingly, Lincoln Life has been advised
that the staff of the Commission has not reviewed the
disclosure in this Prospectus relating to the Fixed Account.
VARIABLE ACCOUNT
Lincoln Life Flexible Premium Variable Life Account R was
established pursuant to a November 4, 1982 resolution of the
Board of Directors of Lincoln Life. The Variable Account is
composed of the Variable Sub-Accounts. Under Indiana
insurance law, the income, gains and losses, realized or
unrealized, from assets allocated to a separate account are
credited to or charged against the account, without regard
to other income, gains or losses of Lincoln Life. Lincoln
Life owns the assets in the Variable Account, but the
Variable Account assets equal to its reserves and other
liabilities are available first to satisfy the obligation of
Lincoln Life with respect to any obligations of Lincoln Life
funded by the Variable Account, and are not chargeable with
liabilities arising out of any other business conducted by
Lincoln Life. Lincoln Life does not guarantee the Variable
Account's investment performance.
Available proceeds received by the Variable Account will be
invested in Fund shares at net asset value. Monies necessary
to fund deductions, charges, transfers and surrenders from
the Variable Account are raised by selling Fund shares at
net asset value. On each Valuation Day, the Variable Account
will purchase or redeem Fund shares for each Variable
Sub-Account based on a netting of all transactions for each
Variable Sub-Account for that day. Fund shares held in the
Variable Account are registered by book entry on the books
maintained by or for the Funds.
The Variable Account is registered with the Commission as a
unit investment trust under the 1940 Act. Registration under
the 1940 Act does not involve supervision of the Variable
Account or Lincoln Life's management or investment practices
or policies by the Commission.
Lincoln Life has other separate accounts, some of which are
registered as unit investment trusts. The other registered
separate accounts hold assets that support different
variable annuity contracts and variable life insurance
policies of Lincoln Life.
POLICY VALUES
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Required Premium Payments, if any, will vary
based on the investment performance of the underlying
investments. A market downturn, affecting the Variable
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. Review of
periodic statements is strongly suggested to determine if
Additional Premium Payments may be necessary to avoid lapse
of the Policy.
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Each Owner will be advised at least annually of the
Accumulation Value, the number of Accumulation Units which
remain credited to the Policy, the current Accumulation Unit
values, the Variable Sub-Account values, the Fixed Account
Value and the Loan Account Value.
ACCUMULATION VALUE
Each Net Premium Payment will be credited to the Policy as
of the end of the Valuation Period in which it is received
at the Administrative Office. The "ACCUMULATION VALUE" of a
Policy is determined by: (1) multiplying the total number of
Variable Accumulation Units credited to the Policy for each
Variable Sub-Account by its appropriate current Variable
Accumulation Unit Value; (2) if a combination of Variable
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.
VARIABLE ACCOUNT VALUE
VARIABLE ACCUMULATION UNIT VALUE
When all or a part of a Net Premium Payment is allocated to
a Variable Sub-Account, the amount allocated is converted
into Variable Accumulation Units by dividing the amount
allocated to the Variable Sub-Account by the value of the
Variable Accumulation Unit for the Variable Sub-Account
calculated at the end of the Valuation Period in which it is
received at the Administrative Office. The Variable
Accumulation Unit value for each Variable Sub-Account was
established at $10.00 for the first Valuation Period of the
particular Variable Sub-Account. The Variable Accumulation
Unit value for each Variable Sub-Account would thereafter
vary independently of the other Variable Sub-Accounts and
may increase or decrease from one Valuation Period to the
next. Allocations to Variable Sub-Accounts are made only as
of the end of a day, called the "VALUATION DAY," on which
the New York Stock Exchange is open for business.
VARIABLE ACCUMULATION UNITS
A "VARIABLE ACCUMULATION UNIT" is a unit of measure used in
the calculation of the value of each Variable Sub-Account.
The Variable Accumulation Unit value will be as determined
for the Valuation Period during which a Premium Payment or
request for transfer is received by Lincoln Life. The
Variable Accumulation Unit value for a Variable Sub-Account
for any later Valuation Period is determined as follows:
1.The total value of Fund shares held in the Variable
Sub-Account is calculated by multiplying the number of
Fund shares owned by the Variable 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 Variable Sub-Account at the end
of the Valuation Period; such liabilities include daily
charges imposed on the Variable 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 Variable
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 charges imposed on a Variable Sub-Account for any
Valuation Period are equal to the daily mortality and
expense risk charge multiplied by the number of calendar
days
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in the Valuation Period. The amount of Monthly Deduction
allocated to each Variable 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 Variable 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
Variable 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 Variable
Account. The Fixed Account Value is guaranteed by Lincoln
Life.
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 twenty Variable Sub-Accounts is invested solely
in the shares of one of the twenty Funds available under the
Policies. Except for AIM Variable Insurance Funds, Inc.,
Delaware Group Premium Fund, Inc. and Lincoln National Money
Market Fund, Inc. which are Maryland corporations, each of
the Funds is a series of one of six Massachusetts business
trusts. Each such trust or corporation is registered as an
open-end, diversified management investment company under
the 1940 Act.
The Fund Groups and their investment advisers and
distributors are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. FUND"),
managed by AIM Advisors, Inc., and distributed by AIM
Distributors Inc., 11 Greenway Plaza, Suite 100,
Houston, TX 77046-1173;
BT Insurance Funds Trust ("BT TRUST"), managed by
Bankers Trust Company, Bankers Trust Plaza, New York, NY
10006, and distributed by First Data Distributors, Inc.,
4400 Computer Drive, Westborough, MA 01581;
Delaware Group Premium Fund Inc. ("DELAWARE FUND"),
managed by Delaware Management Company, Inc. and
distributed by Delaware Distributors, L.P., 1818 Market
Street, Philadelphia, PA 19103;
Variable Insurance Products Fund ("FIDELITY VIP I"), and
Variable Insurance Products Fund II ("FIDELITY VIP II"),
managed by Fidelity Management & Research Company and
distributed by Fidelity Distributors Corporation, 82
Devonshire Street, Boston, MA 02103;
Lincoln National Money Market Fund, Inc., ("LINCOLN
NATIONAL FUND") managed by Lincoln Investment
Management, Inc. and distributed by Lincoln Financial
Advisors, Inc., 1300 S. Clinton Street, Fort Wayne, IN
46802;
MFS-Registered Trademark- Variable Insurance Trust ("MFS
TRUST"), managed by Massachusetts Financial Services
Company and distributed by MFS Fund Distributors, Inc.,
500 Boylston Street, Boston, MA 02116;
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Templeton Variable Products Series Fund ("TEMPLETON
TRUST"), managed by Templeton Investment Counsel, Inc.
and its Templeton and Franklin affiliates and
distributed by Franklin/Templeton Distributors, Inc.,
700 Central Avenue, St. Petersburg, FL 33701;
OCC Accumulation Trust ("OCC TRUST"), managed by OpCap
Advisors and distributed by OCC Distributors, One World
Financial Center, New York, NY 10281.
Four Funds of AIM V.I. Fund are available under the
Policies:
AIM V.I. Capital Appreciation Fund;
AIM V.I. Diversified Income Fund.
AIM V.I. Growth Fund;
AIM V.I. Value Fund;
One Fund of BT TRUST is available under the Policies:
Equity 500 Index Fund.
Three Funds of DELAWARE FUND GROUP are available under the
Policies:
Emerging Markets Series;
Small Cap Value Series;
Trend Series.
One Fund of FIDELITY VIP I is available under the Policies:
Equity-Income Portfolio ("Fidelity VIP Equity-Income
Portfolio").
Two Funds of FIDELITY VIP II are available under the
Policies:
Asset Manager Portfolio ("Fidelity VIP II Asset Manager
Portfolio");
Investment Grade Bond Portfolio ("Fidelity VIP II
Investment Grade Bond Portfolio").
One Fund of LINCOLN NATIONAL FUND is available under the
Policies:
Money Market Fund.
Three Funds of MFS Trust are available under the Policies:
MFS Emerging Growth Series;
MFS Total Return Series;
MFS Utilities Series.
Three Funds of TEMPLETON Trust and are available under the
Policies:
Templeton Asset Allocation Fund: Class 1;
Templeton International Fund: Class 1;
Templeton Stock Fund: Class 1.
Two Funds of OCC Accumulation Trust are available under the
Policies:
Global Equity Portfolio;
Managed Portfolio.
The investment advisory fees charged the Funds by their
advisers are shown on pages 22-23 of this Prospectus.
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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. CAPITAL APPRECIATION FUND (Small Cap Stocks): Seeks
to provide capital appreciation through investments in
common stocks, with emphasis on medium-sized and smaller
emerging growth companies.
AIM V.I. DIVERSIFIED INCOME FUND (Fixed Income -
Intermediate Term Bonds): Seeks to achieve a high level of
current income primarily by investing in a diversified
portfolio of foreign and U.S. government and corporate debt
securities, including lower rated high yield debt securities
(commonly known as "junk bonds").
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks to provide
growth of capital through investments primarily in common
stocks of leading U.S. companies considered by its adviser
to have strong earnings momentum.
AIM V.I. VALUE FUND (Large Cap Stocks): Seeks to achieve
long-term growth of capital by investing primarily in equity
securities judged by its adviser to be undervalued relative
to the 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.
BT EQUITY 500 INDEX FUND (Large Cap Stocks): Seeks to
replicate as closely as possible the performance of the
Standard & Poor's 500 Composite Stock Price Index, an index
emphasizing large-capitalization stocks, before the
deduction of Fund expenses.
DELAWARE EMERGING MARKETS SERIES (International Stocks): An
international fund which seeks to achieve long-term capital
appreciation by investing primarily in equity securities of
issuers located or operating in emerging countries. Under
normal market conditions, at least 65% of the Series assets
will be invested in equity securities of issuers organized
or having a majority of their assets or deriving a majority
of their operating income in at least three countries that
are considered to be developing or emerging.
DELAWARE SMALL CAP VALUE SERIES (Small Cap Stocks): Seeks
capital appreciation by investing primarily in small- to
mid-cap common stocks whose market value appears low
relative to their underlying value or future earnings and
growth potential. Emphasis also will be placed on securities
of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE TREND SERIES (Small Cap Stocks): Seeks long-term
capital appreciation by investing primarily in small-cap
common stocks and convertible securities of emerging and
other growth-oriented companies. These securities will have
been judged to be responsive to changes in the marketplace
and to have fundamental characteristics to support growth.
Income is not an objective.
FIDELITY VIP II ASSET MANAGER PORTFOLIO (Balanced or Total
Return): Seeks high total return with reduced risk over the
long-term by allocating its assets among domestic and
foreign stocks, bonds and short-term money market
instruments.
FIDELITY VIP II INVESTMENT GRADE BOND PORTFOLIO (Fixed
Income - Intermediate Term Bonds): Seeks as high a level of
current income as is consistent with the preservation of
capital by investing in a broad range of investment-grade
fixed-income securities.
FIDELITY VIP EQUITY-INCOME PORTFOLIO (Large Cap Stocks):
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).
18
<PAGE>
LINCOLN MONEY MARKET FUND (Money Market): Seeks maximum
current income consistent with the preservation of capital,
by investing in a portfolio of short-term money market
instruments maturing within one year from date of purchase.
MFS EMERGING GROWTH SERIES (Large Cap Stocks): Seeks to
provide long-term growth of capital by investing primarily
in common stocks of foreign and domestic insurers.
MFS TOTAL RETURN SERIES (Balanced or Total Return): 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 (Specialty): Seeks capital growth and
current income (income above that available from a portfolio
invested entirely in equity securities) by investing, under
normal circumstances, at least 65% of its assets in equity
and debt securities of utility companies.
TEMPLETON ASSET ALLOCATION FUND - CLASS 1 (Balanced or Total
Return): Seeks a high level of total return through a
flexible policy of investing in stocks of companies in any
nation, debt securities of companies and governments of any
nation, and in money market instruments. Assets are
allocated among different investments depending upon
worldwide market and economic conditions.
TEMPLETON INTERNATIONAL FUND - CLASS 1 (International
Stocks): Seeks long-term capital growth through a flexible
policy of investing in stocks and debt obligations of
companies and governments outside the United States.
TEMPLETON STOCK FUND - CLASS 1 (Global Stocks): Seeks
capital growth through a policy of investing primarily in
common stocks issued by companies, large and small, in
various nations throughout the world, including the U.S.
OCC ACCUMULATION TRUST GLOBAL EQUITY PORTFOLIO
(International Stocks): Seeks long-term capital appreciation
through a global investment strategy primarily involving
equity securities.
OCC ACCUMULATION TRUST MANAGED PORTFOLIO (Balanced or Total
Return): 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.
The AIM V.I. Diversified Income Fund, Delaware Emerging
Markets Series, Delaware Small Cap Value Series, Fidelity
VIP Equity-Income Portfolio, Fidelity VIP II Asset Manager
Portfolio, MFS Emerging Growth Series, MFS Total Return
Series, MFS Utilities Series, OCC Global Equity Portfolio,
OCC Managed Portfolio, Templeton Asset Allocation Fund,
Templeton International Fund and Templeton Stock Fund 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.
There is no assurance that the investment objective of any
of the Funds will be met. Each Owner has all of the
investment performance risk for the Variable Sub-Accounts
selected by the Owner. There is investment performance risk
in each of the Variable Sub-Accounts, although the amount of
such risk varies significantly among the Variable
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).
19
<PAGE>
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Variable 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 Variable
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 Variable Sub-Account without prior approval of the
Commission.
VOTING RIGHTS
Lincoln Life will vote the shares of each Fund held in the
Variable 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 Variable Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares 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
Trust 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.
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 Funds do not foresee
any disadvantage to 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 Fund Groups'
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.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
Funds 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.
CHARGES AND FEES
Charges will be deducted in connection with the Policy to
compensate Lincoln Life 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 MADE MONTHLY
There are various expense deductions that are made monthly.
The Monthly Deduction, including the Cost of Insurance
Charge is made from the Net Accumulation Value.
The Monthly Deductions are deducted proportionately from the
value of each underlying investment subject to the charge.
In the case of Variable Sub-Accounts, Variable Accumulation
Units are canceled and the value of the canceled Variable
Accumulation Units is withdrawn in the same proportion as
their respective values have to the Net
20
<PAGE>
Accumulation Value. The Monthly Deductions are made on the
Monthly Anniversary Day starting on the Date of Issue. The
"MONTHLY ANNIVERSARY DAY" under the Policy is the same day
of each month as the Date of Issue, provided that if there
is no such date in a given month, it is 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 either Insured is still living when the younger Insured
would have attained Age 100 and the Policy has not been
surrendered, no further Monthly Deductions will be made and
the Variable Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
MONTHLY DEDUCTION
There is a flat dollar Monthly Deduction of $12.50 until the
first Policy Anniversary and, currently, $5 thereafter
(guaranteed not to exceed $10). In addition there is a
Monthly Deduction charge of $0.09 per $1000 of Specified
Amount for the first twenty years of the Policy and for the
first twenty years following an increase in Specified
Amount. If the No Lapse Provision is in effect there will
also be a Monthly Deduction of $0.01 per $1000 of Specified
Amount.
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 charge depends on the Age,
underwriting category and gender (in accordance with state
law) of both Insureds and the current Net Amount at Risk.
The rate on which the Monthly Deduction for the Cost of
Insurance is based will generally increase as the Insureds
age, 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 previous Monthly Anniversary Day by
1.0032737 (the monthly equivalent of an annual rate of 4%),
subtracting the Accumulation Value at the previous Monthly
Anniversary Day, 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, per $1,000 of Net Amount at Risk, for
standard risks are based on the 1980 Commissioners Standard
Ordinary Mortality Tables, Age Nearest Birthday (1980 CSO,
Male or Female); or, for unisex rates, on the 1980 CSO-B
Table.
21
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
EXPENSE DATA
The purpose of the following Table is to assist in the understanding of the
costs and expenses imposed on underlying Funds investments in the Variable
Sub-Accounts. The table reflects expenses of the Variable Account as well as of
the individual Funds underlying the Variable Sub-Accounts. The Mortality and
Expense Risk Charge shown is the currently charged rate of 0.80% per year and is
guaranteed not to exceed 0.90% per year.
FEE TABLE
<TABLE>
<CAPTION>
BT
INSURANCE
FUNDS
AIM VARIABLE INSURANCE FUNDS, INC. TRUST DELAWARE GROUP
-------------------------------------------- -------- PREMIUM FUND
AIM V.L. AIM V.I. EQUITY ----------------------
CAPITAL AIM V.I. DIVERSIFIED 500 EMERGING
APPRECIATION AIM V.I. VALUE INCOME INDEX MARKET TREND
FUND GROWTH FUND FUND FUND FUND SERIES SERIES
-------- ----------- -------- -------- -------- ----------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
Total Separate Account Annual
Expenses............................... 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 0.63% 0.65% 0.62% 0.60% 0.20% 0.30% 0.62%
Other Expenses.......................... 0.05% 0.08% 0.08% 0.20% 0.10%(2) 1.20% 0.23%
Total Fund Portfolio Annual Expenses.... 0.68% 0.73% 0.70% 0.80% 0.30%(2) 1.50%(3) 0.85%(3)
<CAPTION>
LINCOLN
NATIONAL
-----------
VALUE MONEY
SERIES MARKET FUND
-------- -----------
<S> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 0.80% 0.80%
Total Separate Account Annual
Expenses............................... 0.80% 0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 0.60% 0.48%
Other Expenses.......................... 0.25% 0.11%
Total Fund Portfolio Annual Expenses.... 0.85%(3) 0.59%
</TABLE>
- ------------------------------
(1) A portion of the brokerage commissions that certain funds paid was used to
reduce funds expenses. In addition, certain funds have entered into
arrangements with their custodian and transfer agent whereby interest
earned on uninvested cash balances was used to reduce custodian and
transfer agent expenses. Including these reductions, Total Fund Portfolio
Annual Expenses would have been 0.64% for the VIP II Asset Manager
Portfolio and 0.57% for the VIP Equity-Income Portfolio.
(2) Under the Advisory Agreement with the Advisor, the Funds will pay advisory
fees at the annual percentage rate of the average daily net assets of each
Fund: .20% for the Equity 500 Index Fund. These fees are accrued daily and
paid monthly. The Advisor has voluntarily undertaken to waive the fees and
to reimburse the Fund for certain expenses so that the Equity 500 Index
Fund total operating expenses will not exceed .30%. Such expense
reimbursements may be terminated at the discretion of the Advisor. If this
reimbursement were not in place, the total operating expenses would be
2.78%. For the year ended December 31, 1997, the Advisor waived and/or
reimbursed expenses of $65,771 for the Equity 500 Index Fund.
(3) The investment adviser for the Small Cap Value Series and Trend Series is
Delaware Management Company, Inc. ("Delaware Management"). The investment
adviser for the Emerging Markets Series is Delaware International Advisers
Ltd. ("Delaware International"). Effective May 1, 1998 through October 31,
1998, the investment advisers for the Series of DGPF have agreed
voluntarily to waive their management fees and reimburse each Series for
expenses to the extent that total expenses will not exceed 1.50% for the
Emerging Markets Series and 0.85% for the Small Cap Value Series and Trend
Series. The fee ratios shown above have been restated to assume that the
new voluntary limitation took effect January 1, 1997. For the fiscal year
ended December 31, 1997, before waiver and/or reimbursement by the
investment adviser, total Series expenses as a percentage of average daily
net assets were 2.45% for the Emerging Market Series, 0.90% for Small Cap
Value Series (formerly known as "Value Series"), and 0.88% for Trend
Series.
22
<PAGE>
The following table does not reflect the Premium Load or the Monthly Deduction
described at page of this Prospectus. The information set forth should be
considered together with the information provided in this Prospectus under the
heading "Charges and Fees", and in the prospectus for each Fund. All expenses
are expressed as a percentage of the Variable Sub-Account Value.
<TABLE>
<CAPTION>
TEMPLETON VARIABLE
FIDELITY VARIABLE INSURANCE PRODUCTS MFS-REGISTERED TRADEMARK- PRODUCTS
FUNDS VARIABLE INSURANCE TRUST SERIES FUND (CLASS 1)
------------------------------------ --------------------------------- ---------------------
VIP II VIP I VIP II MFS TEMPLETON
ASSET EQUITY- INVESTMENT EMERGING MFS TOTAL MFS ASSET TEMPLETON
MANAGER INCOME GRADE BOND GROWTH RETURN UTILITIES ALLOCATION INTERNATIONAL
PORTFOLIO PORTFOLIO PORTFOLIO SERIES SERIES SERIES FUND FUND
----------- -------- ----------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
0.80 % 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
0.80 % 0.80% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
0.55 % 0.50% 0.44% 0.75% 0.75% 0.75% 0.60%(6) 0.69%(6)
0.10 % 0.08% 0.14% 0.12%(5) 0.25%(5) 0.25%(5) 0.18% 0.19%
0.65 %(1) 0.58%(1) 0.58% 0.87% 1.00%(4) 1.00%(4) 0.78%(6) 0.88%(6)
</TABLE>
<TABLE>
<CAPTION>
OCC ACCUMULATION
TRUST
---------------------
TEMPLETON GLOBAL
STOCK EQUITY MANAGED
FUND PORTFOLIO PORTFOLIO
--------- --------- ---------
<S> <C> <C>
0.80% 0.80% 0.80%
0.80% 0.80% 0.80%
0.69%(6) 0.79%(7) 0.80%(7)
0.19%(6) 0.40%(8) 0.07%(8)
0.88%(6) 1.19%(9) 0.87%(9)
</TABLE>
- ------------------------------
(4) The Adviser has agreed to bear expenses for each Series, subject to
reimbursement by each Series, such that each Series' "Other Expenses" shall
not exceed 0.25% of the average daily net assets of the Series during the
current fiscal year. Otherwise, "Other Expenses" for the Total Return
Series and Utilities Series would be 0.27% and 0.45% respectively, and
"Total Fund Portfolio Annual Expenses" would be 1.02% and 1.20%
respectively, for these Series. See "Information Concerning Shares of Each
Series Expenses."
(5) Each Series has an expense offset arrangement which reduces the Series'
custodian fee based upon the amount of cash maintained by the Series with
its custodian and dividend disbursing agent, and may enter into other such
arrangements and directed brokerage arrangements (which would also have the
effect of reducing the Series' expenses). Any such fee reductions are not
reflected under "Other Expenses".
(6) Management Fees and Total Operating Expenses have been restated to reflect
the management fee schedule approved by shareholders and effective May 1,
1997. See fund prospectus for details. Actual Management Fees and Total
Fund Operating Expenses during 1997 were lower.
(7) Reflects management fees after taking into effect any waiver.
(8) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(9) Total Portfolio Expenses for the Managed Portfolio are limited to OpCap
Advisors so that their respective annualized operating expenses (net of any
expense offsets) do not exceed 1.00% of average daily net assets. Total
Portfolio Expenses for the Global Equity Portfolio are limited to 1.25% of
average daily net assets. Without such limitation and without giving effect
to any expense offsets, the Management Fees, Other Expenses and Total
Portfolio Expenses incurred for the fiscal year ended December 31, 1997
would have been; .80%, .07%, and .87%, respectively, for the Managed
Portfolio and .80%, .40%, and 1.20%, respectively, for the Global Equity
Portfolio.
23
<PAGE>
SURRENDER CHARGES
A generally declining surrender charge ("SURRENDER CHARGE")
will 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
Insureds, the number of years since the Date of Issue, and
Specified Amount. The charge is in part a deferred sales
charge and in part a recovery of certain first year
administrative costs. The maximum Surrender Charge is
included in each Policy and is in compliance with each
state's nonforfeiture law. Examples of the Surrender Charge
can be seen in Appendix I by subtracting "Surrender Value"
from "Total Accumulation Value" on any chosen set of
investment return assumptions.
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 is imposed, allocated pro-rata
among the Sub-Accounts from which the partial surrender
proceeds are taken.
Any surrenders may result in tax implications. SEE TAX
MATTERS
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.
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 applicant must select the Specified Amount of the Death
Benefit, which may not be less than $250,000 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 on the Second Death and the Owner's
ability to make Premium Payments. In evaluating this
decision, the applicant should consider that the greater the
Net Amount at Risk, the greater the monthly deductions for
the Cost of Insurance.
DEATH BENEFIT OPTIONS
Two different Death Benefit Options are available under the
Policy. The amount 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 Second Death, less (in each case) any
indebtedness under the Policy. In the case of Death Benefit
24
<PAGE>
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 required to maintain the Policy as a
"life insurance contract" for Federal income tax purposes.
The Corridor Percentage is 250% through the time the younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table at page 26 of this Prospectus
to 100% when the younger Insured reaches or would have
reached Age 95.
Death Benefit Option 1 provides Death Benefit Proceeds equal
to the Specified Amount (a minimum of $250,000). If Option 1
is selected, the Policy pays level Death Benefit Proceeds
until the Minimum Death Benefit exceeds the Specified
Amount. (See DEATH BENEFITS, FEDERAL INCOME TAX DEFINITION
OF LIFE INSURANCE).
Death Benefit Option 2 provides Death Benefit Proceeds equal
to the sum of the Specified Amount plus the Accumulation
Value as of the Valuation Day immediately after receipt by
Lincoln Life of Due Proof of the Second 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. The ability of
the Owner to support the Policy 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 from the value of the Policy to pay the
Cost of Insurance.
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 Second 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
amount of 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.
25
<PAGE>
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 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 set forth
below.
<TABLE>
<CAPTION>
ATTAINED AGE OF THE
YOUNGER INSURED
(NEAREST BIRTHDAY) CORRIDOR 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
<CAPTION>
ATTAINED AGE OF THE
YOUNGER INSURED
(NEAREST BIRTHDAY) CORRIDOR PERCENTAGE
- ------------------- ---------------------
<S> <C>
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>
NOTICE OF DEATH OF INSUREDS
Due Proof of Death must be furnished to Lincoln Life at the
Administrative Office as soon as reasonably practicable
after the death of each 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 both Insureds. SEE
SETTLEMENT OPTIONS. The amount of the Death Benefit Proceeds
under Option 2 will be determined as of the date of the
Second Death. Payment of the Death Benefit Proceeds may be
delayed if the Policy is contested or if Variable Account
values cannot be determined.
26
<PAGE>
The Owner may elect a Settlement Option before the Second
Death; after the Second Death, if the Owner has not
irrevocably selected a Settlement Option, the Beneficiary
may elect one of the Settlement Options. 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.
SETTLEMENT OPTIONS
If an Insured is living, the Owner may elect a Settlement
Option and may revoke or change a prior election. The
Beneficiary may make or change an election within 90 days of
the Second Death of the Insured, unless the Owner's election
was stated to be irrevocable.
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.
The fourth Settlement Option, provides that Lincoln Life
pays interest annually on the sum left with Lincoln Life
at a rate of at least 3% per year, and pays the amount
on deposit on the payee's death.
Any other Settlement Option offered by Lincoln Life at the
time of election may also be selected.
POLICY LIQUIDITY
The Policy provides only limited liquidity. Subject to
certain limitations, however, 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 contract for Policy Loans up to an
aggregate amount not to exceed 90% of the Surrender Value at
the time a Policy Loan is made. It is a condition to
securing a Policy Loan that the Owner execute a loan
agreement and that the Policy be assigned to Lincoln Life
free of any other assignments. Interest on Policy Loans
accrues at an annual rate of 8%, and loan interest is
payable to Lincoln Life (for its account) once a year in
arrears on each Policy Anniversary, or earlier upon full
surrender or other payment of proceeds of a Policy.
27
<PAGE>
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 from
the values in each Fixed and Variable Sub-Account, and
treated as an additional Policy Loan, and added to the Loan
Account Value.
During the first ten Policy Years, Lincoln Life's current
practice is to credit interest to the Loan Account Value 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, Lincoln Life's current practice is
to credit interest at an annual rate equal to the interest
rate charged on the loan, less 0% 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.
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 Second 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. Lincoln Life may at its discretion
decline any request for a Policy Loan.
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.
PARTIAL SURRENDER
A partial surrender may be made at any time before the
Second Death 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 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 $250,000, 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.
28
<PAGE>
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
The Owner may surrender the Policy at any time. On surrender
of the Policy, Lincoln Life will pay to the Owner, or
assignee, the Surrender Value next computed after receipt of
the request in proper written form at the Administrative
Office. Payment of any amount from the Variable Account on a
full surrender will usually be made within seven calendar
days thereafter. All coverage under the Policy will
automatically terminate if the Owner makes a full surrender.
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 the Appendix.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any Variable
Sub-Accounts will be made within 7 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 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 either Insured is living, the Owner may assign the
Owner's rights in the Policy, including the right to change
the beneficiary designation. The assignment must be in
proper written form, signed by the Owner 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 either Insured is living, the Owner 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,
29
<PAGE>
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
Except as provided by the No Lapse Provision, if at any time
the Net Accumulation Value is insufficient to pay the
Monthly Deduction, 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 are 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. If the Second Death occurs during the Grace
Period, Death Benefit Proceeds will be paid, but will be
reduced, in addition to any other reductions, by any unpaid
Monthly Deductions. If the Second Death occurs after the
Policy has lapsed, no Death Benefit Proceeds will be paid.
NO LAPSE PROVISION
The applicant may elect the NO LAPSE PROVISION at issue of
the Policy. If this provision is elected and 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, the Policy will
not lapse. 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 the Owner fails
to meet the premium requirements, if there is an increase in
Specified Amount or if the Owner changes the Death Benefit
Option. Once the No Lapse Provision is terminated, 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, the policy may be reinstated provided (a) the policy
has not been surrendered, (b) there is an application for
reinstatement in proper written form, (c) evidence of
insurability of both insureds 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.
30
<PAGE>
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 the Monthly Deduction
due that day.
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
When ever this Prospectus refers to a communication "IN
PROPER WRITTEN FORM," it means a writing, 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.
OTHER POLICY PROVISIONS
ISSUANCE
A Policy may only be issued upon receipt of satisfactory
evidence of insurability, and generally only when both
Insureds are at least age 18 but are less than Age 80.
DATE OF COVERAGE
The date of coverage will be the Date of Issue, provided
both Insureds are alive and prior to any change in the
health and insurability of the Insureds as represented in
the application.
RIGHT TO EXCHANGE THE POLICY
The Owner may, within the first two Policy Years, exchange
the Policy for a permanent life insurance policy then being
offered by Lincoln Life. The benefits for the new policy
will not vary with the investment experience of the Variable
Account. The exchange must be elected within 24 months from
the Date of Issue. No evidence of insurability will be
required.
The Owner, the Insured and the Beneficiary under the new
policy will be the same as those under the exchanged Policy
on the 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 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, the
Owner will be required to make additional Premium Payments
in order to
31
<PAGE>
effect the exchange. The new Policy will have a Date of
Issue and issue Ages as of the date of exchange. 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 the Owner, Lincoln Life will pay the
excess to the Owner in cash. The exchange may be subject to
federal income tax withholding.
If at any time while both Insureds are alive, a change in
the Internal Revenue Code would result in a less favorable
tax treatment of the Insurance provided under the policy or
if the Insureds are legally divorced while the policy is in
force, the Owner may exchange the policy for separate single
life policies on each of the Insureds subject to the
following conditions: (a) evidence of insurability
satisfactory to Lincoln Life is furnished, (b) the amount of
insurance of each new Policy is not larger than one half of
the amount of insurance then in force under the policy, (c)
the premium for each new policy is determined according to
Lincoln Life's rates then in effect for that policy based on
each Insured's then attained age and sex, and (d) any other
requirements as determined by Lincoln Life are met. The new
policy will not take effect until the date all such
requirements are met.
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 for two years from the Date of
Issue so long as both Insureds were alive during those two
years. 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 so long as both Insureds were alive during
those two years.
MISSTATEMENT OF AGE OR GENDER
If the Age or gender of either of the Insureds 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 Second
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 Second
Death.
SUICIDE
If the Second Death is by suicide, while sane or insane,
within two years from the Date of Issue, Lincoln Life will
upon the Second Death pay no more than the sum of the
premiums paid, less any indebtedness and the amount of any
partial surrenders. If the Second Death is 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 upon the Second Death pay no more
than a refund of the monthly charges for the cost of such
additional benefit.
32
<PAGE>
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.
TAX ISSUES
Section 7702 of the Code provides that if certain tests are
met, a Policy will be treated as a life insurance policy for
federal tax purposes. Lincoln Life will monitor compliance
with these tests. The Policy should thus receive the same
federal income tax treatment as fixed benefit life
insurance.
TAX TREATMENT OF DEATH BENEFIT
The death proceeds payable under a Policy are excludable
from gross income of the Beneficiary under Section 101 of
the Code.
FEDERAL INCOME TAX CONSIDERATIONS
Section 7702A of the Code defines modified endowment
contracts as those policies issued or materially changed on
or after June 21, 1988 on which the total premiums paid
during the first seven years exceed the amount that would
have been paid if the policy provided for paid up benefits
after seven level annual premiums. The Code provides for
taxation of surrenders, partial surrenders, loans,
collateral assignments and other pre-death distributions
from modified endowment contracts in the same way annuities
are taxed. Modified endowment contract distributions are
defined by the Code as amounts not received as an annuity
and are taxable to the extent the cash value of the policy
exceeds, at the time of distribution, the premiums paid into
the policy. A 10% tax penalty generally applies to the
taxable portion of such distributions unless the Owner is
over 59 1/2 years of Age or disabled.
The Policies offered by this Prospectus may or may not be
issued as modified endowment contracts. Lincoln Life will
monitor premiums paid and will notify the Owner when the
Policy is in jeopardy of becoming a modified endowment
contract. If a Policy is not a modified endowment contract,
a cash distribution during the first 15 years after a Policy
is issued which causes a reduction in death benefits may
still become fully or partially taxable to the Owner
pursuant to Section 7702(f)(7) of the Code. The Owner should
carefully consider this potential effect and seek further
information before initiating any changes in the terms of
the Policy. Under certain conditions, a Policy may become a
modified endowment contract as a result of a material change
or a reduction in benefits as defined by Section 7702A(c) of
the Code. Lincoln Life will monitor compliance with these
tests.
In addition to meeting the tests required under Section 7702
and Section 7702A, Section 817(h) of the Code requires that
the investments of separate accounts such as the Variable
Account be adequately diversified. Regulations issued by the
Secretary of the Treasury set the standards for measuring
the adequacy of this diversification. A variable life
insurance policy that is not adequately diversified under
these regulations would not be treated as life insurance
under Section 7702 of the Code. To be adequately
diversified, each Variable Sub-Account must meet certain
tests. Lincoln Life believes the Variable Account
investments meet the applicable diversification standards.
Should the Secretary of the Treasury issue additional rules
or regulations limiting the number of funds, transfers
between funds, exchanges of funds or changes in investment
33
<PAGE>
objectives of funds such that the Policy would no longer
qualify as life insurance under Section 7702 of the Code,
Lincoln Life reserves the right to steps required to remain
in compliance.
Lincoln Life will monitor compliance with these regulations
and, to the extent necessary, will change the objectives or
assets of the Variable Sub-Account investments to remain in
compliance. Lincoln Life also reserves the right to make
changes in this Policy or to make distributions from the
Policy to the extent it deems necessary, in its sole
discretion, to continue to qualify this Policy as life
insurance.
A total surrender or termination of the Policy by lapse may
have adverse tax consequences. If the amount received by the
Owner plus total Policy indebtedness exceeds the premiums
paid into the Policy, the excess will generally be treated
as taxable income, whether or not the Policy is a modified
endowment contract.
Federal estate and state and local estate, inheritance and
other tax consequences of ownership or receipt of Policy
proceeds depend on the circumstances of each Owner or
Beneficiary.
TAXATION OF LINCOLN LIFE
Lincoln Life is taxed as a life insurance company under the
Code. Since the Variable Account is not a separate entity
from Lincoln Life and its operations form a part of Lincoln
Life, it will not be taxed separately as a "regulated
investment company" under Sub-chapter M of the Code.
Investment income and realized capital gains on the assets
of the Separate Account are reinvested and taken into
account in determining the value of Variable Accumulation
Units.
Lincoln Life does not initially expect to incur any Federal
income tax liability that would be chargeable to the
Variable Account. Based upon these expectations, no charge
is currently being made against the Variable Account for
federal income taxes. If, however, Lincoln Life determines
that on a separate company basis such taxes may be incurred,
it reserves the right to assess a charge for such taxes
against the Variable Account.
Lincoln Life may also incur state and local taxes in
addition to premium taxes in several states. At present,
these taxes are not significant. If they increase, however,
additional charges for such taxes may be made.
OTHER CONSIDERATIONS
The foregoing discussion is general and is not intended as
tax advice. Counsel and other competent advisers should be
consulted for more complete information. This discussion is
based on Lincoln Life's understanding of Federal income tax
laws as they are currently interpreted by the Internal
Revenue Service. No representation is made as to the
likelihood of continuation of these current laws and
interpretations.
FAIR VALUE OF THE POLICY
It is sometime 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 Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase
34
<PAGE>
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.
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. 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 five years except as
indicated below.
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ---------------------------------------------------
<S> <C>
Nancy J. Alford Vice President [4/96-present], (formerly Second
VICE PRESIDENT Vice President [1/90-4/96]), Lincoln National
Life Insurance Co.
Roland C. Baker President [1/95-present], First Penn-Pacific Life
VICE PRESIDENT AND DIRECTOR Insurance Co. Formerly: Chairman and CFO
1801 S. Meyers Road [7/88-1/95], Baker, Ralish, Shipley and Politzer,
Oakbrook Terrace, Ill. 60181 Inc.
Jon A. Boscia President and Chief Executive Officer, Lincoln
DIRECTOR National Corp. [1/98-present] (Formerly:
200 East Berry Street President and Chief Executive Officer
Fort Wayne, Ind. 46802 [10/96-1/98]); Chief Operating Officer
[5/94-10/96]), Lincoln National Life Insurance
Co. President [7/91-5/94] Lincoln Investment
Management Inc.
John Gotta Vice President and General Manager [1/98-present]
VICE PRESIDENT Formerly: Senior Vice President, CIGNA
900 Cottage Grove Rd. [3/96-12/97]; Vice President, Connecticut Mutual
Bloomfield, CT 06152-2321 Life Insurance Company [8/94-3/96]; Vice
President, CIGNA [3/93-8/94]; Regional Director
of Agencies, Phoenix-Home Life Mutual Insurance
Company [3/90-2/93]
Melanie T. Hall Vice President [1/96-Present] (formerly Second Vice
VICE PRESIDENT President [6/95-1/96]), Lincoln National Life
Insurance Co. Formerly: Assistant Vice President
[1/95-6/95], LNC Equity Sales Corporation,
Assistant Vice President [12/93-1/95], Lincoln
Investment Management, Inc.; Assistant Vice
President [12/92-12/93], Lincoln National Life
Insurance Co.
J. Michael Hemp President [11/96-Present], Lincoln Financial
VICE PRESIDENT Advisors Corp.; Vice President [10/95-Present],
Lincoln National Life Insurance Co. Formerly:
Regional Chief Executive Officer [11/79-10/95],
Lincoln Dallas RMO.
Jack D. Hunter Executive Vice President [5/86-Present] and General
EXECUTIVE VICE PRESIDENT, Counsel [3/75-Present], Lincoln National
GENERAL COUNSEL AND DIRECTOR Corporation and Executive Vice President
200 East Berry Street [8/86-Present] and General Counsel
Fort Wayne, Ind. 46802 [3/75-Present], The Lincoln National Life
Insurance Company
Stephen H. Lewis Senior Vice President, [5/94-present] Lincoln
VICE PRESIDENT National Life Insurance Co. Formerly: President
[2/85-5/94], First Penn-Pacific Life Insurance
Co.
H. Thomas McMeekin Chairman [5/94-present], Lincoln Investment
DIRECTOR Management, Inc. (formerly Executive Vice
200 East Berry Street President [2/92-11/92], Senior Vice President
Fort Wayne, Ind. 46802 [11/87-2/92]; Executive Vice President
[5/94-Present], Lincoln National Corporation
(formerly Senior Vice President [11/92-5/94])
Ian M. Rolland President [1/92-present], Chief Executive Officer
DIRECTOR [5/77-present] and President [12/75-1/92],
200 East Berry Street Lincoln National Corp. Formerly: Chairman
Fort Wayne, Ind. 46802 [1/92-5/94], Chief Executive Officer [7/77-5/94]
and President [3/83-1/93], Lincoln National Life
Insurance Co.
Arthur S. Ross Vice President [8/91-present], Lincoln National
VICE PRESIDENT Life Insurance Co.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND POSITION(S)
WITH REGISTRANT* PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ---------------------------------------------------
<S> <C>
Lawrence T. Rowland Executive Vice President [10/96-present] (formerly
EXECUTIVE VICE PRESIDENT AND Senior Vice President [1/93-10/96]), Vice
DIRECTOR President [10/91-1/93]), Lincoln National Life
One Reinsurance Place Insurance Co.
1700 Magnavox Way
Fort Wayne, Ind. 46804
Keith J. Ryan Senior Vice President (formerly Vice President),
SENIOR VICE PRESIDENT, CHIEF Chief Financial Officer and Assistant Treasurer
FINANCIAL OFFICER AND ASSISTANT [1/96-present]. Formerly: Controller
TREASURER [6/95-12/95], Business Controls Director
[11/90-6/95], Lincoln National Life Insurance Co.
Gabriel L. Shaheen President and Chief Executive Officer
PRESIDENT, CHIEF EXECUTIVE [1/98-present] Formerly: Chairman and Managing
OFFICER AND DIRECTOR Director, Lincoln National (UK) PLC [12/96-1/98];
President, Lincoln National Reassurance Company
[7-95-12/96]; Senior Vice President, Lincoln
National Life Reinsurance Company [1/93-7/95]
Senior Vice President, Lincoln National Life
Insurance Company [5/91-1/93]
Richard C. Vaughan Executive Vice President and Chief Financial
DIRECTOR Officer [1/95-present] (formerly Senior Vice
200 East Berry Street President [4/92-1/95]), Lincoln National Corp.
Fort Wayne, Ind. 46802
Michael R. Walker Vice President [1/96-present], Lincoln National
VICE PRESIDENT Life Insurance Co. Formerly: Vice President
[3/96-1/96], Employers Health Insurance Co.; Vice
President [7/85-3/93], Baker Hughes, Inc.
Roy V. Washington Vice President [7/96-present], Lincoln National
VICE PRESIDENT Life Insurance Co. (formerly, Associate Counsel
[2/95-7/96]). Formerly: Director of Compliance
[8/94-2/95], Lincoln Investment Management, Inc.;
Compliance Consultant [8/89-8/94], Lincoln
National Corp.
Michael L. Wright Senior Vice President [3/95-present], Lincoln
SENIOR VICE PRESIDENT National Life Insurance Co. Formerly: Executive
Vice President and Chief Operating Officer
[11/88-3/95], The Associate Group.
</TABLE>
*Unless otherwise indicated, principal business address is 1300 South Clinton
Street, Fort Wayne, Indiana 46802
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"). The principal business address of Lincoln
Life is 1300 South Clinton Street, Fort Wayne, IN 46802.
The Policy will be sold by individuals, who in addition to
being licensed as life insurance agents for Lincoln Life,
are also registered representatives. These representatives
ordinarily receive commission and services fee up to 95% of
the first year premium, plus up to 10% of all other premiums
paid. The local agency receives additional compensation on
the first year 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 sales charges made under this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Variable Account. Lincoln Life must inform the Owners
and obtain all necessary regulatory approvals. Any
36
<PAGE>
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.
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 Variable 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
37
<PAGE>
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.
YEAR 2000 ISSUES
Variable Life Account R is a Lincoln Life "separate account"
established under Indiana insurance law; thus, Lincoln Life
is responsible, as part of its year 2000 updating process,
for the updating of its Account R-related computer systems.
An affiliate of Lincoln Life, Delaware Service Company
(Delaware), provides substantially all of the necessary
accounting and valuation services for Account R. Delaware,
for its part, is responsible for updating all of its
computer systems, including those which service Account R,
to accommodate the year 2000. Lincoln Life and Delaware have
begun formal discussions with each other to assess the
requirements for their respective systems to interface
properly in order to facilitate the accurate and orderly
operation of Account R beginning in the year 2000.
The year 2000 issue is pervasive and complex and affects
virtually every aspect of the businesses of both Lincoln
Life and Delaware (the Companies). The computer systems of
the Companies and their interfaces with the computer systems
of vendors, suppliers, customers and other business partners
are particularly vulnerable. The inability to properly
recognize date-sensitive electronic information and to
transfer data between systems could cause errors or even
complete failure of systems, which would result in a
temporary inability to process transactions correctly and
engage in normal business activities for Account R. The
Companies respectively are redirecting significant portions
of their internal information technology efforts and are
contracting, as needed, with outside consultants to help
update their systems to accommodate the year 2000. Also, in
addition to the discussions with each other noted above, the
Companies have respectively initiated formal discussions
with other critical parties that interface with their
systems to gain an understanding of the progress by those
parties in addressing year 2000 issues. While the Companies
are making substantial efforts to address their own systems
and the systems with which they interface, it is not
possible to provide assurance that operational problems will
not occur. The Companies presently believe that, with the
modification of existing computer systems, updates by
vendors and conversion to new software and hardware, the
year 2000 issue will not pose significant operations
problems for their respective computer systems. In addition,
the Companies are incorporating potential issues surrounding
year 2000 into their contingency planning process, in the
event that, despite these substantial efforts, there are
unresolved year 2000 problems. If the remediation efforts
noted above are not completed timely or properly, the year
2000 issue could have a material adverse impact on the
operation of the businesses of Lincoln Life or Delaware, or
both.
The cost of addressing year 2000 issues and the timeliness
of completion is being monitored by management of the
respective Companies and, for each company, will be based on
its management's best estimates which are derived utilizing
numerous assumptions of future events, including the
continued availability of certain resources, third-party
modification plans and other factors. Nevertheless, there
can be no guarantee either by Lincoln Life or by Delaware
that estimated costs will be achieved, and actual results
could differ significantly from those anticipated. Specific
factors that might cause
38
<PAGE>
such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the
ability to locate and correct all relevant computer
problems, and other uncertainties.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances these proceedings
include claims for unspecified or substantial punitive
damages and similar types of relief in addition to amounts
for alleged contractual liability or requests for equitable
relief. After consultation with legal counsel and a review
of available facts, it is management's opinion that the
ultimate liability, if any, under these suits will not have
a material adverse effect on the financial position of
Lincoln Life.
During the 1990's, class action lawsuits alleging sales
practices fraud have been filed against many life insurance
companies, and Lincoln Life has not been immune. Two
lawsuits alleging fraud in the sale of interest-sensitive
universal and whole life insurance policies have been filed
against Lincoln Life. These two suits have been filed as
class actions, although as of the date of this Prospectus
the court had not certified a class in either case.
Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. Although the
relief sought in these cases is substantial, the cases are
in the early stages of litigation, and it is premature to
make assessments about potential loss, if any. Management
denies the allegations and intends to defend these suits
vigorously. The amount of liability, if any, which may arise
as a result of these suits (exclusive of any indemnification
from professional liability insurers) cannot be reasonably
estimated at this time.
EXPERTS
The statutory-basis financial statements and schedules of
Lincoln Life appearing in this prospectus and registration
statement have been audited by Ernst & Young LLP,
independent auditors, as set forth in their report which
also appears elsewhere in this document and in the
registration statement. The financial statements and
schedules audited by Ernst & Young LLP have been included in
this document in reliance on their report given on their
authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been
examined by Michael J. Roscoe, 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 Brian Burke, 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
Variable 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.
39
<PAGE>
APPENDIX 1
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, and that the
No-Lapse Provision is not selected.
The amounts shown for the Accumulation Value, Surrender
Value and Death Benefit Proceeds as of each Policy
Anniversary reflect the fact that the net investment return
on the assets held in the Sub-Accounts is lower than the
gross return. This is due to the daily charges 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 Variable Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90%. In addition, the
net investment returns 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 Variable Account.
Considering current charges for mortality and expense risks
and the assumed Fund expenses, gross annual rates of return
of 0%, 6%, and 12% correspond to net investment experience
at constant annual rates of -1.60%, 4.40% and 10.40%.
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 -1.70%, 4.30% and 10.30%.
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 8.0% 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.
40
<PAGE>
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 $12.50 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. The
charge also includes $0.09 per $1,000 of Specified Amount
during the first twenty Policy Years.
Upon request, the Company will furnish a comparable
illustration based on the proposed insureds' ages, gender
classification, smoking classification, risk classification
and premium payment requested.
41
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,733 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
SURRENDER VALUE
DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT RETURN
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF OF
END OF ACCUMULATED AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30%
- ----------- --------------- --------- --------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,420 1,000,000 1,000,000 1,000,000 11,130 11,840 12,550 0 0
2 29,560 1,000,000 1,000,000 1,000,000 21,939 24,047 28,240 8,673 10,780
3 45,458 1,000,000 1,000,000 1,000,000 32,375 35,577 41,125 19,621 23,823
4 62,150 1,000,000 1,000,000 1,000,000 42,413 49,415 57,301 30,207 37,209
5 79,678 1,000,000 1,000,000 1,000,000 52,029 62,544 74,867 40,301 50,816
6 98,081 1,000,000 1,000,000 1,000,000 61,188 75,936 93,933 50,076 64,823
7 117,405 1,000,000 1,000,000 1,000,000 69,846 89,552 114,605 59,968 79,675
8 137,695 1,000,000 1,000,000 1,000,000 77,940 103,338 136,992 69,297 94,695
9 158,999 1,000,000 1,000,000 1,000,000 85,386 117,214 161,197 77,978 109,806
10 181,369 1,000,000 1,000,000 1,000,000 92,090 131,089 187,331 85,917 124,916
15 311,155 1,000,000 1,000,000 1,000,000 110,809 196,869 352,582 110,809 195,869
20 476,799 1,000,000 1,000,000 1,000,000 88,056 240,688 599,423 88,058 240,688
25 688,208 0 1,000,000 1,062,815 0 214,564 1,012,205 0 214,564
30 958,025 0 0 1,785,419 0 0 1,700,399 0 0
<CAPTION>
END OF GROSS 12%
POLICY NET
YEAR 10.30%
- ----------- -----------
<S> <C>
1 0
2 12,974
3 28,372
4 45,094
5 63,140
6 82,821
7 104,728
8 128,349
9 153,789
10 181,158
15 352,582
20 599,423
25 1,012,205
30 1,700,399
</TABLE>
All 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 "Net" percentages 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 22-23 of this Prospectus.
42
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,733 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
SURRENDER VALUE
DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE ANNUAL INVESTMENT RETURN
PREMIUMS ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF OF
END OF ACCUMULATED AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6%
POLICY 5% INTEREST NET NET NET NET NET NET NET NET
YEAR PER YEAR -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40%
- ----------- --------------- --------- --------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,420 1,000,000 1,000,000 1,000,000 11,204 11,916 12,629 0 0
2 29,560 1,000,000 1,000,000 1,000,000 22,296 24,420 26,631 9,029 11,154
3 45,458 1,000,000 1,000,000 1,000,000 33,185 37,443 42,050 20,432 24,690
4 62,150 1,000,000 1,000,000 1,000,000 43,871 51,004 59,029 31,665 38,798
5 79,678 1,000,000 1,000,000 1,000,000 54,355 65,123 77,725 42,627 53,395
6 98,081 1,000,000 1,000,000 1,000,000 64,634 79,820 98,313 53,521 68,707
7 117,405 1,000,000 1,000,000 1,000,000 74,706 95,116 120,983 64,829 85,238
8 137,695 1,000,000 1,000,000 1,000,000 84,572 111,033 145,948 75,929 102,390
9 158,999 1,000,000 1,000,000 1,000,000 94,227 127,593 173,441 86,819 120,185
10 181,369 1,000,000 1,000,000 1,000,000 103,670 144,821 203,721 97,497 138,647
15 311,155 1,000,000 1,000,000 1,000,000 146,421 240,719 407,074 146,421 240,719
20 476,799 1,000,000 1,000,000 1,000,000 175,200 349,763 733,888 175,200 349,763
25 688,208 1,000,000 1,000,000 1,342,171 180,350 471,348 1,278,258 180,350 471,348
30 958,025 1,000,000 1,000,000 2,268,824 121,260 590,068 2,160,785 121,260 590,068
<CAPTION>
END OF GROSS 12%
POLICY NET
YEAR 10.40%
- ----------- -----------
<S> <C>
1 0
2 13,365
3 29,297
4 46,823
5 65,998
6 87,201
7 111,105
8 137,305
9 166,033
10 197,548
15 407,074
20 733,888
25 1,278,258
30 2,160,785
</TABLE>
All 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 "Net" percentages 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 22-23 of this Prospectus.
43
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,655 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
END OF 5% INTEREST NET NET NET NET NET NET NET NET NET
POLICY YEAR PER YEAR -1.70% 4.30% 10.30% -1.70% 4.30% 10.30% -1.70% 4.30% 10.30%
- ----------- ----------- --------- --------- --------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,738 1,000,000 1,000,000 1,000,000 18,009 19,143 20,277 0 0 0
2 46,612 1,000,000 1,000,000 1,000,000 34,937 38,302 41,803 10,878 14,242 17,743
3 71,681 1,000,000 1,000,000 1,000,000 50,637 57,312 64,541 27,647 34,321 41,550
4 98,003 1,000,000 1,000,000 1,000,000 64,994 76,038 88,495 43,042 54,086 88,542
5 125,640 1,000,000 1,000,000 1,000,000 77,878 94,329 113,666 56,995 73,445 92,783
6 154,660 1,000,000 1,000,000 1,000,000 89,119 111,988 140,034 69,274 92,143 120,189
7 185,131 1,000,000 1,000,000 1,000,000 98,484 128,759 167,536 80,844 111,119 149,896
8 217,125 1,000,000 1,000,000 1,000,000 105,650 144,290 196,050 90,215 128,855 180,615
9 250,719 1,000,000 1,000,000 1,000,000 110,196 158,130 225,393 96,965 144,900 212,163
10 285,993 1,000,000 1,000,000 1,000,000 111,622 169,749 255,363 100,597 158,723 244,338
15 490,648 1,000,000 1,000,000 1,000,000 50,585 171,667 409,907 50,585 171,667 409,907
20 751,845 0 0 1,000,000 0 0 567,734 0 0 567,734
25 1,085,207 0 0 1,000,000 0 0 763,305 0 0 763,305
30 1,510,670 0 0 1,267,982 0 0 1,255,408 0 0 1,255,408
</TABLE>
All 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 "Net" percentages 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 22-23 of this Prospectus.
44
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,655 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
ACCUMULATED ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
AT GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
END OF 5% INTEREST NET NET NET NET NET NET NET NET NET
POLICY YEAR PER YEAR -1.60% 4.40% 10.40% -1.60% 4.40% 10.40% -1.60% 4.40% 10.40%
- ----------- ----------- --------- --------- --------- ----------- ----------- --------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,738 1,000,000 1,000,000 1,000,000 18,315 19,460 20,604 0 0 0
2 46,612 1,000,000 1,000,000 1,000,000 36,277 39,704 43,269 12,218 15,644 19,209
3 71,681 1,000,000 1,000,000 1,000,000 53,814 60,689 68,125 30,823 37,699 45,135
4 98,003 1,000,000 1,000,000 1,000,000 70,908 82,424 95,380 48,955 60,471 73,427
5 125,640 1,000,000 1,000,000 1,000,000 87,552 104,930 125,270 66,669 84,047 104,386
6 154,660 1,000,000 1,000,000 1,000,000 103,738 128,227 158,060 83,892 108,381 138,214
7 185,131 1,000,000 1,000,000 1,000,000 119,454 152,337 194,044 101,813 134,697 176,403
8 217,125 1,000,000 1,000,000 1,000,000 134,690 177,285 233,552 119,254 161,850 218,116
9 250,719 1,000,000 1,000,000 1,000,000 149,434 203,097 276,952 136,204 189,867 263,722
10 285,993 1,000,000 1,000,000 1,000,000 163,673 229,800 324,658 152,648 218,775 313,633
15 490,648 1,000,000 1,000,000 1,000,000 220,042 371,832 641,850 220,042 371,832 641,850
20 751,845 1,000,000 1,000,000 1,217,003 215,503 505,748 1,159,050 215,503 505,748 1,159,050
25 1,085,207 1,000,000 1,000,000 2,107,844 114,737 635,724 2,007,470 114,737 635,724 2,007,470
30 1,510,670 0 1,000,000 3,414,981 0 772,561 3,381,169 0 772,561 3,381,169
</TABLE>
All 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 "Net" percentages 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 22-23 of this Prospectus.
45
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $18,560.7 $19,389.6
- ------------------------------------------------------------------------------------
Preferred stocks 257.3 239.7
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 436.0 358.3
- ------------------------------------------------------------------------------------
Affiliated common stocks 412.1 241.5
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,012.7 2,976.7
- ------------------------------------------------------------------------------------
Real estate 584.4 621.3
- ------------------------------------------------------------------------------------
Policy loans 660.5 626.5
- ------------------------------------------------------------------------------------
Other investments 335.5 282.7
- ------------------------------------------------------------------------------------
Cash and short-term investments 2,133.0 759.2
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 26,392.2 25,495.5
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 42.4 60.9
- ------------------------------------------------------------------------------------
Accrued investment income 343.5 343.6
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 44.1 25.8
- ------------------------------------------------------------------------------------
Other admitted assets 216.0 355.7
- ------------------------------------------------------------------------------------
Separate account assets 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $ 5,872.9 $ 5,954.0
- ------------------------------------------------------------------------------------
Other policyholder funds 16,360.1 17,262.4
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 878.2 250.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 720.4 564.6
- ------------------------------------------------------------------------------------
Asset valuation reserve 450.0 375.5
- ------------------------------------------------------------------------------------
Interest maintenance reserve 135.4 76.7
- ------------------------------------------------------------------------------------
Other liabilities 413.9 490.9
- ------------------------------------------------------------------------------------
Federal income taxes 0.8 4.3
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (761.9) (659.7)
- ------------------------------------------------------------------------------------
Separate account liabilities 31,330.9 23,735.1
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 55,400.7 48,054.0
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Paid-in surplus 1,821.8 883.4
- ------------------------------------------------------------------------------------
Unassigned surplus 1,121.6 1,054.2
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,968.4 1,962.6
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $58,369.1 $50,016.6
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF INCOME -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $ 5,589.0 $ 7,268.5 $ 4,899.1
- -----------------------------------------------------------------------------
Net investment income 1,847.1 1,756.3 1,772.2
- -----------------------------------------------------------------------------
Amortization of interest maintenance reserve 41.5 27.2 34.0
- -----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 99.7 90.9 98.3
- -----------------------------------------------------------------------------
Expense charges on deposit funds 119.3 100.7 83.2
- -----------------------------------------------------------------------------
Other income 21.3 16.8 14.5
- ----------------------------------------------------------------------------- --------- --------- ---------
Total revenues 7,717.9 9,260.4 6,901.3
- -----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 4,522.1 5,989.9 4,184.0
- -----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,728.4 2,878.5 2,345.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 7,250.5 8,868.4 6,529.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before dividends to policyholders, income taxes and net
realized gain on investments 467.4 392.0 371.6
- -----------------------------------------------------------------------------
Dividends to policyholders 27.5 27.3 27.3
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before federal income taxes and net realized gain on
investments 439.9 364.7 344.3
- -----------------------------------------------------------------------------
Federal income taxes 78.3 83.6 103.7
- ----------------------------------------------------------------------------- --------- --------- ---------
Gain from operations before net realized gain on investments 361.6 281.1 240.6
- -----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding net
transfers to the interest maintenance reserve 31.3 53.3 43.9
- ----------------------------------------------------------------------------- --------- --------- ---------
Net income $ 392.9 $ 334.4 $ 284.5
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes.
S-2
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CHANGES IN CAPITAL AND SURPLUS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 1,962.6 $ 1,732.9 $ 1,679.6
- -----------------------------------------------------------------------------
Correction of prior years' asset valuation reserve (Note 15) (37.6) -- --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets (Note 15) (57.0) -- --
- ----------------------------------------------------------------------------- --------- --------- ---------
1,868.0 1,732.9 1,679.6
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income 392.9 334.4 284.5
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (36.2) 38.6 143.2
- -----------------------------------------------------------------------------
Nonadmitted assets (0.4) (3.0) 2.9
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (3.9) 0.6 (2.0)
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.9) (0.4) 2.9
- -----------------------------------------------------------------------------
Asset valuation reserve (36.9) (105.5) (112.5)
- -----------------------------------------------------------------------------
Mortgage loan, real estate and other investment reserves -- -- 2.2
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 938.4 100.0 15.1
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation (2.6) -- 27.0
- -----------------------------------------------------------------------------
Dividends to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
See accompanying notes. S-3
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF CASH FLOWS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 6,364.3 $ 8,059.4 $ 5,430.9
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (649.2) (767.5) (383.6)
- -----------------------------------------------------------------------
Investment income received 1,798.8 1,700.6 1,713.2
- -----------------------------------------------------------------------
Benefits paid (5,345.2) (4,050.4) (3,239.6)
- -----------------------------------------------------------------------
Insurance expenses paid (2,867.5) (2,972.2) (2,513.5)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) (87.0) (72.3) 38.4
- -----------------------------------------------------------------------
Dividends to policyholders (28.4) (27.7) (16.5)
- -----------------------------------------------------------------------
Other income received and expenses paid, net (42.7) 6.3 14.4
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities (856.9) 1,876.2 1,043.7
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 12,142.6 12,542.0 13,183.9
- -----------------------------------------------------------------------
Purchase of investments (10,345.0) (14,175.4) (14,049.6)
- -----------------------------------------------------------------------
Other sources (uses) 563.1 (266.5) (64.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities 2,360.7 (1,899.9) (929.7)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in -- 100.0 15.1
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 120.0 100.0 63.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (100.0) (63.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (150.0) (135.0) (310.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities (130.0) 2.0 (294.9)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments 1,373.8 (21.7) (180.9)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 759.2 780.9 961.8
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 2,133.0 $ 759.2 $ 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</TABLE>
See accompanying notes.
S-4
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
ORGANIZATION AND OPERATIONS
The Lincoln National Life Insurance Company ("Company") is a wholly owned
subsidiary of Lincoln National Corporation ("LNC") and is domiciled in
Indiana. As of December 31, 1997, the Company owns 100% of the outstanding
common stock of four insurance company subsidiaries: First Penn-Pacific Life
Insurance Company ("First Penn"), Lincoln National Health & Casualty
Insurance Company ("LNH&C"), Lincoln National Reassurance Company ("LNRAC")
and Lincoln Life & Annuity Company of New York ("LLANY").
The Company's principal businesses consist of underwriting annuities,
deposit-type contracts and life and health insurance through multiple
distribution channels and the reinsurance of individual and group life and
health business. The Company is licensed and sells its products in 49
states, Canada and several U.S. territories.
USE OF ESTIMATES
The nature of the insurance and investment management businesses requires
management to make estimates and assumptions that affect the amounts
reported in the statutory-basis financial statements and accompanying notes.
Actual results could differ from those estimates.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in conformity with
accounting practices prescribed or permitted by the Indiana Department of
Insurance ("Department"), which practices differ from generally accepted
accounting principles ("GAAP"). The more significant variances from GAAP are
as follows:
INVESTMENTS
Bonds are reported at cost or amortized cost or fair value based on their
National Association of Insurance Commissioners ("NAIC") rating. For GAAP,
the Company's bonds are classified as available-for-sale and, accordingly,
are reported at fair value with changes in the fair values reported directly
in shareholder's equity after adjustments for related amortization of
deferred acquisition costs, additional policyholder commitments and deferred
income taxes.
Investments in real estate are reported net of related obligations rather
than on a gross basis.
Changes between cost and admitted asset investment amounts are credited or
charged directly to unassigned surplus rather than to a separate surplus
account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by an NAIC prescribed formula and is reported as a
liability rather than unassigned surplus. Under GAAP, realized capital gains
and losses are reported in the income statement on a pre-tax basis in the
period that the asset giving rise to the gain or loss is sold and valuation
allowances are provided when there has been a decline in value deemed other
than temporary, in which case, the provision for such declines are charged
to income.
SUBSIDIARIES
The accounts and operations of the Company's subsidiaries are not
consolidated with the accounts and operations of the Company as would be
required by GAAP. Under statutory accounting principles, the Company's
subsidiaries are carried at their statutory basis net equity and presented
in the balance sheet as affiliated common stocks.
POLICY ACQUISITION COSTS
The costs of acquiring and renewing business are expensed when incurred.
Under GAAP, acquisition costs related to traditional life insurance, to the
extent recoverable from future policy revenues, are deferred and amortized
over the premium-paying period of the related policies using assumptions
consistent with those used in computing policy benefit reserves. For
universal life insurance, annuity and other investment-type products,
deferred
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
policy acquisition costs, to the extent recoverable from future gross
profits, are amortized generally in proportion to the present value of
expected gross profits from surrender charges and investment, mortality and
expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Premiums and deposits with respect to universal life policies and annuity
and other investment-type contracts are reported as premium revenues;
whereas, under GAAP, such premiums and deposits are treated as liabilities
and policy charges represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits would represent the excess of benefits paid over the policy account
value and interest credited to the account values.
REINSURANCE
Premiums, claims and policy benefits and contract liabilities are reported
in the accompanying financial statements net of reinsurance amounts. For
GAAP, all assets and liabilities related to reinsurance ceded contracts are
reported on a gross basis.
A liability for reinsurance balances has been provided for unsecured policy
and contract liabilities and unearned premiums ceded to reinsurers not
authorized by the Department to assume such business. Changes to those
amounts are credited or charged directly to unassigned surplus. Under GAAP,
an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts would be accounted
for using deposit accounting under GAAP.
INCOME TAXES
Deferred income taxes are not provided for differences between financial
statement amounts and tax bases of assets and liabilities.
POLICYHOLDER DIVIDENDS
Policyholder dividends are recognized when declared rather than over the
term of the related policies.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
A reconciliation of the Company's net income and capital and surplus
determined on a statutory accounting basis with amounts determined in
accordance with GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1997 1996 1997 1996 1995
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory basis $ 2,968.4 $ 1,962.6 $ 392.9 $ 334.4 $ 284.5
- ---------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs and
present value of future profits 958.3 1,119.1 (98.9) 66.7 (63.0)
------------------------------------------
Policy and contract reserves (1,672.9) (1,405.3) (48.6) (57.1) (55.3)
------------------------------------------
Interest maintenance reserve 135.4 76.7 58.7 (39.7) 60.9
------------------------------------------
Deferred income taxes (13.0) (27.4) 70.3 1.8 38.3
------------------------------------------
Policyholders' share of earnings and
surplus on participating business (79.8) (81.9) 5.3 (.3) .2
------------------------------------------
Asset valuation reserve 450.0 375.5 -- -- --
------------------------------------------
Net realized gain (loss) on investments (91.5) (72.0) (20.4) 78.7 30.0
------------------------------------------
Unrealized gain on investments 1,245.5 825.2 -- -- --
------------------------------------------
Nonadmitted assets, including nonadmitted
investments 61.0 (7.1) -- -- --
------------------------------------------
Investments in subsidiary companies 188.8 156.6 (80.5) 29.9 34.3
------------------------------------------
Other, net (162.5) (99.0) (35.0) (82.6) (7.3)
------------------------------------------ --------- --------- --------- --------- ---------
Net increase (decrease) 1,019.3 860.4 (149.1) (2.6) 38.1
- --------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 3,987.7 $ 2,823.0 $ 243.8 $ 331.8 $ 322.6
- --------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
The discount or premium on bonds is amortized using the interest method. For
mortgage-backed bonds, the Company recognizes income using a constant
effective yield based on anticipated prepayments and the estimated economic
life of the securities. When actual prepayments differ significantly from
anticipated prepayments, the effective yield is recalculated to reflect
actual payments to date and anticipated future payments. The net investment
in the securities is adjusted to the amount that would have existed had the
new effective yield been applied since the acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items and are amortized over the
remaining lives of the hedged items as adjustments to investment income or
benefits from the hedged items through the IMR. Any unamortized gains or
losses are recognized when the underlying hedged items are sold. The
premiums paid for interest rate caps and swaptions are deferred and
amoritized to net investment income on a straight-line basis over the term
of the respective derivative.
Hedge accounting is applied as indicated above after the Company determines
that the items to be hedged expose the Company to interest rate
fluctuations, the widening of bond yield spreads over comparable maturity
U.S. Government obligations, increased liabilities associated with certain
reinsurance agreements and foreign exchange risk. Moreover, the derivatives
used are designated as a hedge and reduce the indicated risk by having a
high correlation between changes in the value of the derivatives and the
items being hedged at both the inception of the hedge and throughout the
hedge period. Should such criteria not be met or if the hedged items have
been sold, terminated or matured, the change in value of the derivatives is
included in net income.
Mortgage loans on real estate are reported at unpaid balances, less
allowances for impairments. Real estate is reported at depreciated cost.
Realized investment gains and losses on investments sold are determined
using the specific identification method. Changes in admitted asset carrying
amounts of bonds, mortgage loans and common and preferred stocks are
credited or charged directly in unassigned surplus.
LOANED SECURITIES
Securities loaned are treated as collateralized financing transactions and a
liability is recorded equal to the amount to be paid to reacquire the
security. It is the Company's policy to take possession of securities with a
market value at least equal to the value of the securities loaned.
Securities loaned are recorded at amortized cost as long as the value of the
related collateral is sufficient. The Company's agreements with third
parties generally contain contractual provisions to allow for additional
collateral to be obtained when necessary. The Company values collateral
daily and obtains additional collateral when deemed appropriate.
GOODWILL
Goodwill, which represents the excess of the ceding commission over
statutory-basis net assets of business purchased under an assumption
reinsurance agreement, is amortized on a straight-line basis over ten years.
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Department. The Company waives deduction of deferred fractional premiums on
the death of life and annuity policy insureds and returns any premium beyond
the date of death, except for policies issued prior to March 1977. Surrender
values on policies do not exceed the corresponding benefit reserves.
Additional reserves are established when the results of cash flow testing
under various interest rate scenerios indicate the need for such reserves.
If net premiums exceed the gross premiums on any insurance in-force,
additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual reserve released and the tabular
cost have been determined by formula or from the basic data for such items.
Tabular interest funds not involving life contingencies were determined
using the actual interest credited to the funds plus the change in accrued
interest.
Liabilities related to guaranteed investment contracts and policyholder
funds left on deposit with the Company generally are equal to fund balances
less applicable surrender charges.
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
Unpaid claims and claim adjustment expenses on accident and health policies
represent the estimated ultimate net cost of all reported and unreported
claims incurred during the year. The Company does not discount claims and
claim adjustment expense reserves. The reserves for unpaid claims and claim
adjustment expenses are estimated using individual case-basis valuations and
statistical analyses. Those estimates are subject to the effects of trends
in claim severity and frequency. Although considerable variability is
inherent in such estimates, management believes that the reserves for claims
and claim adjustment expenses are adequate. The estimates are continually
reviewed and adjusted as necessary as experience develops or new information
becomes known; such adjustments are included in current operations.
REINSURANCE CEDED AND ASSUMED
Reinsurance premiums and claims and claim adjustment expenses are accounted
for on bases consistent with those used in accounting for the original
policies issued and the terms of the reinsurance contracts. Certain business
is transacted on a funds withheld basis and investment income on funds
withheld are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans is
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC. Pursuant to an intercompany
tax sharing agreement with LNC, the Company provides for income taxes on a
separate return filing basis. The tax sharing agreement also provides that
the Company will receive benefit for net operating losses, capital losses
and tax credits which are not usable on a separate return basis to the
extent such items may be utilized in the consolidated income tax returns of
LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of the
intrinsic value method, compensation cost is the excess, if any, of the
quoted market price of LNC's common stock at the grant date, or other
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
These assets and liabilities represent segregated funds administered and
invested by the Company for the exclusive benefit of pension and variable
life and annuity contractholders. The fees received by the Company for
administrative and contractholder maintenance services performed for these
separate accounts are included in the Company's statements of income.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Department. "Prescribed" statutory accounting practices include state laws,
regulations and general administrative rules, as well as a variety of
publications of the NAIC. "Permitted" statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
may differ from state to state, may differ from company to company within a
state and may change in the future. The NAIC currently is in the process of
recodifying statutory accounting practices ("Codification"). Codification
will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company uses to prepare its statutory-basis financial statements.
Codification, which is expected to be approved by the NAIC in 1998, will
require adoption by the various states before it becomes the prescribed
statutory-basis of accounting for insurance companies domesticated within
those states. Accordingly, before Codification becomes effective for the
Company, the state of Indiana must adopt Codification as the prescribed
basis of accounting on which domestic insurers must report their
statutory-basis results to the Department. At this time, it is unclear
whether Indiana will adopt Codification. However, based on the current draft
guidance, management believes that the impact of Codification will not be
material to the Company's statutory-basis financial statements.
The Company has received written approval from the Department to record
surrender charges applicable to separate account liabilities for variable
life and annuity products as a liability in the separate account financial
statements payable to the Company's general account. In the accompanying
financial statements, a corresponding receivable is recorded with the
related income impact recorded in the accompanying statement of operations
as a change in reserves or change in premium and other deposit funds.
S-10
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS
The major categories of net investment income are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,524.4 $ 1,442.2 $ 1,457.4
----------------------------------------------------------------
Preferred stocks 23.5 9.6 6.4
----------------------------------------------------------------
Unaffiliated common stocks 8.3 6.5 5.2
----------------------------------------------------------------
Affiliated common stocks 15.0 9.5 12.6
----------------------------------------------------------------
Mortgage loans on real estate 257.2 269.3 252.0
----------------------------------------------------------------
Real estate 92.2 114.4 110.0
----------------------------------------------------------------
Policy loans 37.5 35.0 32.1
----------------------------------------------------------------
Other investments 28.2 22.4 62.6
----------------------------------------------------------------
Cash and short-term investments 70.3 48.9 53.2
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,056.6 1,957.8 1,991.5
- -------------------------------------------------------------------
Expenses:
Depreciation 21.0 25.0 25.9
----------------------------------------------------------------
Other 188.5 176.5 193.4
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 209.5 201.5 219.3
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 1,847.1 $ 1,756.3 $ 1,772.2
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
and 1996 amounted to $2,600,000 and $2,500,000,
respectively, consisting principally of interest on bonds in
default and mortgage loans.
S-11
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in bonds are
summarized as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
----------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Corporate $13,003.8 $ 942.2 $ 60.1 $13,885.9
------------------------------------------------
U.S. government 436.3 67.9 -- 504.2
------------------------------------------------
Foreign government 1,202.1 104.9 5.4 1,301.6
------------------------------------------------
Mortgage-backed 3,874.3 215.2 27.1 4,062.4
------------------------------------------------
State and municipal 44.2 .3 -- 44.5
------------------------------------------------ --------- ----------- ----------- ---------
$18,560.7 $ 1,330.5 $ 92.6 $19,798.6
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
At December 31, 1996:
Corporate $12,548.1 $ 586.5 $ 66.6 $13,068.0
------------------------------------------------
U.S. government 1,088.7 43.2 18.0 1,113.9
------------------------------------------------
Foreign government 1,234.0 105.1 1.4 1,337.7
------------------------------------------------
Mortgage-backed 4,478.4 183.3 27.4 4,634.3
------------------------------------------------
State and municipal 40.4 .1 -- 40.5
------------------------------------------------ --------- ----------- ----------- ---------
$19,389.6 $ 918.2 $ 113.4 $20,194.4
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1997 and 1996 reflects NAIC adjustments of
$5,500,000 and $2,700,000, respectively, to decrease
amortized cost.
Fair values for bonds are based on quoted market prices,
where available. For bonds not actively traded, fair values
are estimated using values obtained from independent pricing
services or, in the case of private placements, are
estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit
quality and maturity of the investments.
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1997, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1998 $ 490.1 $ 494.9
--------------------------------------------------------------------------
In 1999-2002 3,088.7 3,185.4
--------------------------------------------------------------------------
In 2003-2007 4,762.7 4,971.0
--------------------------------------------------------------------------
After 2007 6,344.9 7,084.9
--------------------------------------------------------------------------
Mortgage-backed securities 3,874.3 4,062.4
-------------------------------------------------------------------------- --------- ---------
Total $18,560.7 $19,798.6
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
At December 31, 1997, the Company did not have a material
concentration of financial instruments in a single investee,
industry or geographic location.
Proceeds from sales of investments in bonds during 1997,
1996 and 1995 were $9,715,000,000, $10,996,900,000 and
$12,234,100,000, respectively. Gross gains during 1997, 1996
and 1995 of $218,100,000, $169,700,000 and $225,600,000,
respectively, and gross losses of $78,000,000, $177,000,000
and $83,100,000, respectively, were realized on those sales.
At December 31, 1997 and 1996, investments in bonds, with an
admitted asset value of $76,200,000 and $70,700,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
The cost or amortized cost, gross unrealized gains and
losses and the fair value of investments in unaffiliated
common stocks and preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
At December 31, 1996:
Preferred stocks $239.7 $10.5 $ 1.7 $248.5
- ----------------------------------------
Unaffiliated common stocks 289.9 84.6 16.2 358.3
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1997 and 1996 reflects NAIC
adjustments of $4,000,000 and $700,000, respectively, to
decrease amortized cost.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
During 1997, the minimum and maximum lending rates for
mortgage loans were 7.09% and 9.25%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1997, the
Company did not hold any mortgages with interest overdue
beyond one year. All properties covered by mortgage loans
have fire insurance at least equal to the excess of the loan
over the maximum loan that would be allowed on the land
without the building.
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 209.3 $ 69.3 $ 186.8
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $54.0,
$(6.7) and $51.1 in 1997, 1996 and 1995, respectively) 100.2 (12.4) 94.8
- ------------------------------------------------------------------------ --------- --------- ---------
109.1 81.7 92.0
Less federal income taxes on realized gains 77.8 28.4 48.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 31.3 $ 53.3 $ 43.9
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly-owned subsidiaries is summarized as
follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1997
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,154.4 $ 284.8 $ 399.0 $ 796.3
- -----------------------------------------------------------
Other assets 36.9 77.3 481.6 130.8
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,072.2 $ 266.7 $ 279.3 $ 588.7
- -----------------------------------------------------------
Other liabilities 48.4 21.7 546.4 5.8
- -----------------------------------------------------------
Liabilities related to separate accounts -- -- -- 164.7
- -----------------------------------------------------------
Capital and surplus 70.7 73.7 54.9 212.9
- ----------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,191.3 $ 362.1 $ 880.6 $ 972.1
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1997
------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 267.6 $ 135.4 $ 125.3 $ 230.0
- ------------------------------------------------------------
Expenses 262.6 244.2 114.6 224.4
- ------------------------------------------------------------
Net realized gains (losses) .1 .6 (.1) (.1)
- ------------------------------------------------------------ --------- --------- --------- ---------
Net income $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,090.7 $ 146.4 $ 406.7 $ 664.3
- -----------------------------------------------------------
Other assets 31.8 17.7 503.1 9.1
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total admitted assets $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
Insurance reserves $ 1,013.5 $ 72.7 $ 261.8 $ 601.1
- -----------------------------------------------------------
Other liabilities 41.3 18.7 597.2 22.1
- -----------------------------------------------------------
Capital and surplus 67.7 72.7 50.8 50.2
- ----------------------------------------------------------- --------- ----------- ----------- -----------
Total liabilities and capital and surplus $ 1,122.5 $ 164.1 $ 909.8 $ 673.4
- ----------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 246.5 $ 104.9 $ 120.8 $ 642.7
- -------------------------------------------------------------
Expenses 247.1 97.1 114.1 661.3
- -------------------------------------------------------------
Net realized gains (losses) (.6) -- -- --
- ------------------------------------------------------------- --------- ----------- ----------- -----------
Net income (loss) $ (1.2) $ 7.8 $ 6.7 $ (18.6)
- ------------------------------------------------------------- --------- ----------- ----------- -----------
--------- ----------- ----------- -----------
</TABLE>
The carrying value of affiliated common stocks, representing
their statutory-basis net equity, was $412,100,000 and
$241,500,000 at December 31, 1997 and 1996, respectively.
The cost basis of investments in subsidiaries as of December
31, 1997 and 1996 was $466,200,000 and $194,000,000,
respectively.
During 1997 and 1996, the Company's insurance subsidiaries
paid dividends of $15,000,000 and $10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate for financial
reporting purposes differs from the prevailing statutory tax
rate principally due to tax-exempt investment income,
dividends-received tax deductions, differences in policy
acquisition costs and policy and contract liabilities for
tax return and financial statement purposes.
Federal income taxes incurred of $78,300,000, $83,600,000
and $103,700,000 in 1997, 1996 and 1995, respectively, would
be subject to recovery in the event that the Company incurs
net operating losses within three years of the years for
which such taxes were paid.
Prior to 1984, a portion of the Company's current income was
not subject to current income tax, but was accumulated for
income tax purposes in a memorandum account designated as
"policyholders' surplus." The Company's balance in the
"policyholders' surplus" account at December 31, 1983 of
$187,000,000 was "frozen" by the Tax Reform Act of 1984 and,
accordingly, there have been no additions to the accounts
after that date. That portion of current income on which
income taxes have been paid will continue to be accumulated
in a memorandum account designated as "shareholder's
surplus," and is available for dividends to the shareholder
without additional payment of tax by the Company. The
December 31, 1997 memorandum account balance for
"shareholder's surplus"
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
was $1,905,000,000. Should dividends to the shareholder
exceed its respective "shareholder's surplus," amounts would
need to be transferred from the "policyholders' surplus" and
would be subject to federal income tax at that time. Under
existing or foreseeable circumstances, the Company neither
expects nor intends that distributions will be made that
will result in any such tax.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "Other Admitted Assets", includes
amounts recoverable from other insurers for claims paid by
the Company, and the balance sheet caption, "Future Policy
Benefits and Claims," has been reduced for insurance ceded
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 1,431.0 $ 1,154.5
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 35.9 16.0
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions included in the income statement
caption, "Premiums and Deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 727.2 $ 241.3 $ 667.7
- ------------------------------------------------------------------------
Insurance ceded 302.9 193.3 453.1
- ------------------------------------------------------------------------ --------- --------- ---------
Net amount included in premiums $ 424.3 $ 48.0 $ 214.6
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and Settlement
Expenses," is net of reinsurance recoveries of
$1,240,500,000, $787,900,000 and $1,407,000,000 for 1997,
1996 and 1995, respectively.
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and Fees in Course of Collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1997
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.2 $ 2.4 $ .8
- ------------------------------------------------------------------------
Ordinary renewal 17.8 3.2 14.6
- ------------------------------------------------------------------------
Group life 10.6 .2 10.4
- ------------------------------------------------------------------------ --------- --- -----
$ 31.6 $ 5.8 $ 25.8
--------- --- -----
--------- --- -----
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 3.9 $ 1.9 $ 2.0
- ------------------------------------------------------------------------
Ordinary renewal 35.1 3.0 32.1
- ------------------------------------------------------------------------
Group life 9.4 (.1) 9.5
- ------------------------------------------------------------------------ --------- --- -----
$ 48.4 $ 4.8 $ 43.6
--------- --- -----
--------- --- -----
</TABLE>
The Company has entered into non-exclusive managing general
agent agreements with International Benefit Services Corp.,
HRM Claim Management, Inc. and Pediatrics Insurance
Consultants, Inc. to write group life and health business.
Direct premiums written related to the agreements amounted
to $2,000,000, $2,600,000 and $8,800,000 in 1997 and
$26,200,000, $3,800,000 and $8,600,000 in 1996,
respectively. During 1996, LNC Administrative Services
Corporation entered into a similar agreement with the
Company with direct premiums written amounting to $7,200,000
and 6,200,000 in 1997 and 1996, respectively. Authority
granted by the managing general agents agreements include
underwriting, claims adjustment and claims payment services.
7. ANNUITY RESERVES
At December 31, 1997, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES (CONTINUED)
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,426.3 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 4,225.8 8
-----------------------------------------------------------------------------
At market value 30,064.7 59
----------------------------------------------------------------------------- --------- ---
36,716.8 72
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 11,657.7 23
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,531.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 50,905.6 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,797.5
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $49,108.1
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
8. CAPITAL AND SURPLUS
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1997, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In 1998, the Company can pay dividends of
$361,600,000 without prior approval of the Indiana Insurance Commissioner.
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). The aggregate expenses and
accumulated obligations for the Company's portion of these plans are not
material to the Company's statutory-basis financial statements of income or
financial position for any of the periods shown.
LNC has various incentive plans for key employees, agents and directors of
LNC and its subsidiaries that provide for the issuance of stock options,
stock appreciation rights, restricted stock awards and stock incentive
awards. These plans are comprised primarily of stock option incentive plans.
Stock options granted under the stock option incentive plans are at the
market value at the date of grants and, subject to termination of
employment, expire ten years from the date of grant. Such options are
transferable only upon death and are exercisable one year from the date of
grant for options issued prior to 1992. Option issued subsequent to 1991 are
exercisable in 25% increments on the option issuance anniversary in the four
years following issuance.
As of December 31, 1997, 716,211 shares of LNC common stock were subject to
options granted to Company employees and agents under the stock option
incentive plans of which 370,239 were exercisable on that date. The exercise
prices of the outstanding options range from $23.50 to $75.66. During 1997,
1996 and 1995, 170,789, 72,405 and
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS (CONTINUED)
117,806 options were exercised, respectively, and 1,846, 10,950 and 11,473
options were forfeited, respectively.
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES
DISABILITY INCOME CLAIMS
The liability for disability income claims net of the related asset for
amounts recoverable from reinsurers at December 31, 1997 and 1996 is a net
liability of $516,900,000 and $572,000,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves may be required in the future. Accordingly, this liability may
prove to be deficient or excessive. However, it is management's opinion that
such future development will not materially affect the financial position of
the Company. The Company reviews reserve levels on an ongoing basis.
During 1995, the Company completed an in-depth review of the experience of
its disability income business. As a result of this study, and based on the
assumption that recent experience will continue in the future, net income
decreased by $15,200,000 as a result of strengthening the disability income
reserve.
Because of continuing adverse experience and worsening projections of future
experience, the Company conducted an additional in-depth review of loss
experience on its disability income business during 1997. As a result of
this study, the reserve level was deemed to be inadequate to meet future
obligations if current incident levels were to continue in the future. In
order to address this situation, the Company strengthened its disability
income reserve by $80,000,000 (pre-tax).
MARKETING AND COMPLIANCE ISSUES
Regulators continue to focus on market conduct and compliance issues. Under
certain circumstances companies operating in the insurance and financial
services markets have been held responsible for providing incomplete or
misleading sales materials and for replacing existing policies with policies
that were less advantageous to the policyholder. The Company's management
continues to monitor the Company's sales materials and compliance procedures
and is making an extensive effort to minimize any potential liability. Due
to the uncertainty surrounding such matters, it is not possible to provide a
meaningful estimate of the range of potential outcomes at this time;
however, it is management's opinion that such future development will not
materially affect the financial position of the Company.
GROUP PENSION ANNUITIES
The liabilities for guaranteed interest and group pension annuity contracts,
which are no longer being sold by the Company, are supported by a single
portfolio of assets that attempts to match the duration of these
liabilities. Due to the long-term nature of group pension annuities and the
resulting inability to exactly match cash flows, a risk exists that future
cash flows from investments will not be reinvested at rates as high as
currently earned by the portfolio.
Accordingly, these liabilities may prove to be deficient or excessive.
However, it is management's opinion that such future development will not
materially affect the financial position of the Company.
LEASES
The Company leases its home office properties through sale-leaseback
agreements. The agreements provide for a 25 year lease period with options
to renew for six additional terms of five years each. The agreements also
provide the Company with the right of first refusal to purchase the
properties during the term of the lease, including renewal periods, at a
price as defined in the agreements. The Company also has the option to
purchase the leased properties at fair market value as defined in the
agreements on the last day of the initial 25-year lease ending in 2009 or on
the last day of any of the renewal periods.
Total rental expense on operating leases in 1997, 1996 and 1995 was
$29,300,000, $26,400,000 and
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
$22,500,000, respectively. Future minimum rental commitments are as follows
(in millions):
<TABLE>
<S> <C>
1998 $ 18.5
- --------------------------------------
1999 18.9
- --------------------------------------
2000 20.1
- --------------------------------------
2001 20.4
- --------------------------------------
2002 20.7
- --------------------------------------
Thereafter 152.2
- -------------------------------------- ---------
$ 250.8
---------
---------
</TABLE>
The future commitments include amounts for space and equipment to be used by
the personnel that were added on January 2, 1998 as a result of the purchase
of a block of individual life and annuity business (see NOTE 12).
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for providing information technology services for the Fort Wayne
operations. Annual costs are estimated to range from $33,600,000 to
$56,800,000.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. Industry regulations prescribe the maximum
coverage that the Company can retain on an individual insured. Prior to
December 31, 1997, the Company limited its maximum coverage that it retained
on an individual to $3,000,000. Based on a review of the capital and
business in-force (including the addition of the block of business described
in NOTE 12), effective in January 1998, the Company changed the amount it
will retain on an individual to $10,000,000. Portions of the Company's
deferred annuity business have also been reinsured with other companies to
limit its exposure to interest rate risks. At December 31, 1997, the
reserves associated with these reinsurance arrangements totaled
$1,760,000,000. To cover products other than life insurance, the Company
acquires other insurance coverages with retentions and limits that
management believes are appropriate for the circumstances. The Company
remains liable if its reinsurers are unable to meet their contractual
obligations under the applicable reinsurance agreements.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1997, the Company has provided $12,400,000 of
statutory surplus relief to other insurance companies under reinsurance
transactions. Generally, such amounts are offset by corresponding
receivables from the ceding company, which are secured by future profits on
the reinsured business. However, the Company is subject to the risk that the
ceding company may become insolvent and the right of offset would not be
permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $8,200,000 and $4,300,000 at December 31, 1997
and 1996, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1997, the Company did not have a concentration of: 1)
business transactions with a particular customer, lender or distributor; 2)
revenues from a particular product or service; 3) sources of supply of labor
or services used in the business; or 4) a market or geographic area in which
business is conducted that makes it vulnerable to an event that is at least
reasonably possible to occur in the near term and which could cause a severe
impact to the Company's financial condition.
OTHER CONTINGENCY MATTERS
The Company is involved in various pending or threatened legal proceedings
arising from the conduct of business. Most of these proceedings are routine
in the ordinary course of business. The Company maintains professional
liability insurance coverage for claims in excess of $5,000,000. The degree
of applicability of this coverage depends on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
not have a material adverse affect on the financial position or results of
operations of the Company.
Two lawsuits involve alleged fraud in the sale of interest sensitive
universal life and whole life insurance policies. These two suits have been
filed as class actions against the Company, although the court has not
certified a class in either case. Plaintiffs seek unspecified damages and
penalties for themselves and on behalf of the putative class while the
relief sought in these cases in substantial, the cases are in the early
stages of litigation, and it is premature to make assessments about
potential loss, if any. Management intends to defend these suits vigorously.
The amount of liability, if any, which may arise as a result of these suits
cannot be reasonably estimated at this time.
The number of insurance companies that are under regulatory supervision has
resulted, and is expected to continue to result, in assessments by state
guaranty funds to cover losses to policyholders of insolvent or
rehabilitated companies. Mandatory assessments may be partially recovered
through a reduction in future premium taxes in some states. The Company has
accrued for expected assessments net of estimated future premium tax
deductions.
GUARANTEES
The Company has guarantees with off-balance-sheet risks whose contractual
amounts represent credit exposure. Outstanding guarantees with off-
balance-sheet risks, shown in notional or contract amounts, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR
CONTRACT AMOUNTS
--------------------
DECEMBER 31
--------------------
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Mortgage loan pass-through
certificates $ 41.6 $ 50.3
- ------------------------------
Real estate partnerships -- .5
- ------------------------------ --------- ---------
$ 41.6 $ 50.8
--------- ---------
--------- ---------
</TABLE>
The Company has invested in real estate partnerships that use conventional
mortgage loans to finance their projects. In some cases, the terms of these
arrangements involve guarantees by each of the partners to indemnify the
mortgagor in the event a partner is unable to pay its principal and interest
payments. In addition, the Company has sold commercial mortgage loans
through grantor trusts which issued pass-through certificates. The Company
has agreed to repurchase any mortgage loans which remain delinquent for 90
days at a repurchase price substantially equal to the outstanding principal
balance plus accrued interest thereon to the date of repurchase. It is
management's opinion that the value of the properties underlying these
commitments is sufficient that in the event of default the impact would not
be material to the Company. Accordingly, both the carrying value and fair
value of these guarantees is zero at December 31, 1997 and 1996.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
Government obligations, increased liabilities associated with reinsurance
agreements and foreign exchange risks. In addition, the Company is subject
to the risks associated with changes in the value of its derivatives;
however, such changes in value generally are offset by changes in the value
of the items being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1997 1996 1997 1997 1996 1996
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,900.0 $5,500.0 $13.9 $ .9 $20.8 $ 8.2
---------------------------------
Swaptions 1,752.0 672.0 6.9 6.9 11.0 10.6
---------------------------------
Financial futures contracts -- 147.7 -- -- (2.4) (2.4)
---------------------------------
Interest rate swaps 10.0 -- -- (1.8) -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,662.0 6,319.7 20.8 6.0 29.4 16.4
Foreign currency derivatives:
Forward contracts 163.1 251.5 5.4 5.4 .2 (.2)
---------------------------------
Foreign currency options -- 43.9 -- -- .6 .4
---------------------------------
Foreign currency swaps 15.0 15.0 -- (2.1) -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
178.1 310.4 5.4 3.3 .8 (1.9)
-------- -------- -------- ----- -------- ------
$6,840.1 $6,630.1 $26.2 $ 9.3 $30.2 $ 14.5
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation and discussion of the notional or contract amounts for the
significant programs using derivative agreements and contracts at December
31 is a follows:
<TABLE>
<CAPTION>
----------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 5,500.0 $ 5,110.0 $ -- $ 600.0 $ 672.0 $ --
- -----------------------------------
New contracts -- 390.0 50.0 15.0 1,080.0 672.0
- -----------------------------------
Terminations and maturities (600.0) -- (50.0) (615.0) -- --
- ----------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ----------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES INTEREST RATE SWAPS
CONTRACTS
------------------------------------------
1997 1996 1997 1996
------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ 147.7 $ -- $ -- $ 5.0
- ------------------------------------------------------------
New contracts 88.3 7,918.8 10.0 --
- ------------------------------------------------------------
Terminations and maturities (236.0) (7,771.1) -- (5.0)
- ------------------------------------------------------------ --------- --------- --------- ---------
Balance at end of year $ -- $ 147.7 $ 10.0 $ --
- ------------------------------------------------------------ --------- --------- --------- ---------
--------- --------- --------- ---------
</TABLE>
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES
----------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1997 1996 1997 1996 1997 1996
----------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 251.5 $ 15.7 $ 43.9 $ 99.2 $ 15.0 $ 15.0
- --------------------------------------
New contracts 833.1 406.9 -- 1,168.8 -- --
- --------------------------------------
Terminations and maturities (921.6) (171.1) (43.9) (1,224.1) -- --
- -------------------------------------- --------- --------- --------- --------- --------- ---------
Balance at end of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------- --------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- --------- ---------
</TABLE>
INTEREST RATE CAPS
The interest rate cap agreements, which expire in 1998 through 2003, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($13,900,000 as of December 31, 1997) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 2002 and 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of
fluctuating interest rates. The premium paid for the swaptions is included
in other assets ($6,900,000 as of December 31, 1997) and is being amortized
over the terms of the agreements. This amortization is included in net
investment income.
SPREAD LOCKS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
Government note is larger or smaller than a contractually specified spread.
Cash payments are based on the product of the notional amount, the spread
between the swap rate and the yield of an equivalent maturity Government
security and the price sensitivity of the swap at that time. The purpose of
the Company's spread-lock program is to protect a portion of its fixed
maturity securities against widening of spreads.
FINANCIAL FUTURES
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its fixed
maturity securities. Financial futures contracts obligate the Company to buy
or sell a financial instrument at a specified future date for a specified
price. They may be settled in cash or through delivery of the financial
instrument. Cash settlements on the change in market values of financial
futures contracts are made daily.
INTEREST RATE SWAPS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
agreements the stream of variable coupon payments generated from the bonds,
and in turn, receives a fixed payment from the counterparty at a
predetermined interest rate. The net receipts/payments from interest rate
swaps are recorded in net investment income.
FOREIGN CURRENCY DERIVATIVES
The Company uses a combination of foreign exchange forward contracts,
foreign currency options and foreign currency swaps, all of which are traded
over-the-counter, to hedge some of the foreign exchange risk of investments
in fixed maturity securities denominated in foreign currencies. The foreign
currency forward contracts obligate the Company to deliver a specified
amount of currency at a future date at a specified exchange rate. Foreign
currency options give the Company the right, but not the obligation, to buy
or sell a foreign currency at a specific exchange rate during a specified
time period. A foreign currency swap is a contractual agreement to exchange
the currencies of two different countries pursuant to an agreement to
re-exchange the two currencies at the same rate of exchange at a specified
future date.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$7,000,000, $6,900,000 and $5,600,000 in 1997, 1996 and 1995, respectively.
Deferred losses of $2,600,000 as of December 31, 1997, were the result of:
1) terminated and expired spread-lock agreements and; 2) financial futures
contracts. These losses are included with the related fixed maturity
securities to which the hedge applied and are being amortized over the life
of such securities.
The Company is exposed to credit loss in the event of nonperformance by
counterparties on interest rate cap agreements, swaptions, spread-lock
agreements, interest rate swaps, foreign exchange forward contracts, foreign
currency options and foreign currency swaps. However, the Company does not
anticipate nonperformance by any of the counterparties. The credit risk
associated with such agreements is minimized by purchasing such agreements
from financial institutions with long-standing, superior performance
records. The amount of such exposure is essentially the net replacement cost
or market value for such agreements with each counterparty if the net market
value is in the Company's favor. At December 31, 1997, the exposure was
$11,700,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair values of mortgage loans on real estate are established
using a discounted cash flow method based on credit rating, maturity and
future income. The rating for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future Policy Benefits and Claims" and "Other
Policyholder Funds," include investment type insurance contracts (i.e.,
deposit contracts and guaranteed interest contracts). The fair values for
the deposit contracts and certain guaranteed interest contracts are based on
their approximate surrender values. The fair values for the remaining
guaranteed interest and similar contracts are estimated using discounted
cash flow calculations. These calculations are based on interest rates
currently offered on similar contracts with maturities that are consistent
with those remaining for the contracts being valued.
The remainder of the balance sheet captions "Future Policy Benefits and
Claims" and "Other Policyholder Funds," that do not fit the definition of
"investment-type insurance contracts" are considered insurance contracts.
Fair value disclosures are not required for these insurance contracts and
have not been determined by the Company. It is the Company's position that
the disclosure of the fair value of these insurance contracts is important
because readers of these financial statements could draw inappropriate
conclusions about the Company's capital and surplus determined on a fair
value basis. It could be misleading if only the fair value of assets and
liabilities defined as financial instruments are disclosed. The Company and
other companies in the insurance industry are monitoring the related actions
of the various rule-making bodies and attempting to determine an appropriate
methodology for estimating and disclosing the "fair value" of their
insurance contract liabilities.
SHORT-TERM DEBT
Fair values of short-term debt approximates carrying values.
GUARANTEES
The Company's guarantees include guarantees related to real estate
partnerships and mortgage loan pass-through certificates. Based on
historical performance where repurchases have been negligible and the
current status, which indicates none of the loans are delinquent, the fair
value liability for the guarantees related to the mortgage loan pass-through
certificates is insignificant.
DERIVATIVES
The Company's derivatives include interest rate cap agreements, swaptions,
spread-lock agreements, foreign currency exchange contracts, financial
futures contracts, interest rate swaps, foreign currency options and foreign
currency swaps. Fair values for these contracts are based on current
settlement values. These values are based on: 1) quoted market prices for
the foreign currency exchange contracts and financial future contracts and;
2) brokerage quotes that utilize pricing models or formulas using current
assumptions for all other swaps and agreements.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
The carrying values and estimated fair values of the Company's financial
instruments are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------------
1997 1996
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 18,560.7 $ 19,798.6 $ 19,389.6 $ 20,194.4
- -----------------------------------------------
Preferred stock 257.3 268.7 239.7 248.5
- -----------------------------------------------
Unaffiliated common stock 436.0 436.0 358.3 358.3
- -----------------------------------------------
Mortgage loans on real estate 3,012.7 3,179.2 2,976.7 3,070.9
- -----------------------------------------------
Policy loans 660.5 648.3 626.5 612.7
- -----------------------------------------------
Other investments 335.5 335.5 282.7 282.7
- -----------------------------------------------
Cash and short-term investments 2,133.0 2,133.0 759.2 759.2
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,324.2) (16,887.6) (17,871.6) (17,333.0)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (1,267.0) (1,294.6) (1,799.7) (1,835.4)
--------------------------------------------
Short-term debt (120.0) (120.0) (100.0) (100.0)
- -----------------------------------------------
Derivatives 26.2 9.3 26.5 13.8
- -----------------------------------------------
Investment commitments -- (.5) -- (.6)
- -----------------------------------------------
</TABLE>
12. ACQUISITIONS AND SALES OF SUBSIDIARIES
In October 1996, the Company and LLANY purchased a block of group
tax-qualified annuity business from UNUM Corporation's affiliate. The
transaction was completed in the form of a reinsurance transaction, which
resulted in a ceding commission of $71,800,000. The ceding commission has
been recorded as admissible goodwill of $62,300,000, which is to be
amortized on a straight-line basis over 10 years. LLANY was required by the
New York Department of Insurance to expense its portion of the ceding
commission in 1996. Policy liabilities and related accruals of the Company
and its wholly owned subsidiary increased by $3,200,000,000 as a result of
this transaction.
In 1997, LNC contributed 25,000,000 shares of common stock of American
States Financial Corporation ("American States") to the Company. American
States is a property casualty insurance holding company of which LNC owned
83.3%. The contributed common stock was accounted for as a capital
contribution equal to the fair value of the common stock received by the
Company. Subsequently, the American States common stock owned by the
Company, along with all other American States common stock owned by LNC and
its affiliates, was sold. The Company received proceeds from the sale in the
amount of $1,175,000,000. The Company recognized no gain or loss on the sale
of its portion of the common stock due to the receipt of such stock at fair
value.
On January 2, 1998, the Company issued a surplus note to LNC in return for
$500,000,000 in cash. The note calls for the Company to pay, on or before
March 31, 2028, the principal amount of the note and interest quarterly at a
6.56% annual rate. LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
12. ACQUISITIONS AND SALES OF SUBSIDIARIES (CONTINUED)
anniversary date of the note, but not before January 2, 2003. Any payment of
interest or repayment of principal may be paid only out of excess surplus
(as defined in the note) and is subject to the approval of the Commissioner
of the Indiana Department of Insurance.
Proceeds from the sale of the Company's American States common stock, as
well as proceeds from the surplus note, were used to finance an indemnity
reinsurance transaction whereby the Company reinsured 100% of a block of
individual life insurance and annuity business from CIGNA Corporation. The
Company paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of
the reinsurance agreement, which will result in a decrease to surplus in
1998 of approximately $1,000,000,000. Operating results generated by this
block of business after the closing date will be included in the Company
financial statements from the closing date. At the time of closing, this
block of business had statutory liabilities of $4,658,200,000 that became
the Company's obligation. The company also received assets, measured on a
historical statutory basis, equal to the liabilities. During 1997, this
block produced premiums, fees and deposits of $1,051,000,000 and earnings of
$87,200,000 on a statutory basis. The Company also expects to pay
$30,000,000 to cover expenses associated with the reinsurance agreement and
to record a charge of approximately $12,000,000 during 1998 to cover certain
costs of integrating the existing operations with the new block of business.
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Financial Group, Inc. ("LFGI"),
has a nearly exclusive general agents contract with the Company under which
it sells the Company's products and provides the service that otherwise
would be provided by a home office marketing department and regional
offices. For providing these selling and marketing services, the Company
paid LFGI override commissions and operating expense allowances of
$61,600,000, $56,300,000 and $43,300,000 in 1997, 1996 and 1995,
respectively. LFGI incurred expenses of $5,500,000, $15,700,000 and
$10,400,000 in 1997, 1996 and 1995, respectively, in excess of the override
commissions and operating expense allowances received from the Company,
which the Company is not required to reimburse. Effective in January 1998,
the Company and LFGI agreed to increase the override commission expense and
eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1997 and 1996 include the
Company's participation in a short-term investment pool with LNC of
$325,600,000 and $175,100,000, respectively. Related investment income
amounted to $15,500,000, $15,300,000 and $21,100,000 in 1997, 1996 and 1995,
respectively. Other liabilities at December 31, 1997 and 1996 include
$120,000,000 and $100,000,000, respectively, of notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $48,500,000, $34,100,000 and
$24,900,000 in 1997, 1996 and 1995, respectively.
The Company cedes and accepts reinsurance from affiliated companies.
Premiums in the accompanying statements of income include premiums on
insurance business accepted under reinsurance contracts and exclude premiums
ceded to other affiliated companies, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996 1995
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 11.9 $ 17.9 $ 17.6
- ----------------------
Insurance ceded 100.3 302.8 214.4
- ----------------------
</TABLE>
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES (CONTINUED)
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1997 1996
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 245.5 $ 312.7
- ------------------------
Future policy benefits
and claims ceded 997.2 891.8
- ------------------------
Amounts recoverable on
paid and unpaid losses 30.4 31.2
- ------------------------
Reinsurance payable on
paid losses 5.3 2.7
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,115.4 1,062.4
- ------------------------
</TABLE>
Substantially all reinsurance ceded to affiliated companies is with
unauthorized companies. To take a reserve credit for such reinsurance, the
Company holds assets from the reinsurer, including funds held under
reinsurance treaties, and is the beneficiary on letters of credit
aggregating $280,900,000 and $314,200,000 at December 31, 1997 and 1996,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1997 and 1996, LNC had guaranteed $229,100,000 and $239,200,000,
respectively, of these letters of credit. At December 31, 1997, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $130,700,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered, principally for
annuity contracts, and for which the contractholder, rather than the
Company, bears the investment risk. Separate account contractholders have no
claim against the assets of the general account of the Company. Separate
account assets are reported at fair value and consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds. The detailed
operations of the separate accounts are not included in the accompanying
financial statements. Fees charged on separate account policyholder deposits
are included in other income.
Separate account premiums, deposits and other considerations amounted to
$4,821,800,000, $4,148,700,000 and $3,068,200,000 in 1997, 1996 and 1995,
respectively. Reserves for separate accounts with assets at fair value were
$30,560,700,000 and $23,047,800,000 at December 31, 1997 and 1996,
respectively. All reserves are subject to discretionary withdrawal at market
value. Substantially all of the Company's separate accounts are
nonguaranteed.
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
A reconciliation of transfers to (from) separate accounts are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1997 1996
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of
various Separate Accounts:
Transfers to separate accounts $ 4,824.0 $ 4,149.6
- ------------------------------------------------------------
Transfers from separate accounts (2,943.8) (2,058.5)
- ------------------------------------------------------------ --------- ---------
Net transfer to separate accounts as reported in the
Company's NAIC Annual Statement -- Summary of Operations $ 1,880.2 $ 2,091.1
- ------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
15. RECONCILIATION OF ANNUAL STATEMENT TO AUDITED FINANCIAL STATEMENTS
In 1997, certain errors were identified by the Illinois
Insurance Department in the calculation of the AVR as of
December 31, 1996 and 1995. The effects of the AVR errors
also resulted in the need for revisions in the calculation
of certain investment limitation thresholds, the results of
which indicated that additional assets should have been
nonadmitted as of December 31, 1996. As discussed by the
Company with the Indiana and Illinois Insurance Departments,
corrections were made to affected pages of the Company's
NAIC Annual Statement which were refiled with various state
insurance departments. However, due to immateriality of the
corrections in relation to the financial statements taken as
a whole, the audited 1996 and 1995 statutory-basis financial
statements were not corrected and re-issued.
The Company's 1997 NAIC Annual Statement, as filed with
various state insurance departments, also includes the
corrected balances for 1996 and 1995. The following is a
reconciliation of total admitted assets, total liabilities
and capital and surplus as of December 31, 1996 as presented
in the 1997 NAIC Annual Statement (as corrected) to the
accompanying audited financial statements.
<TABLE>
<CAPTION>
TOTAL CAPITAL
ADMITTED TOTAL AND
ASSETS LIABILITIES SURPLUS
---------------------------------
<S> <C> <C> <C>
Balance as of December 31, 1996 as
reported in the accompanying audited
financial statements $50,016.6 $ 48,054.0 $ 1962.6
- ----------------------------------------
Effect of AVR errors -- 37.6 (37.6)
- ----------------------------------------
Effect of change in investment
limitations (57.0) -- (57.0)
- ---------------------------------------- --------- ----------- --------
Balance as of December 31, 1996 as
reported in the 1997 NAIC Annual
Statement $49,959.6 $ 48,091.6 $1,868.0
- ---------------------------------------- --------- ----------- --------
--------- ----------- --------
</TABLE>
16. IMPACT OF YEAR 2000 (UNAUDITED)
The Year 2000 Issue is pervasive and complex and affects virtually every
aspect of the Company's business. The Company's computer systems and
interfaces with the computer systems of vendors, suppliers, customers and
business partners are particularly vulnerable. The inability to properly
recognize date sensitive electronic information and transfer data between
systems could cause errors or even a complete systems failure which would
result in a temporary inability to process transactions correctly and engage
in normal business
S-29
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. IMPACT OF YEAR 2000 (UNAUDITED) (CONTINUED)
activities. The Company is redirecting a large portion of its internal
information technology efforts and contracting with outside consultants to
update its systems to accommodate the year 2000. Also, the Company has
initiated formal communications with critical parties that interface with
the Company's systems to gain an understanding of their progress in
addressing Year 2000 Issues. While the Company is making every effort to
address its own systems and the systems with which it interfaces, it is not
possible to provide assurance that operational problems will not occur. The
Company presently believes that with the modification of existing computer
systems, updates by vendors and conversion to new software and hardware, the
Year 2000 Issue will not pose significant operational problems for its
computer systems. In addition, the Company is developing contingency plans
in the event that, despite its best efforts, there are unresolved year 2000
problems. If the remediation efforts noted above are not completed timely or
properly, the Year 2000 Issue could have a material adverse impact on the
operation of the Company's business.
During 1997 and 1996, the Company incurred expenditures of approximately
$5,500,000 ($3,600,000 after-tax) to address this issue. The Company's
financial plans for 1998 through 2000 include expected expenditures of an
additional $20,000,000 ($13,000,000 after-tax) on this issue. The cost of
addressing Year 2000 Issues and the timeliness of completion will be closely
monitored by management and are based on managements's current best
estimates which were derived utilizing numerous assumptions of future
events, including the continued availability of certain resources, third
party modification plans and other factors. Nevertheless, there can be no
guarantee that these estimated costs will be achieved and actual results
could differ significantly from those anticipated. Specific factors that
might cause such differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer problems and other uncertainties.
S-30
<PAGE>
REPORT OF INDEPENDENT AUDITORS
Board of Directors
The Lincoln National Life Insurance Company
We have audited the accompanying statutory-basis balance sheets
of The Lincoln National Life Insurance Company (a wholly owned
subsidiary of Lincoln National Corporation) as of December 31,
1997 and 1996, and the related statutory-basis statements of
income, changes in capital and surplus and cash flows for each
of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether
the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company
presents its financial statements in conformity with accounting
practices prescribed or permitted by the Indiana Department of
Insurance, which practices differ from generally accepted
accounting principles. The variances between such practices and
generally accepted accounting principles and the effects on the
accompanying financial statements are also described in Note 1.
In our opinion, because of the effects of the matter described
in the preceding paragraph, the financial statements referred to
above do not present fairly, in conformity with generally
accepted accounting principles, the financial position of The
Lincoln National Life Insurance Company at December 31, 1997 and
1996, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1997.
However, in our opinion, the financial statements referred to
above present fairly, in all material respects, the financial
position of The Lincoln National Life Insurance Company at
December 31, 1997 and 1996, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1997, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
[LOGO]
February 5, 1998
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C> <C>
Investment income earned:
Government bonds $ 52.8
-----------------------------------------------------------------------------------------
Other bonds (unaffiliated) 1,471.6
-----------------------------------------------------------------------------------------
Preferred stocks (unaffiliated) 23.5
-----------------------------------------------------------------------------------------
Common stocks (unaffiliated) 8.3
-----------------------------------------------------------------------------------------
Common stocks of affiliates 15.0
-----------------------------------------------------------------------------------------
Mortgage loans 257.2
-----------------------------------------------------------------------------------------
Real estate 92.2
-----------------------------------------------------------------------------------------
Premium notes, policy loans and liens 37.5
-----------------------------------------------------------------------------------------
Cash on hand and on deposit 1.0
-----------------------------------------------------------------------------------------
Short-term investments 69.3
-----------------------------------------------------------------------------------------
Other invested assets 21.9
-----------------------------------------------------------------------------------------
Derivative instruments (10.0)
-----------------------------------------------------------------------------------------
Aggregate write-ins for investment income 16.3
----------------------------------------------------------------------------------------- ---------
Gross investment income $ 2,056.6
- ---------------------------------------------------------------------------------------------------- ---------
---------
Real estate owned (cost, less encumbrances) $ 585.2
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans (unpaid balance):
Farm mortgages $ 0.1
-----------------------------------------------------------------------------------------
Residential mortgages 3.1
-----------------------------------------------------------------------------------------
Commercial mortgages 3,009.5
----------------------------------------------------------------------------------------- ---------
Total mortgage loans $ 3,012.7
- ---------------------------------------------------------------------------------------------------- ---------
---------
Mortgage loans by standing (unpaid balance):
Good standing $ 2,974.1
----------------------------------------------------------------------------------------- ---------
---------
Good standing with restructured terms $ 38.5
----------------------------------------------------------------------------------------- ---------
---------
Interest overdue more than three months, not in foreclosure $ --
----------------------------------------------------------------------------------------- ---------
---------
Foreclosure in process $ 0.1
----------------------------------------------------------------------------------------- ---------
---------
Other long-term assets (statement value) $ 281.5
- ---------------------------------------------------------------------------------------------------- ---------
---------
</TABLE>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Bonds and stocks of parent, subsidiaries and affiliates (cost):
Common stocks of subsidiaries $ 466.2
- ----------------------------------------------------------------------------------------------- ---------
---------
Bonds and short-term investments by class and maturity:
Bonds by maturity (statement value):
Due within one year or less $ 3,140.1
------------------------------------------------------------------------------------------
Over 1 year through 5 years 5,182.8
------------------------------------------------------------------------------------------
Over 5 years through 10 years 5,772.8
------------------------------------------------------------------------------------------
Over 10 years through 20 years 3,275.3
------------------------------------------------------------------------------------------
Over 20 years 3,270.6
------------------------------------------------------------------------------------------ ---------
Total by maturity $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Bonds by class (statement value):
Class 1 $13,879.0
------------------------------------------------------------------------------------------
Class 2 5,215.6
------------------------------------------------------------------------------------------
Class 3 848.0
------------------------------------------------------------------------------------------
Class 4 668.8
------------------------------------------------------------------------------------------
Class 5 23.6
------------------------------------------------------------------------------------------
Class 6 6.6
------------------------------------------------------------------------------------------ ---------
Total by class $20,641.6
-------------------------------------------------------------------------------------------- ---------
---------
Total bonds publicly traded $16,457.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Total bonds privately placed $ 4,184.5
- ----------------------------------------------------------------------------------------------- ---------
---------
Preferred stocks (statement value) $ 257.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Unaffiliated common stocks (market value) $ 436.0
- ----------------------------------------------------------------------------------------------- ---------
---------
Short-term investments (cost or amortized cost) $ 2,080.9
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps owned (statement value) $ 20.8
- ----------------------------------------------------------------------------------------------- ---------
---------
Financial options and caps written (statement value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Swap and forward agreements open (statement value) $ 5.4
- ----------------------------------------------------------------------------------------------- ---------
---------
Futures contracts open (current value) $ --
- ----------------------------------------------------------------------------------------------- ---------
---------
Cash on deposit $ 52.1
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance in-force:
Ordinary $ 108.6
------------------------------------------------------------------------------------------ ---------
---------
Group life $ 31.2
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA (CONTINUED)
DECEMBER 31, 1997 (IN MILLIONS)
<TABLE>
<S> <C>
Amount of accidental death insurance in-force under ordinary policies $ 5.3
- ----------------------------------------------------------------------------------------------- ---------
---------
Life insurance policies with disability provisions in-force:
Ordinary $ 5.5
------------------------------------------------------------------------------------------ ---------
---------
Group life $ --
------------------------------------------------------------------------------------------ ---------
---------
Supplementary contracts in-force:
Ordinary -- not involving life contingencies:
Amount on deposit $ --
------------------------------------------------------------------------------------------ ---------
---------
Income payable $ 0.8
------------------------------------------------------------------------------------------ ---------
---------
Ordinary -- involving life contingencies:
Income payable $ 3.0
------------------------------------------------------------------------------------------ ---------
---------
Group -- not involving life contingencies:
Income payable $ 1.1
------------------------------------------------------------------------------------------ ---------
---------
Group -- involving life contingencies:
Income payable $ --
------------------------------------------------------------------------------------------ ---------
---------
Annuities:
Ordinary:
Immediate -- amount of income payable $ 71.8
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- fully paid account balance $ 0.7
------------------------------------------------------------------------------------------ ---------
---------
Deferred -- not fully paid account balance $ 264.0
------------------------------------------------------------------------------------------ ---------
---------
Group:
Amount of income payable $ 0.3
------------------------------------------------------------------------------------------ ---------
---------
Fully paid account balance $ 0.1
------------------------------------------------------------------------------------------ ---------
---------
Not fully paid account balance $ 72.3
------------------------------------------------------------------------------------------ ---------
---------
Accident and health insurance -- premiums in-force:
Ordinary $ 166.0
------------------------------------------------------------------------------------------ ---------
---------
Group $ 77.7
------------------------------------------------------------------------------------------ ---------
---------
Deposit funds and dividend accumulations:
Deposit funds account balance $16,507.3
------------------------------------------------------------------------------------------ ---------
---------
Dividend accumulations -- account balance $ 114.4
------------------------------------------------------------------------------------------ ---------
---------
</TABLE>
S-34
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTE TO SUPPLEMENTAL SCHEDULE OF SELECTED
STATUTORY-BASIS FINANCIAL DATA
NOTE -- BASIS OF PRESENTATION
The accompanying schedule presents selected statutory-basis
financial data as of December 31, 1997 and for the year then
ended for purposes of complying with paragraph 9 of the Annual
Audited Financial Reports in the General Section of the National
Association of Insurance Commissioners' Annual Statement
Instructions and agrees to or is included in the amounts
reported in The Lincoln National Life Insurance Company's 1997
Statutory Annual Statement as filed with the Indiana Department
of Insurance.
S-35
<PAGE>
REPORT OF INDEPENDENT AUDITORS ON
OTHER FINANCIAL INFORMATION
Board of Directors
The Lincoln National Life Insurance Company
Our audits were conducted for the purpose of forming an opinion
on the statutory-basis financial statements taken as a whole.
The accompanying supplemental schedule of selected statutory
basis financial data is presented to comply with the National
Association of Insurance Commissioners' Annual Statement
Instructions and is not a required part of the statutory-basis
financial statements. Such information has been subjected to the
auditing procedures applied in our audit of the statutory-basis
financial statements and, in our opinion, is fairly stated in
all material respects in relation to the statutory-basis
financial statements taken as a whole.
[LOGO]
February 5, 1998
S-36
<PAGE>
FEES AND CHARGES REPRESENTATION
Lincoln Life represents that the fees and charges deducted
under the Contracts, in the aggregate, are reasonable in
relation to the services rendered, the expenses expected to
be incurred, and the risks assumed by Lincoln Life.
UNDERTAKING TO FILE REPORTS
Subject to the terms and conditions of Section 15(d) of the
Securities Exchange Act of 1934, the undersigned registrant
hereby undertakes to file with the Securities and Exchange
Commission such supplementary and periodic information,
documents, and reports as may be prescribed by any rule or
regulation of the Commission heretofore or hereafter duly
adopted pursuant to authority conferred in that section.
INDEMNIFICATION
(a) Brief description of indemnification provisions.
In general, Article VII of the By-Laws of The Lincoln National Life Insurance
Company (LNL) provides that LNL will indemnify certain persons against
expenses, judgments and certain other specified costs incurred by any
such person if he/she is made a party or is threatened to be made a party
to a suit or proceeding because he/she was a director, officer, or
employee of LNL, as long as he/she acted in good faith and in a manner
he/she reasonably believed to be in the best interests of, or not opposed
to the best interests of, LNL. Certain additional conditions apply to
indemnification in criminal proceedings.
In particular, separate conditions govern indemnification of directors,
officers, and employees of LNL in connection with suits by, or in the
right of, LNL.
Please refer to Article VII of the By-Laws of LNL (Exhibit No. 6(b) hereto) for
the full text of the indemnification provisions. Indemnification is
permitted by, and is subject to the requirements of, Indiana law.
(b) Undertaking pursuant to Rule 484 of Regulation C under the Securities
Act of 1933.
Insofar as indemnification for liabilities arising under the Securities Act of
1933 may be permitted to directors, officers and controlling persons of
the Registrant pursuant to the provisions described in Item 28(a) above
or otherwise, the Registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public
policy as expressed in the Act and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities (other
than the payment by the Registrant of expenses incurred or paid by a
director, officer, or controlling person of the Registrant in the
successful defense of any such action, suit or proceeding) is asserted by
such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion
of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act
and will be governed by the final adjudication of such issue.
CONTENTS OF REGISTRATION STATEMENT
This registration statement comprises the following papers
and document:
The facing sheet; A cross-reference sheet (reconciliation
and tie); The prospectus, consisting of 82 pages; The
undertaking to file reports; The fees and charges
representation; Statements regarding indemnification; The
signatures.
Exhibit 1. Consent of Ernst & Young LLP
Exhibit 2. Opinion and Consent of Michael J. Roscoe, FSA-MAAA
Exhibit 3. Opinion and Consent of Brian Burke, Esq.
<PAGE>
SIGNATURES
As required by the Securities Act of 1933, the registrant has duly caused
this Pre-Effective Amendment No. 1 to this Registration Statement on Form S-6
(File No. 333-43107) to be signed on its behalf by the undersigned thereunto
duly authorized, in the City of Fort Wayne and State of Indiana on the 13th day
of April 1998.
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE
LIFE ACCOUNT R (Name of Registrant)
By: /s/ GABRIEL L. SHAHEEN
-----------------------------------
Gabriel L. Shaheen
PRESIDENT
THE LINCOLN NATIONAL LIFE INSURANCE
COMPANY
By: THE LINCOLN NATIONAL LIFE
INSURANCE COMPANY
(NAME OF DEPOSITOR)
By: /s/ GABRIEL L. SHAHEEN
-----------------------------------
Gabriel L. Shaheen
PRESIDENT
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the Registration Statement has been signed below on April 13, 1998, by the
following persons, as officers and directors of the Depositor, in the capacities
indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------------------------------ ---------------------------------------------------------------
<C> <S>
/s/ GABRIEL L. SHAHEEN
-------------------------------------- President, Chief Executive Officer & Director (Principal
Gabriel L. Shaheen Executive Officer)
/s/ JON A. BOSCIA
-------------------------------------- Director
Jon A. Boscia
/s/ JACK D. HUNTER
-------------------------------------- Executive Vice President, General Counsel and Director
Jack D. Hunter
-------------------------------------- Executive Vice President and Director
Lawrence T. Rowland
/s/ THOMAS R. KAEHR Second Vice President, Chief Financial Officer and Assistant
-------------------------------------- Treasurer (Acting Principal Accounting Officer and Acting
Thomas R. Kaehr Principal Financial Officer)
/s/ IAN M. ROLLAND
-------------------------------------- Director
Ian M. Rolland
/s/ H. THOMAS MCMEEKIN
-------------------------------------- Director
H. Thomas McMeekin
/s/ RICHARD C. VAUGHAN
-------------------------------------- Director
Richard C. Vaughan
</TABLE>
<PAGE>
Exhibit 1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the reference to our firm under the caption "Experts" in the
Pre Effective Amendment No. 1 to the Registration Statement (Form S-6
No. 333-43107) pertaining to the Lincoln Life Flexible Premium Variable Life
Separate Account R, and to the use therein of our report dated February 5,
1998, with respect to the statutory-basis financial statements of The Lincoln
National Life Insurance Company for each of the three years in the period
ended December 31, 1997.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
April 9, 1998
<PAGE>
LINCOLN LIFE
900 COTTAGE GROVE ROAD
HARTFORD, CT 06152
April 10, 1998
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549
Re: Lincoln Life Flexible Premium Variable Life Separate Account R
Registration Statement S-6, File No. 333-43107 - Pre-Effective
Amendment No. 1
Commissioners:
This opinion is furnished in connection with Pre-Effective Amendment No. 1 to
the Registration Statement on Form S-6 filed by The Lincoln National Life
Insurance Company under the Securities Act of 1993 recorded as File No.
333-43107. The prospectus included in said Pre-Effective Amendment describes
second-to-die flexible premium variable universal life insurance policies
(the "Policies"). The forms of Policies were prepared under my direction.
In my opinion, the illustrations of benefits under the Policies included in
the Section entitled "Illustrations" in the prospectus, based on assumptions
stated in the illustrations, are consistent with the provisions of the forms
of the Policies. The ages selected in the illustrations are representative of
the manner in which the Policies operate.
I hereby consent to the use of this opinion as an exhibit to the Registration
Statement and to the reference to me under the heading "Experts" in the
prospectus.
Very truly yours,
/s/ Michael J. Roscoe
Michael J. Roscoe, FSA, MAAA
<PAGE>
[LINCOLN LIFE LETTERHEAD]
EXHIBIT 3
April 10, 1998
VIA EDGAR
- ---------
The Lincoln National Life Insurance Company
1300 South Clinton Street
P.O. Box 1110
Fort Wayne, IN 46801
Re: Lincoln Life Flexible Premium Variable Life Account R
(File No. 333-43107)
Ladies and Gentlemen:
I have made such examination of law and have examined such records and
documents as I have deemed necessary to render the opinion expressed below.
I am of the opinion that upon acceptance by Lincoln Life Flexible Premium
Variable Life Account R (the "Account"), a segregated account of The Lincoln
National Life Insurance Company (Lincoln Life), of contributions from a
person pursuant to an insurance policy issued in accordance with the
prospectus contained in the registration statement on Form S-6, and upon
compliance with applicable law, such person will have a legally issued
interest in his or her individual account with the Account, and the securities
issued will represent binding obligations of Lincoln Life.
I consent to the filing of this Opinion as an exhibit to the Account's
Pre-Effective Amendment No. 1 to the Registration Statement on Form S-6.
Sincerely,
/s/ Brian Burke
- ---------------
Brian Burke
Counsel
