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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
ADMINISTRATIVE OFFICE
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(800) 552-9898 (5/99-7/99)
(800) 444-2363 (8/99 AND LATER)
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A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
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This Prospectus describes a flexible premium variable life insurance
contract (the "Policy"), offered by The Lincoln National Life Insurance Company
("Lincoln Life", "Company", "we", "us", "our"). The Policy provides death
benefits when the second of the two named Insureds dies (a "Second Death
Policy").
The Policy features:
- flexible premium payments;
- a choice of one of two death benefit options; and
- a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds, furnished with this Prospectus,
should be read carefully to understand the Policy being offered.
The mutual funds ("Funds") available through Lincoln Life's Separate Account
R ("Separate Account") are:
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<S> <C>
AIM VARIABLE INSURANCE FUNDS, INC. LINCOLN NATIONAL MONEY MARKET FUND, INC.
AIM V.I. Capital Appreciation Fund Money Market Fund
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE
AIM V.I. Diversified Income Fund TRUST
AIM V.I. Growth Fund MFS Emerging Growth Series
AIM V.I. Value Fund MFS Total Return Series
BT INSURANCE FUNDS TRUST MFS Utilities Series
Equity 500 Index Fund OCC ACCUMULATION TRUST
DELAWARE GROUP PREMIUM FUND, INC. Global Equity Portfolio
Emerging Markets Series Managed Portfolio
Small Cap Value Series TEMPLETON VARIABLE PRODUCTS SERIES FUND
Trend Series Templeton Asset Allocation Fund Class 1
FIDELITY VARIABLE INSURANCE PRODUCTS FUND Templeton International Fund Class 1
Equity-Income Portfolio -- Initial Class Templeton Stock Fund Class 1
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Asset Manager Portfolio -- Initial Class
Investment Grade Bond Portfolio -- Initial
Class
</TABLE>
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 1, 1999
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TABLE OF CONTENTS
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CONTENTS PAGE
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HIGHLIGHTS...................................... 3
Initial Choices To Be Made.................... 3
Level or Varying Death Benefit................ 3
Amount of Premium Payment..................... 4
Selection of Funding Vehicles................. 4
Charges and Fees.............................. 5
Changes in Specified Amount................... 5
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT................................ 6
BUYING VARIABLE LIFE INSURANCE.................. 7
Replacements.................................. 8
APPLICATION..................................... 8
OWNERSHIP....................................... 9
BENEFICIARY..................................... 9
INSUREDS........................................ 9
THE POLICY...................................... 10
Policy Specifications......................... 10
PREMIUM FEATURES................................ 10
Planned Premiums; Additional Premiums......... 10
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......... 11
Allocation of Net Premium Payments............ 11
Transfers..................................... 12
Optional Sub-Account Allocation Programs...... 12
Dollar Cost Averaging....................... 12
Automatic Rebalancing....................... 13
POLICY VALUES................................... 13
Accumulation Value............................ 13
Separate Account Value........................ 14
Variable Accumulation Unit Value............ 14
Variable Accumulation Units................. 14
Fixed Account and Loan Account Value.......... 15
Net Accumulation Value........................ 15
FUNDS........................................... 15
Substitution of Securities.................... 19
Voting Rights................................. 19
Fund Participation Agreements................. 19
CHARGES AND FEES................................ 20
Deductions Made Monthly....................... 20
Monthly Deduction........................... 20
Cost of Insurance Charge.................... 20
Mortality and Expense Risk Charge........... 21
Mortality and Expense Risk Charge and Fund
Expenses..................................... 22
Surrender Charges............................. 24
Transaction Fee for Excess Transfers.......... 24
DEATH BENEFITS.................................. 25
Death Benefit Options......................... 25
Changes in Death Benefit Options and Specified
Amount....................................... 26
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CONTENTS PAGE
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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.............. 31
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.................. 32
Incontestability.............................. 32
Misstatement of Age or Gender................. 32
Suicide....................................... 33
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........................ 35
DIRECTORS AND OFFICERS OF LINCOLN LIFE.......... 35
DISTRIBUTION OF POLICIES........................ 36
CHANGES OF INVESTMENT POLICY.................... 37
OTHER CONTRACTS ISSUED BY LINCOLN LIFE.......... 37
STATE REGULATION................................ 37
REPORTS TO OWNERS............................... 37
ADVERTISING..................................... 38
PREPARING FOR YEAR 2000......................... 38
LEGAL PROCEEDINGS............................... 39
EXPERTS......................................... 40
REGISTRATION STATEMENT.......................... 40
Appendix 1...................................... 41
Corridor Percentages.......................... 41
Appendix 2...................................... 42
Illustration of Accumulation Values, Surrender
Values, and Death Benefit Proceeds........... 42
Financial Statements............................
Separate Account.............................. R-1
Lincoln Life.................................. S-1
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HIGHLIGHTS
This section is an overview of key Policy features.
(Regulations in your state may vary the provisions of your
own Policy.) Your Policy is a flexible premium variable life
insurance policy. Your Policy insures two Insureds. If one
of the Insureds dies, the Policy pays no death benefit. Your
Policy will pay the death benefit only when the second
Insured dies. A "second-to-die" policy might be suitable
when both of the Insureds have income of their own and only
want to provide financial support for their dependents if
both of them should die, or to provide liquidity to heirs
when the second Insured dies. If replacement income or
immediate cash liquidity is needed upon the death of one
Insured, this type of policy may not be suitable.
The Policy's value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. The value of the Policy and, under one option, the
death benefit amount, depends on the investment results of
the funding options you select.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. Lincoln Life reserves the right to return your
premium payments if they result in your Policy failing to
meet Code requirements.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. You, as the Owner, have three important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the two Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the second Insured dies. Before we pay
the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death
Benefit. We calculate the Death Benefit payable as of the
date of the second Insured's death.
When you purchase your Policy, you must choose one of two
Death Benefit Options:
1) a level death benefit; or
2) a varying death benefit.
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If you choose the level Death Benefit Option, the Death
Benefit will be the greater of:
1) the "Specified Amount", which is the amount of the death
benefit in effect for the Policy when the second Insured
died (the Specified Amount may be found on the Policy's
Specification Page); or
2) the "Corridor Death Benefit", which is the death benefit
calculated as a percentage of the Accumulation Value. The
Net Accumulation Value is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts.
If you choose the varying Death Benefit Option, the Death
Benefit will be the greater of:
1) the Specified Amount plus the Net Accumulation Value when
the second Insured died; or
2) the Corridor Death Benefit.
See page 25 for more details.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 11.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 20)
increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. More information is on page 30.
When you first receive your Policy you will have 10 days to
look it over, unless state law requires a greater time. This
is called the "Right-to-Examine" time period. Use this time
to review your Policy and make sure that it meets your
needs. During this time period, your Initial Premium Payment
will be deposited in the Money Market Sub-Account. If you
then decide you do not want your Policy, we will return all
Premium Payments to you with no interest paid. See page 11.
SELECTION OF FUNDING VEHICLES
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the variable funds, you take all the
investment risk on that money. This means that if the mutual
fund(s) you select go up in value, the value of your Policy,
net of charges and expenses, also goes up. If they lose
value, so does your Policy. Each fund has its own investment
objective. You should review each fund's Prospectus before
making your decision.
You must choose the Fund(s) in which you want to place each
Net Premium Payment. These "Sub-Accounts" make up the
Separate Account. Each Sub-Account invests in shares of a
certain Fund. A Sub-Account is not guaranteed and will
increase or decrease in value according to the particular
Fund's investment performance. See page 15.
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You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium Payments made into the Fixed Account:
- become part of Lincoln Life's General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at Lincoln Life's discretion.
For additional information, see page 7.
CHARGES AND FEES
We deduct a premium load of 8% from each Premium Payment. We
make monthly deductions for administrative expenses
(currently, $12.50 per month for the first Policy Year and
$5 per month afterwards), the Cost of Insurance and any
riders that are placed on your Policy. For Policy Years
1-20, a monthly charge of $0.09 per $1,000 of Specified
Amount is deducted. If the No-Lapse Provision is selected,
there will be an additional monthly charge of $0.01 per
$1,000 of Specified Amount (Note: the No-Lapse provision is
not available in IL, MA, MD, NJ and TX). See page 20.
Daily deductions are subtracted from the Separate Account
for mortality and expense risk. Currently, this charge is at
an annual rate of .80%. See page 21.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on pages 22-23 shows you the current
expense levels for each Fund.
Each Policy Year you will be allowed to make 12 transfers
between funding options. Beyond 12, a $25 fee may apply. See
page 12.
You may surrender the Policy in full or withdraw part of its
value. A Surrender Charge is applied if the Policy is
surrendered totally and is the amount retained by us if the
Policy is surrendered. We charge you an administrative fee
of $25, but not more than 2% of the amount withdrawn, each
time you request a partial surrender of your Policy. If you
totally surrender your Policy within the first 15 years, a
surrender charge will be deducted in computing what will be
paid you. If you surrender your Policy within the first 15
years after an increase in the Specified Amount, a surrender
charge will also be imposed, in addition to any existing
surrender charge. See page 24.
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account. Currently, the annual interest rate is
8%. For the first ten Policy Years interest will be credited
to the Loan Account Value at the annual rate of interest
charged for a loan minus 1%. For Policy Years eleven and
beyond, interest will be credited at an annual rate equal to
the current interest charged. See page 27.
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. See page 26.
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LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated
in 1905, is among the nation's largest writers of annuities,
individual life insurance and life reinsurance. Wholly-owned
by Lincoln National Corporation ("LNC"), a publicly held
Indiana insurance holding company incorporated in 1968, it
is licensed in all states (except New York), the District of
Columbia, Guam, and the Commonwealth of the Northern Mariana
Islands. Its principal office is at 1300 South Clinton
Street, Fort Wayne, IN 46802. Lincoln Life, LNC and their
affiliates comprise the "Lincoln Financial Group" which
provides a variety of wealth accumulation and protection
products and services.
Lincoln Life Flexible Premium Variable Life Account R
("Account R") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account R attributable to the Policies, though our
property, are not chargeable with liabilities of any other
business of Lincoln Life and are available first to satisfy
our obligations under the Policies. Account R income, gains,
and losses are credited to or charged against Account R
without regard to our other income, gains, or losses. Its
values and investment performance are not guaranteed. It is
registered with the Securities and Exchange Commission
("Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account R's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund our variable life insurance
policies and variable annuity contracts.
Account R is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the Funds available
as funding vehicles under the Policies. On each Valuation
Day (any day on which the New York Stock Exchange is open),
Net Premium Payments allocated to Account R will be invested
in Fund shares at net asset value, and monies necessary to
pay for deductions, charges, transfers and surrenders from
Account R are raised by selling Fund shares at net asset
value.
The Funds and their investment objectives, which they may or
may not achieve, are on pages 15-18. More Fund information
is in the Funds' prospectuses, which must accompany or
precede this prospectus and should be read carefully. Some
Funds have investment objectives and policies similar to
those of other funds managed by the same investment adviser.
Their investment results may be higher or lower than those
of the other funds, and there can be no assurance, and no
representation is made, that a Fund's investment results
will be comparable to the investment results of any other
fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy and to compliance
with regulatory requirements if, in our sole discretion,
legal, regulatory, marketing, tax or investment
considerations so warrant or in the event a particular Fund
is no longer available for investment by the Sub-Accounts.
No substitution will take place without prior approval of
the Commission, to the extent required by law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and
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to decide what responsive action might be appropriate. If a
Sub-Account were to withdraw its investment in a Fund
because of a conflict, a Fund might have to sell portfolio
securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of Lincoln Life's General Account
supporting its insurance and annuity obligations. We will
credit interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-aversive or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy
inforce for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages.
Sufficient premiums must always be paid to keep a policy
inforce, and there is a risk of lapse if premiums are too
low in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, if elected, may help to assure a death benefit
even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of fund options available, it is possible to
finetune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
And any investment income and realized capital gains within
a fund are automatically reinvested without being taxed to
the Policy owners. Policy values therefore accumulate on a
tax-deferred basis. These situations would normally result
in immediate tax liabilities in the case of direct
investment in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable
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life insurance. Unless a policy has become a "modified
endowment contract" (see page 33), an Owner can borrow
Policy values tax-free, without surrender charges and at
very low net interest cost. Policy loans can be a source of
retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insureds' ages (see page 25). The death
benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
Certain costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) are not unlike those incurred through
investment in mutual funds or variable annuities. A
significant additional cost of variable life insurance is
the "cost of insurance" charge which is imposed on the
"amount at risk" (the death benefit less Policy value) and
increases as the insured grows older. This charge varies by
age, underwriting classification, smoking status and in most
states by gender. The effect of its increase can be seen in
illustrations in this Prospectus (see Appendix 2) or in
personalized illustrations available upon request. Surrender
Charges, which decrease over time, are another significant
additional cost if the Policy is not retained.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, a number of matters should be considered
by the applicant. Will any commission be paid to an agent or
any other person with respect to the replacement? Are
coverages and comparable values available from the Policy,
as compared to his or her existing policy? For example, the
Insureds may no longer be insurable, or the contestability
period may have elapsed with respect to the existing policy,
while the Policy could be contested. The Owner should
consider similar matters before deciding to replace the
Policy or withdraw funds from the Policy for the purchase of
funding a new policy of life insurance.
APPLICATION
Any person who wants to buy a Policy must first complete an
application on a form provided by Lincoln Life.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. We require a medical history and examination of each
of the Insureds. 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, in
most states, 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
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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
entity. 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.
BENEFICIARY
The Beneficiary is designated by the Owner or the Applicant
and is the person who will receive the Death Benefit
proceeds payable under the Policy. The person or persons
named in the application as "Beneficiary" are the
Beneficiaries of the Death Beneift 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 recorded. No change of Beneficiary will
affect, or prejudice Lincoln Life as to any payment made or
action taken by Lincoln Life before it was recorded.
If any Beneficiary dies before the 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 assignee.
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.
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THE POLICY
The Policy is the life insurance contract described in the
Prospectus. The Date of Issue is the date on which we begin
life insurance coverage under a Policy. A Policy Year is the
twelve month period, beginning on the date of issue, during
which the Policy is in effect. The Policy Anniversary is the
day of the year the Policy was issued.
On issuance, a 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 (the date on which the
initial premium is applied to the Policy) and must be equal
to or exceed the amount necessary to provide for two Monthly
Deductions or, if selected, the No Lapse Premium.
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. We will no longer accept Premium
Payments, and will make no further monthly deductions.
Policy Values held in the Separate Account will be
transferred to the Fixed Account. We will no longer transfer
amounts to the Sub-Accounts. The Policy will remain in force
until surrender or the Second Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the applicant chooses to pay
Lincoln Life on a scheduled basis. This is the amount for
which we send a premium reminder notice.
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
Lincoln Life. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency. Pre-authorized automatic
Additional Premium Payments can also be arranged at any
time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy Lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
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LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
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
(longer for Policies issued in replacement of other
insurance) and notice of surrender rights to the Owner,
Lincoln Life will refund to the Owner all Premium Payments.
Any Premium Payments received by Lincoln Life before the end
of the Right-to-Examine Period will be held in the Money
Market Sub-Account, and will be allocated to the Sub-
Accounts designated by the Owner at the end of a
Right-to-Examine Period. If the Policy is returned for
cancellation within the Right-to-Examine Period, we will
return any Premium Payments within seven days, although 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
Account and 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 or a Fixed Account
Value of less than $2,500. Lincoln Life, at its sole
discretion, may waive minimum balance requirements on the
Sub-Accounts.
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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.
Transfer of amounts of at least $500 from one Sub-Account to
another or from the Sub-Accounts to the Fixed Account are
possible at any time. Within 30 days after each anniversary
of the Date of Issue, the Owner may transfer up to 20% of
the Fixed Account Value (as of the preceding anniversary of
the Date of Issue) to one or more Sub-Accounts. 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 Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests. Any transfer made which causes
the remaining value of Accumulation Units for a Sub-Account
or the Fixed Account to be less than $500 will result in
those remaining Accumulation Units being canceled and their
aggregate value reallocated proportionately among the other
Sub-Accounts and the Fixed Account to which Policy values
are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, 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. These transfers do not
count against the free transfers available. By making
allocations on a regularly scheduled basis, instead of on a
lump sum basis, an Owner may reduce exposure to market
volatility. Dollar Cost Averaging will not assure a profit
or protect against a declining market.
If the Owner elects Dollar Cost Averaging, the value in the
Money Market Sub-Account must be at least $1,000 initially.
The minimum amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives a request from the Owner in
proper written form or by telephone, if adequately
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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) within one week after the
Administrative Office receives a request for termination in
proper written form or by telephone, if adequately
authenticated; or (4) if the Policy is surrendered.
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 Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). The Fixed Account is not subject to
rebalancing. The pre-determined level is the allocation
initially selected on the application, until changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no charge for Automatic Rebalancing, but
Lincoln Life reserves the right to impose a charge.
POLICY VALUES
The "Accumulation Value" is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require Additional Premium Payments beyond
those expected (unless the No Lapse Provision requirements
have been satisfied) to maintain the level of coverage or to
avoid lapse of the Policy. We strongly suggest you review
periodic statements to determine if Additional Premium
Payments may be necessary to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after the 8.0% reduction
for the premium load, is the "Net Premium Payment." It is
the Net Premium Payment that is available for allocation to
the Fixed Account or the Sub-Accounts.
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We credit Net Premium Payments to the Policy as of the end
of the Valuation Period in which it is received at the
Administrative Office. The "Valuation Period" is the time
between Valuation Days, and a "Valuation Day" is every day
on which the New York Stock Exchange is open and trading is
unrestricted. Accumulation Units are valued on every
Valuation Day.
The "Accumulation Value" of a Policy is determined by: (1)
multiplying the total number of Variable Accumulation Units
credited to the Policy for each Sub-Account by its
appropriate current Variable Accumulation Unit Value; (2) if
a combination of Sub-Accounts is elected, totaling the
resulting values; and (3) adding any values attributable to
the Fixed Account and the Loan Account. The Accumulation
Value will be affected by Monthly Deductions.
SEPARATE ACCOUNT VALUE
The "Separate Account Value" is the portion of the
Accumulation Value attributable to the Separate Account.
VARIABLE ACCUMULATION UNIT VALUE
All or a part of a Net Premium Payment allocated to a
Sub-Account is converted into Variable Accumulation Units by
dividing the amount allocated by the value of the Variable
Accumulation Unit for the Sub-Account next calculated after
it is received at the Administrative Office. The Variable
Accumulation Unit value for each Sub-Account was initially
established at $10.00. It may thereafter increase or
decrease from one Valuation Period to the next. Allocations
to Sub-Accounts are made only as of the end of a Valuation
Day.
VARIABLE ACCUMULATION UNITS
A "Variable Accumulation Unit" is a unit of measure used in
the calculation of the value of each 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 Sub-Account for any
later Valuation Period is determined as follows:
1.The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and adding
any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period;
minus
2.The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by Lincoln Life that Lincoln Life
determines result from the operations of the Separate
Account; and
3.The result of (2) is divided by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Variable Accumulation Units that have an aggregate value on
the date of such deduction equal to the total amount by
which the Sub-Account is reduced.
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The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. Such value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the Fund used in a particular
Sub-Account and fees and charges under the Policy.
FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees the Fixed Account Value.
NET ACCUMULATION VALUE
The "Net Accumulation Value" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available as
funding vehicles under the Policies. Each of the Funds is a
series of one of nine entities, all Massachusetts business
trusts, except for AIM Variable Insurance Funds, Inc.,
Delaware Group Premium Fund, Inc. and Lincoln National Money
Market Fund, Inc., which are Maryland corporations. Each
such entity is registered as an open-end, diversified
management investment company (mutual fund) under the 1940
Act. These entities are collectively referred to herein as
the "Trusts."
The Trusts and their Investment advisers and distributors
are:
AIM Variable Insurance Funds, Inc. ("AIM V.I. Fund"),
managed by A I M Advisors, Inc., and distributed by
A I M 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 Trust"),
managed by Delaware Management Company, Inc. and
distributed by Delaware Distributors, L.P., 1818 Market
Street, Philadelphia, PA 19103;
Fidelity Variable Insurance Products Fund ("Fidelity
VIP"), 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 02109;
Lincoln National Money Market Fund, Inc. ("Lincoln
Trust"), 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.,
100 Fountain Parkway, Petersburg, FL 33716-1205;
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 the DELAWARE Trust are available under the
Policies:
Emerging Markets Series;
Small Cap Value Series;
Trend Series.
One Fund of FIDELITY VIP is available under the Policies:
Equity-Income Portfolio -- Initial Class ("Fidelity VIP
Equity-Income Portfolio").
Two Funds of FIDELITY VIP II are available under the
Policies:
Asset Manager Portfolio -- Initial Class ("Fidelity VIP
II Asset Manager Portfolio");
Investment Grade Bond Portfolio -- Initial Class
("Fidelity VIP II Investment Grade Bond Portfolio").
One Fund of LINCOLN Trust 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 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 and 23 of this Prospectus.
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There follows a brief description of the investment
objective and program of each Fund. There can be no
assurance that any of the stated investment objectives will
be achieved.
The investment objectives and policies of certain Trusts are
similar to the investment objectives and policies of other
funds that may be managed by the same investment adviser.
The investment results of the Trusts, however, may be higher
or lower than the results of such other funds. There can be
no assurance, and no representation is made, that the
investment results of any of the Trusts will be comparable
to the investment results of any other fund, even if the
other fund has the same investment adviser.
AIM V.I. CAPITAL APPRECIATION FUND (Small Cap Stocks): Seeks
growth of capital through investment in common stocks, with
emphasis on medium and small-sized growth companies. The
investment advisor will be particularly interested in
companies that are likely to benefit from new or innovative
products, services or processes that should enhance such
companies' prospects for future growth in earnings.
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 growth of
capital primarily by investing in seasoned and better
capitalized companies considered to have strong earnings
momentum. Current income will not be a criterion of
investment selection, and any such income should be
considered incidental.
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 investment advisor to be
undervalued relative to the investment advisor's appraisal
of current or projected earnings of the companies issuing
the securities, or relative to current market values of
assets owned by the companies issuing the securities or
relative to the equity markets generally. Income is a
secondary objective and would be satisfied principally from
the interest (interest and dividends) generated by the
common stocks, convertible bonds and convertible preferred
stocks that make up the Fund's portfolio.
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
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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 -- INITIAL CLASS
(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 -- INITIAL
CLASS (Fixed Income - Intermediate Term Bonds): Seeks as
high a level of current income as is consistent with the
preservation of capital by investing in U.S.
dollar-denominated investment-grade bonds.
FIDELITY VIP EQUITY-INCOME PORTFOLIO -- INITIAL CLASS (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).
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.
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).
TEMPLETON ASSET ALLOCATION FUND -- CLASS 1 (Balanced or
Total Return): Seeks a high level of total return. Invests
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. It invests
primarily in stocks of companies outside the United States,
including emerging markets. Any income realized will be
incidental.
TEMPLETON STOCK FUND -- CLASS 1 (Global Stocks): Seeks
long-term capital growth. Invests primarily in equity
securities issued by companies, large and small, in various
nations throughout the world, including the United States
and emerging markets.
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.
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Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses. Please review the Prospectuses carefully.
There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments. The right to
select among Funds will be limited by the terms and
conditions imposed by Lincoln Life (SEE Allocation of Net
Premium Payments).
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in the judgment of
Lincoln Life, further investment in such shares should cease
to be appropriate in view of the purpose of the Separate
Account or in view of legal, regulatory or federal income
tax restrictions, Lincoln Life may substitute shares of
another Fund. There will be no substitution of securities in
any Sub-Account without prior approval of the Commission.
VOTING RIGHTS
Lincoln Life will vote the shares of each Fund held in the
Separate Account at special meetings of the shareholders of
the particular Fund in accordance with instructions received
by the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares 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 Trusts' Boards
intend to monitor events in order to identify any material
irreconcilable conflicts which may possibly arise and to
determine what action, if any, should be taken in response
thereto. If such a conflict were to occur, one of the
separate accounts might withdraw its investment in a Fund.
This might force a Fund to sell portfolio securities at
disadvantageous prices.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
Trusts and their advisers or distributors under which
Lincoln Life makes the Funds available under the Policies
and performs certain administrative services. In some cases,
the advisers or distributors may compensate Lincoln Life at
annual rates of between .10% and .25% of assets in a
particular Fund attributable to the Policies.
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CHARGES AND FEES
Lincoln Life deducts charges in connection with the Policy
to compensate it for providing the insurance benefit set
forth in the Policy, administering the Policy, assuming
certain risks in connection with the Policy and for
incurring expenses associated with the distribution of the
Policy.
The nature and amount of these charges are as follows:
DEDUCTIONS MADE MONTHLY
We make various expense deductions 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.
For 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 Accumulation Value. The Monthly Deductions
are made on the Monthly Anniversary Day, the Date of Issue,
and the same day of each month thereafter, or if there is no
such date in a given month, the first Valuation Day of the
next month. If the day that would otherwise be a Monthly
Anniversary Day is not a Valuation Day, then the Monthly
Anniversary Day is the next Valuation Day.
If the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period ("Grace
Period"), to make a payment sufficient to cover that
deduction. (See Lapse and Reinstatement: Lapse of a Policy).
If 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 Separate 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 after the first Policy Year).
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. (Note: the No Lapse provision is not
available in IL, MA, MD, NJ and TX.)
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 is the portion of the Monthly
Deduction designed to compensate Lincoln Life for the
anticipated cost of paying Death Benefits in excess of the
Accumulation Value, not including riders, supplementary
benefits or monthly expense charges.
The Cost of Insurance charge depends on the Age,
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
20
<PAGE>
(Death Benefit minus the Accumulated Value). 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.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than estimated, and therefore, a
greater amount of death benefit will be payable. The expense
risk assumed is that expenses incurred is issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80% per year, and is guaranteed not to
exceed 0.90% per year.
21
<PAGE>
MORTALITY AND EXPENSE RISK CHARGE AND FUND EXPENSES
The purpose of the following Table is to help purchasers and prospective
purchasers understand the costs and expenses that are borne, directly and
indirectly, by purchasers assuming that all Net Premium Payments are allocated
to the Separate Account. The table reflects expenses of the Separate Account as
well as of the individual Funds underlying the Sub-Accounts. The Mortality and
Expense Risk Charge shown is the currently charged rate during the first twelve
Policy Years. It currently declines to .55% per year thereafter and is
guaranteed not to exceed .90% per year.
FEE TABLE
<TABLE>
<CAPTION>
AIM VARIABLE INSURANCE FUNDS, INC.
-------------------------------------------------------------- BT INSURANCE
AIM V.I. FUNDS TRUST
CAPITAL AIM V.I. ----------------
APPRECIATION DIVERSIFIED AIM V.I. AIM V.I. EQUITY 500 INDEX
FUND INCOME FUND GROWTH FUND VALUE FUND FUND(1)
-------------- ---------------- ------------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 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%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 0.62% 0.60% 0.64% 0.61% 0.20%
12(b)1 Fees -- -- -- -- --
Other Expenses.......................... 0.05% 0.17% 0.08% 0.05% 0.99%
Total Fund Operating Expenses Without
Waivers or Reductions.................. 0.67% 0.77% 0.72% 0.66% 1.19%
Total Waivers and Reductions............ -- -- -- -- (0.89%)
Total Fund Operating Expenses With
Waivers or Reductions.................. 0.67% 0.77% 0.72% 0.66% 0.30%
<CAPTION>
DELAWARE GROUP
PREMIUM FUND
---------------------------------------------- LINCOLN
SMALL NATIONAL
EMERGING CAP -------
MARKET TREND VALUE MONEY MARKET
SERIES(2) SERIES(3) SERIES(3) FUND
-------------- -------------- ------------ -------
<S> <C> <C> <C> <C>
SEPARATE ACCOUNT ANNUAL EXPENSES
Mortality and Expense Risk Charge....... 0.80% 0.80% 0.80% 0.80%
Total Separate Account Annual Expenses.. 0.80% 0.80% 0.80% 0.80%
FUND PORTFOLIO ANNUAL EXPENSES
Management Fees......................... 1.25% 0.75% 0.75% 0.48%
12(b)1 Fees -- -- -- --
Other Expenses.......................... 0.42% 0.10% 0.10% 0.11%
Total Fund Operating Expenses Without
Waivers or Reductions.................. 1.67% 0.85% 0.85% 0.59%
Total Waivers and Reductions............ (0.17%) (0.04%) -- --
Total Fund Operating Expenses With
Waivers or Reductions.................. 1.50% 0.81% 0.85% 0.59%
</TABLE>
- ------------------------------
(1) Under the Advisory Agreement with Bankers Trust Company (the "Advisor"), the
Fund will pay an advisory fee at an annual percentage rate of 0.20% of the
average daily net assets of the Fund. These fees are accrued daily and paid
monthly. The Advisor has voluntarily undertaken to waive its fees and to
reimburse the Fund for certain expenses so the Fund's total operating
expenses will not exceed 0.30% of average daily net assets.
(2) The investment advisor for the Emerging Markets Series is Delaware
International Advisors, Limited ("DIAL"). Effective May 1, 1999 through
October 31, 1999, DIAL has voluntarily agreed to waive its management fees
and reimburse the Series for expenses to the extent that total expenses will
not exceed 1.50% for the Emerging Markets Series. Pursuant to a vote of the
Fund's shareholders on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows: 1.25% on the first $500
million, 1.20% on the next $500 million, 1.15% on the next $1,500 million,
1.10% on assets in excess of $2,500 million; all per year.
(3) The investment advisor for the Trend Series and Small Cap Value Series is
Delaware Management Company, Inc. ("DMC"). Effective May 1, 1999 through
October 31, 1999, DMC has voluntarily agreed to waive its management fees
and reimburse each Series for expenses to the extent that total expenses
will not exceed 0.85% for the Trend Series and 0.85% for the Small Cap Value
Series. Pursuant to a vote of the Fund's shareholders on March 17, 1999, a
new management fee structure based on average daily net assets was approved
as follows: 0.75% on the first $500 million, 0.70% on the next $500 million,
0.65% on the next $1,500 million, 0.60% on assets in excess of $2,500
million; all per year.
Other Expenses of the Trusts shown in the table are based on expenses incurred
by each Trust for the year ending December 31, 1998. Future Fund expenses will
vary. The table does not reflect the monthly deductions for the cost of
insurance and any riders, nor does it reflect the monthly deduction of $15
during the first Policy Year, and currently, $5 thereafter for administrative
expenses. The information set forth should be considered together with the
information provided in this Prospectus under the heading "Charges and Fees",
and in each Fund's Prospectus. All expenses are expressed as a percentage of
average account value.
22
<PAGE>
<TABLE>
<CAPTION>
FIDELITY VARIABLE INSURANCE
PRODUCTS FUNDS MFS-REGISTERED TRADEMARK-
- -------------------------------- VARIABLE TEMPLETON VARIABLE PRODUCTS OCC ACCUMULATION
VIP II VIP VIP II INSURANCE TRUST SERIES FUND (CLASS 1) TRUST
ASSET EQUITY- INVESTMENT ------------------------------- --------------------------------- -------------------
MANAGER INCOME GRADE BOND MFS MFS TEMPLETON
PORTFOLIO PORTFOLIO PORTFOLIO EMERGING TOTAL MFS ASSET TEMPLETON TEMPLETON GLOBAL
(INITIAL (INITIAL (INITIAL GROWTH RETURN UTILITIES ALLOCATION INTERNATIONAL STOCK EQUITY MANAGED
CLASS)(4) CLASS)(4) CLASS) SERIES SERIES SERIES FUND FUND FUND PORTFOLIO PORTFOLIO
- --------- --------- ---------- --------- --------- --------- --------- ------------ -------- --------- --------
<S> <C> <C> <C> <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% 0.80% 0.80% 0.80% 0.80% 0.80% 0.80%
0.54% 0.49% 0.43% 0.75% 0.75% 0.75% 0.60% 0.69% 0.70% 0.80% 0.78%
-- -- -- -- -- -- -- -- -- -- --
0.10% 0.09% 0.14% 0.10%(5) 0.16%(5) 0.26%(5) 0.18% 0.17% 0.19% 0.33%(6) 0.04%(6)
0.64% 0.58% 0.57% 0.85%(5) 0.91%(5) 1.01%(5) 0.78% 0.86% 0.89% 1.13%(7) 0.82%(7)
-- -- -- -- -- -- -- -- -- -- --
0.64% 0.58% 0.57% 0.85%(5) 0.91%(5) 1.01%(5) 0.78% 0.86% 0.89% 1.13% 0.82%
</TABLE>
- ------------------------------
(4) A portion of the brokerage commissions that certain funds pay was used to
reduce funds expenses. In addition, certain funds, or Fidelity Management &
Research on behalf of certain funds, have entered into arrangements with
their custodian whereby credits realized as a result of uninvested cash
balances were used to reduce custodian expenses. Including these reductions,
the total operating expenses presented in the table would have been 0.63%
for the VIP II Asset Manager Portfolio and 0.57% for the VIP Equity-Income
Portfolio.
(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. Each series may enter into
other such arrangements and directed brokerage arrangements, which would
also have the effect of reducing the series' expenses. Expenses do not take
into account these expense reductions, and are therefore higher than the
actual expenses of the series.
(6) Other Expenses are shown gross of expense offsets afforded the Portfolios
which effectively lowered overall custody expenses.
(7) Total Portfolio Expenses for the Managed Portfolio are limited by OpCap
Advisors so that the respective annualized operating expenses (net of any
expense offsets) do not exceed 1.00% of average daily net assets. Total
Portfolio Expenses (net of any expense offsets) for the Global Equity
Portfolio are limited to 1.25% of average daily net assets.
23
<PAGE>
SURRENDER CHARGES
A generally declining 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 2 by
subtracting "Surrender Value" from "Total Accumulation
Value" on any chosen set of investment return assumptions.
The surrender charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of face
amount, it is higher for older than for younger issue ages.
For example, assuming issue ages 80 (the oldest possible
issue ages for a Policy), the first year surrender charge is
$37.40 per $1000 of face amount. At issue ages 65 it is
$25.10 per $1000 of face amount, at issue ages 55 it is
$13.68 per $1000 of face amount, and at issue ages 25 it is
$2.87 per $1000 of face amount. These calculations assume
both insureds are the same age. The surrender charge cannot
exceed Policy value but may equal Policy value, especially
during the first two Policy Years. All surrender charges
decline to zero over the 15 years following issuance of the
Policy. See, for example, the illustrations in Appendix 2
for issue ages 55 and 65.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. Lincoln Life may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 (not to exceed 2% of the amount
surrendered) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken.
Any surrenders, full or partial, 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.
24
<PAGE>
DEATH BENEFITS
The Death Benefit Proceeds is the amount payable to the
Beneficiary upon the Second Death (the death of the second
of the two Insureds to die), in accordance with the Death
Benefit Option elected. Loans (if any) and overdue
deductions are deducted from the Death Benefit Proceeds
prior to payment.
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $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 Death Benefit Proceeds payable under the Policy
is the greater of (a) the Corridor Death Benefit or (b) the
amount determined under the Death Benefit Option in effect
on the date of the Second Death, less (in each case) any
indebtedness under the Policy. In the case of Death Benefit
Option 1, the Specified Amount is reduced by the amount of
any partial surrender. The "Corridor Death Benefit" is the
applicable percentage (the "Corridor Percentage") of the
Accumulation Value (rather than by reference to the
Specified Amount) required to maintain the Policy as a "life
insurance contract" for Federal income tax purposes. The
Corridor Percentage is 250% through the time the younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table in Appendix I 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 date 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.
25
<PAGE>
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.
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. A table of
Corridor Percentages is in Appendix I.
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
26
<PAGE>
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 Separate Account values
cannot be determined.
SETTLEMENT OPTIONS
There are several ways in which the Beneficiary may receive
the Death Benefit Proceeds, or in which the Owner may choose
to receive payments upon surrender of the Policy.
The Owner may elect 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.
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. The Loan Account is the
account in which Policy indebtedness (outstanding Loans and
interest) accrues once it
27
<PAGE>
is transferred out of the Fixed Account or Sub-Accounts.
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.
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 the Fixed Account and each 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.
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
You may make a partial surrender 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.
28
<PAGE>
The effect of partial surrenders on the Death Benefit
Proceeds depends on the Death Benefit Option elected under
the Policy. If Death Benefit Option 1 has been elected, a
partial surrender would reduce the Accumulation Value and
the Specified Amount. The reduction in the Specified Amount,
which would reduce any past increases on a last in, first
out basis, reduces the amount of the Death Benefit Proceeds.
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at the time
of the surrender, unless Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. 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 Appendix 2.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
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.
29
<PAGE>
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, 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 is not paid to
Lincoln Life on or before the day that is the later of (a)
31 days after the date of mailing of the notice, and (b) 61
days after the date of the Monthly Anniversary Day with
respect to which such notice was sent (together, the "Grace
Period"), then the policy shall terminate and all coverage
under the policy shall lapse without value. 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
(Note: the No Lapse provision is not available in IL, MA,
MD, NJ and TX.)
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 (the cumulative premium required to have been
paid by each Monthly Anniversary Day, 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 you fail to
meet the premium requirements, if there is an increase in
Specified Amount or if you change the Death Benefit Option.
Once the No Lapse Provision terminates, it cannot be
reinstated.
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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, it may be reinstated provided (a) it has not been
surrendered, (b) there is an application for reinstatement
in proper written form, (c) evidence of insurability of 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.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
approval. The Accumulation Value at reinstatement will be
the Net Premium Payment then made less all Monthly
Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LINCOLN LIFE
PROPER WRITTEN FORM
Whenever this Prospectus refers to a communication "in
proper written form," it means in 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.
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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 Separate
Account. The exchange must be elected within 24 months from
the Date of Issue. No evidence of insurability will be
required.
The Owner, the Insureds 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 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;
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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.
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
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<PAGE>
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 Separate
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 Sub-Account must meet certain tests.
Lincoln Life believes the Separate 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
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 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 Separate 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
Separate Account. Based upon these expectations, no charge
is currently being made against the Separate 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 Separate 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
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<PAGE>
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 sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her advisors for guidance as to the appropriate
methodology for determining the fair value of the Policy for
a particular purpose.
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. Except as indicated below, the address of each is 1300
South Clinton Street, Fort Wayne, Indiana 46802 and each has
been employed by Lincoln Life or its affiliates for more
than five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ----------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present], (formerly Second Vice
VICE PRESIDENT 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, Chief Executive Officer and Director,
DIRECTOR Lincoln National Corp. [1/98-present] (Formerly:
200 East Berry Street President and Chief Executive Officer [10/96-1/98]
Fort Wayne, Ind. 46802 and Chief Operating Officer [5/94-10/96]), Lincoln
National Life Insurance Co.; President [7/91-5/94]
Lincoln Investment Management, Inc.
JOHN GOTTA Senior Vice President and General Manager (formerly
SENIOR VICE PRESIDENT AND Vice President) [1/98-present] Lincoln National Life
ASSISTANT SECRETARY Insurance Co. Formerly: Senior Vice President,
350 Church Street Connecticut General Life Insurance Company
Hartford, Ct. 06103 [3/96-12/97]; Vice President, Connecticut Mutual
Life Insurance Company [8/94-3/96]; Vice President,
CIGNA [3/93-8/94]
J. MICHAEL HEMP President [11/96-Present], Lincoln Financial
SENIOR VICE PRESIDENT Advisors Corp.; Senior Vice President (formerly Vice
350 Church Street President) [10/95-Present], Lincoln National Life
Hartford, Ct. 06103 Insurance Co. Formerly: Regional Chief Executive
Officer [11/79-10/95], Lincoln Dallas RMO.
STEPHEN H. LEWIS Senior Vice President, [5/94-present] Lincoln
SENIOR VICE PRESIDENT National Life Insurance Co. Formerly: President
[2/85-5/94], First Penn-Pacific Life Insurance Co.
H. THOMAS MCMEEKIN President [5/94-present], Lincoln Investment
DIRECTOR Management, Inc.; Executive Vice President
200 East Berry Street [5/94-Present], Lincoln National Corporation
Fort Wayne, Ind. 46802 (formerly Senior Vice President [11/92-5/94])
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ----------------------------------------------------
<S> <C>
ARTHUR S. ROSS Vice President, Lincoln National Life Insurance Co.
VICE PRESIDENT
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] (formerly
EXECUTIVE VICE PRESIDENT AND Senior Vice President [1/93-10/96]), Lincoln
DIRECTOR National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
KEITH J. RYAN Vice President and Controller [4/99-present]
VICE PRESIDENT AND CONTROLLER Formerly: Senior Vice President [2/98-4/99]; Vice
President, Chief Financial Officer and Assistant
Treasurer [1/96-present]; Controller [6/95-12/95],
Business Controls Director [11/90-6/95], Lincoln
National Life Insurance Company
GABRIEL L. SHAHEEN President and Chief Executive Officer
PRESIDENT, CHIEF EXECUTIVE [1/98-present], Lincoln National Life Insurance Co.
OFFICER AND DIRECTOR Formerly: Chairman and Managing 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]
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and
SENIOR VICE PRESIDENT, CHIEF Assistant Treasurer [4/99-present] Formerly: Vice
FINANCIAL OFFICER AND ASSISTANT President and Assistant Secretary [1/98-4/99],
TREASURER Senior Vice President, Lincoln Financial Advisors
Corporation [1/98-4/99], Senior Vice President,
Treasurer and Chief Financial Officer, American
States Insurance Company [2/95-12/97], and Vice
President - Corp. Acct., American States Insurance
Company [5/92-2/95]
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer
DIRECTOR [1/95-present] (formerly Senior Vice President
200 East Berry Street [4/92-1/95]), Lincoln National Corp.
Fort Wayne, Ind. 46802
MICHAEL R. WALKER Vice President [1/96-present], Lincoln National Life
VICE PRESIDENT Insurance Co. Formerly: Vice President [3/93-1/96],
Employers Health Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present], Lincoln National Life
VICE PRESIDENT 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>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, also 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, Indiana
46802.
The Policy may be sold by individuals, who in addition to
being appointed as life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Life or other
broker-dealers. These representatives ordinarily receive
commission and service
36
<PAGE>
fees up to 60% of the first year premium, plus up to 5% of
all other premiums paid. The selling office receives
additional compensation on the first year premium and all
additional premiums. In some situations, the selling office
may elect to share its commission with the registered
representative. Selling representatives are also eligible
for bonuses and non-cash compensation if certain production
levels are reached. All compensation is paid from Lincoln
Life's resources, which include sales charges made under
this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life must inform the Owners
and obtain all necessary regulatory approvals. Any change
must be submitted to the various state insurance departments
which shall disapprove it if deemed detrimental to the
interests of the Owners or if it renders Lincoln Life's
operations hazardous to the public. If an Owner objects, the
Policy may be converted to a substantially comparable fixed
benefit life insurance policy offered by Lincoln Life on the
life of the Insureds. 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 Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
37
<PAGE>
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
We are also ranked and rated by independent financial rating
services, including Moody's, Standard & Poor's, Duff &
Phelps and A.M. Best Company. The purpose of these ratings
is to reflect our financial strength or claims-paying
ability. The ratings are not intended to reflect the
investment experience or financial strength of the Variable
Account. We may advertise these ratings from time to time.
In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations,
individuals or other parties which recommend Lincoln Life or
the Policies. Furthermore, we may occasionally include in
advertisements comparisons of currently taxable and tax
deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the
date field to identify the year. If left uncorrected these
programs, which were designed and developed without
considering the impact of the upcoming change in the
century, could fail to operate or could produce erroneous
results when processing dates after December 31, 1999. For
example, a bond with a stated maturity date of July 1, 2000,
a computer program could read and store the maturity date as
July 1, 1900. This problem is known by many names, such as
the "Year 2000 Problem", "Y2K" and the "Millenium Bug."
The Year 2000 Problem affects virtually all computer
programs worldwide. It can cause a computer system to
suddenly stop operating. It can also result in a computer
corrupting vital company records, and the program could go
undetected for a long time. For our products, if left
unchecked it could cause such problems as purchase payment,
collection and deposit errors; claim payment difficulties;
accounting errors; erroneous unit values; and difficulties
or delays in processing transfers, surrenders and
withdrawals. In a worst case scenario, this could result in
a material disruption to the operations both of Lincoln Life
and of Delaware Service Company Inc. (Delaware), the
provider of the accounting and valuation services for the
Separate Account.
However, both companies are wholly owned by Lincoln National
Corporation (LNC), which has had Year 2000 processes in
place since 1996. LNC projects aggregate expenditures in
excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year
2000 teams and steering committees that are answerable to
their counterparts in LNC.
In light of the potential problems discussed above, Lincoln
Life, as part of its Year 2000 updating process, has assumed
responsibility for correcting all high-priority Information
38
<PAGE>
Technology (IT) systems which service the Separate Account.
Delaware is responsible for updating all its high-priority
IT systems to support these vital services. The Year 2000
effort, for both IT and non-IT systems, is organized into
four phases:
- awareness-raising and inventory of all assets (including
third-party agent and vendor relationships;
- assessment and high-level planning and strategy;
- remediation of affected systems and equipment; and
- testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their
high-priority IT systems remediated and tested to
demonstrate readiness by June 30, 1999. During the third and
fourth quarters of 1999 additional testing of the
environment will continue. Both companies are currently on
schedule to have their high-priority non-IT systems
(elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant
delays; however, some uncertainty remains. Specific factors
that give rise to this uncertainty include (but are
certainly not limited to) a possible loss of technical
resources to perform the work; failure to identify all
susceptible systems; and non-compliance by third parties
whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled INVESTIGATING THE
IMPACT OF THE YEAR 2000 TECHNOLOGY PROBLEM, S. Rpt. 106-10,
the U.S. Senate Special Committee on the Year 2000
Technology Problem expressed its concern that "Financial
services firms ... are particularly vulnerable to ... the
risk that a material customer or business partner will fail,
as a result of the computer problems, to meet its
obligations."
One important source of uncertainty is the extent to which
the key trading partners of Lincoln Life and of Delaware
will be successful in their own remediation and testing
efforts. Lincoln Life and Delaware have been monitoring the
progress of their trading partners; however, the efforts of
these partners are beyond our control.
Lincoln Life and Delaware expect to have completed their
necessary remediation and testing efforts prior to December
31, 1999. However, given the nature and complexity of the
problem, there can be no guarantee by either company that
there will not be significant computer problems after
December 31, 1999.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for equitable relief.
After consultation with legal counsel and a review of
available facts, it is management's opinion that the
ultimate liability, if any, under these suits will not have
a material adverse effect on the financial position of
Lincoln Life.
Lincoln Life is presently defending three lawsuits in which
Plaintiffs seek to represent national classes of
policyholders in connection with alleged fraud, breach of
contract and other claims relating to the sale of
interest-sensitive universal and participating whole life
insurance policies. As of the date of this prospectus, the
courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. Although the
relief sought in these cases is substantial, the cases are
in the preliminary stages of litigation, and it is premature
to make assessments about potential loss, if any. Management
is defending these suits vigorously. The amount of
liability, if any, which may ultimately arise as a result of
these suits cannot be reasonably determined at this time.
39
<PAGE>
EXPERTS
The financial statements of the Separate Account and the
statutory-basis financial statements of Lincoln Life
appearing in this prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports which also appear elsewhere in
this document and in the Registration Statement. The
financial statements audited by Ernst & Young LLP have been
included in this document in reliance on their reports given
on their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been
examined by Vaughn W. Robbins, FSA as stated in the Opinion
filed as an Exhibit to the Registration Statement.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
as stated in the Opinion filed as an Exhibit to the
Registration Statement.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Separate Account, Lincoln Life, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
40
<PAGE>
APPENDIX 1
CORRIDOR PERCENTAGES
<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
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>
41
<PAGE>
APPENDIX 2
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 show 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 charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. In addition, the
amounts shown also reflect the deduction of Fund investment
advisory fees and other expenses which will vary depending
on which funding vehicle is chosen but which are assumed for
purposes of these illustrations to be equivalent to an
annual effective rate of 0.80% of the daily net asset value
of the Separate Account. This rate reflects an arithmetic
average of total Fund portfolio annual expenses for the year
ending December 31, 1998.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.60%, 4.40%, and 10.40% on a current basis, -1.70%, 4.30%
and 10.30% on a guaranteed basis.
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, and are
shown in the illustrations.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is a flat dollar charge of $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.
42
<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>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <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 0 13,676
2 29,560 1,000,000 1,000,000 1,000,000 21,939 24,047 26,240 8,673 10,780 12,974 13,266
3 45,458 1,000,000 1,000,000 1,000,000 32,375 36,577 41,125 19,621 23,823 28,372 12,753
4 62,150 1,000,000 1,000,000 1,000,000 42,413 49,415 57,301 30,207 37,209 45,094 12,206
5 79,678 1,000,000 1,000,000 1,000,000 52,029 62,544 74,867 40,301 50,816 63,140 11,728
6 98,081 1,000,000 1,000,000 1,000,000 61,188 75,936 93,933 50,076 64,823 82,821 11,112
7 117,405 1,000,000 1,000,000 1,000,000 69,846 89,552 114,605 59,968 79,675 104,728 9,877
8 137,695 1,000,000 1,000,000 1,000,000 77,940 103,338 136,992 69,297 94,695 128,349 8,643
9 158,999 1,000,000 1,000,000 1,000,000 85,386 117,214 161,197 77,978 109,806 153,789 7,408
10 181,369 1,000,000 1,000,000 1,000,000 92,090 131,089 187,331 85,917 124,916 181,158 6,173
11 204,857 1,000,000 1,000,000 1,000,000 97,950 144,864 215,525 93,011 139,926 210,586 4,939
12 229,519 1,000,000 1,000,000 1,000,000 102,861 158,437 245,935 99,157 154,733 242,231 3,704
13 255,415 1,000,000 1,000,000 1,000,000 106,717 171,702 278,752 104,247 169,233 276,283 2,469
14 282,605 1,000,000 1,000,000 1,000,000 109,414 184,559 314,214 108,179 183,324 312,980 1,235
15 311,155 1,000,000 1,000,000 1,000,000 110,809 196,869 352,582 110,809 196,869 352,582 0
20 476,799 1,000,000 1,000,000 1,000,000 88,056 240,688 599,423 88,056 240,688 599,423 0
25 688,208 0 1,000,000 1,062,815 0 214,564 1,012,205 0 214,564 1,012,205 0
30 958,025 0 0 1,785,419 0 0 1,700,399 0 0 1,700,399 0
</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. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
43
<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>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <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 0 13,676
2 29,560 1,000,000 1,000,000 1,000,000 22,296 24,420 26,631 9,029 11,154 13,365 13,266
3 45,458 1,000,000 1,000,000 1,000,000 33,185 37,443 42,050 20,432 24,690 29,297 12,753
4 62,150 1,000,000 1,000,000 1,000,000 43,871 51,004 59,029 31,665 38,798 46,823 12,206
5 79,678 1,000,000 1,000,000 1,000,000 54,355 65,123 77,725 42,627 53,395 65,998 11,728
6 98,081 1,000,000 1,000,000 1,000,000 64,634 79,820 98,313 53,521 68,707 87,201 11,112
7 117,405 1,000,000 1,000,000 1,000,000 74,706 95,116 120,983 64,829 85,238 111,105 9,877
8 137,695 1,000,000 1,000,000 1,000,000 84,572 111,033 145,948 75,929 102,390 137,305 8,643
9 158,999 1,000,000 1,000,000 1,000,000 94,227 127,593 173,441 86,819 120,185 166,033 7,408
10 181,369 1,000,000 1,000,000 1,000,000 103,670 144,821 203,721 97,497 138,647 197,548 6,173
11 204,857 1,000,000 1,000,000 1,000,000 112,897 162,739 237,074 107,958 157,800 232,135 4,939
12 229,519 1,000,000 1,000,000 1,000,000 121,830 181,301 273,750 118,126 177,597 270,046 3,704
13 255,415 1,000,000 1,000,000 1,000,000 130,435 200,504 314,073 127,966 198,035 311,604 2,469
14 282,605 1,000,000 1,000,000 1,000,000 138,643 220,310 358,377 137,408 219,076 357,142 1,235
15 311,155 1,000,000 1,000,000 1,000,000 146,421 240,719 407,074 146,421 240,719 407,074 0
20 476,799 1,000,000 1,000,000 1,000,000 175,200 349,763 733,888 175,200 349,763 733,888 0
25 688,208 1,000,000 1,000,000 1,342,171 180,350 471,348 1,278,258 180,350 471,348 1,278,258 0
30 958,025 1,000,000 1,000,000 2,268,824 121,260 590,068 2,160,785 121,260 590,068 2,160,785 0
</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 amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Fund
Expenses" at page 22 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
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- ----------- ----------- ----------- -------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 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 66,542
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
11 323,030 1,000,000 1,000,000 1,000,000 109,380 178,561 285,774 100,560 169,741 276,954
12 361,920 1,000,000 1,000,000 1,000,000 102,868 183,925 316,483 96,253 177,310 309,868
13 402,753 1,000,000 1,000,000 1,000,000 91,432 185,138 347,414 87,022 180,728 343,004
14 445,629 1,000,000 1,000,000 1,000,000 74,328 181,399 378,557 72,123 179,194 376,352
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 1,267,962 0 0 1,255,408 0 0 1,255,408
<CAPTION>
END OF
POLICY SURRENDER
YEAR CHARGE
- ------ ---------
<S> <C>
1 25,098
2 24,060
3 22,991
4 21,953
5 20,883
6 19,845
7 17,640
8 15,435
9 13,230
10 11,025
11 8,820
12 6,615
13 4,410
14 2,205
15 0
20 0
25 0
30 0
</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. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.80% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
45
<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
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- ----------- ----------- ----------- -------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 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 84,047 104,366
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
11 323,030 1,000,000 1,000,000 1,000,000 177,392 257,426 377,135 168,572 248,606 368,315
12 361,920 1,000,000 1,000,000 1,000,000 190,115 285,585 434,552 183,500 278,970 427,936
13 402,753 1,000,000 1,000,000 1,000,000 201,721 314,218 497,448 197,310 309,808 493,038
14 445,629 1,000,000 1,000,000 1,000,000 211,846 343,069 566,331 209,641 340,864 564,126
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
<CAPTION>
END OF
POLICY SURRENDER
YEAR CHARGE
- ------ ---------
<S> <C>
1 25,098
2 24,060
3 22,991
4 21,953
5 20,883
6 19,845
7 17,640
8 15,435
9 13,230
10 11,025
11 8,820
12 6,615
13 4,410
14 2,205
15 0
20 0
25 0
30 0
</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 amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.80% per year. See "Fund
Expenses" at page 22 of this Prospectus.
46
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
R-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ 5,720,395 $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 7,113,832 305,543 370,274
- --------------------------- ----------- ------------- ------------
TOTAL ASSETS 12,834,227 305,543 370,274
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 387 14 25
- --------------------------- ----------- ------------- ------------
NET ASSETS $12,833,840 $305,529 $370,249
- --------------------------- ----------- ------------- ------------
----------- ------------- ------------
Percent of net assets 100.00% 2.38% 2.88%
- --------------------------- ----------- ------------- ------------
----------- ------------- ------------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 27,777 37,234
Unit value $ 10.999 $ 9.944
- --------------------------- ------------- ------------
NET ASSETS $305,529 $370,249
- --------------------------- ------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ 4,916,440 $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 768,182 -- 522,208
- --------------------------- ----------- ----------- ---------
TOTAL ASSETS 768,182 4,916,440 522,208
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 34 117 11
- --------------------------- ----------- ----------- ---------
NET ASSETS $768,148 $ 4,916,323 $ 522,197
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
Percent of net assets 5.98% 38.31% 4.07%
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 73,335 480,881 45,653
Unit value $ 10.475 $ 10.224 $ 11.438
- --------------------------- ----------- ----------- ---------
NET ASSETS $768,148 $ 4,916,323 $ 522,197
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes.
R-2
<PAGE>
<TABLE>
<CAPTION>
BANKER'S DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM TRUST PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. EQUITY SMALL CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ -- $ -- $ 292,561 $ 376,950 $ 134,444 $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 594,132 681,318 1,417,339 -- -- -- 667,530 237,134
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 594,132 681,318 1,417,339 292,561 376,950 134,444 667,530 237,134
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 13 15 31 12 8 9 15 15
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 594,119 $ 681,303 $1,417,308 $ 292,549 $ 376,942 $ 134,435 $ 667,515 $ 237,119
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Percent of net assets 4.63% 5.31% 11.04% 2.28% 2.94% 1.05% 5.20% 1.85%
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 51,058 58,567 127,426 30,132 34,193 17,590 65,221 22,332
Unit value $ 11.636 $ 11.633 $ 11.123 $ 9.709 $ 11.024 $ 7.643 $ 10.235 $ 10.618
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 594,119 $ 681,303 $1,417,308 $ 292,549 $ 376,942 $ 134,435 $ 667,515 $ 237,119
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 140,181 220,260 148,383 101,787 100,262 802,232 37,067
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 140,181 220,260 148,383 101,787 100,262 802,232 37,067
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 3 14 6 7 19 17 2
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Percent of net assets 1.09% 1.72% 1.16% 0.79% 0.78% 6.25% 0.29%
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 13,495 20,411 15,148 10,412 10,158 83,612 4,003
Unit value $ 10.387 $ 10.791 $ 9.795 $ 9.775 $ 9.868 $ 9.595 $ 9.258
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
R-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- -------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ 59,265 $ 405 $12,573
Dividends from net
realized gains on
investments 89,117 7,166 4,012
Mortality and expense
guarantees (15,398) (506) (443)
- --------------------------- -------- ------------- ------------
NET INVESTMENT INCOME 132,984 7,065 16,142
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 20,588 1,131 5
Net change in unrealized
appreciation or
depreciation on
investments 647,779 44,813 (11,427)
- --------------------------- -------- ------------- ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 668,367 45,944 (11,422)
- --------------------------- -------- ------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $801,351 $53,009 $ 4,720
- --------------------------- -------- ------------- ------------
-------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ----------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $37,695 $ --
Dividends from net
realized gains on
investments -- -- --
Mortality and expense
guarantees (856) (6,329) (599)
- --------------------------- ----------- --------- ---------
NET INVESTMENT INCOME (856) 31,366 (599)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 259 -- 5,876
Net change in unrealized
appreciation or
depreciation on
investments 6,838 -- 99,056
- --------------------------- ----------- --------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 7,097 -- 104,932
- --------------------------- ----------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $6,241 $31,366 $ 104,333
- --------------------------- ----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes.
R-4
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ 1,681 $ 2,872 $ 2,407 $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments 31,515 25,401 15,403 -- -- -- -- --
Mortality and expense
guarantees (837) (993) (1,229) (396) (258) (250) (643) (217)
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET INVESTMENT INCOME 32,359 27,280 16,581 (396) (258) (250) (643) (217)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
Net change in unrealized
appreciation or
depreciation on
investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 82,320 86,472 109,383 38,797 30,518 7,137 54,300 9,328
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 114,679 $ 113,752 $125,964 $38,401 $30,260 $6,887 $ 53,657 $9,111
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
---------- ---------- ------------- ---------- --------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 1,632 $ 0 $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- 5,620 -- -- -- --
Mortality and expense
guarantees (200) (314) (267) (122) (166) (703) (70)
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET INVESTMENT INCOME (200) (314) 6,985 (122) (166) (703) (70)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 103 43 280 32 120 402 124
Net change in unrealized
appreciation or
depreciation on
investments 6,369 11,452 13,659 4,507 11,550 53,289 1,631
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 6,472 11,495 13,939 4,539 11,670 53,691 1,755
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 6,272 $ 11,181 $20,924 $4,417 $11,504 $52,988 $1,685
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
------- -------- ------------- ------ ---------- ------- ----------
</TABLE>
R-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 132,984 $ 7,065 $ 16,142
Net realized gain (loss) on
investments 20,588 1,131 5
Net change in unrealized appreciation
or depreciation on investments 647,779 44,813 (11,427)
- --------------------------------------- ----------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 801,351 53,009 4,720
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 16,601,606 274,025 388,335
Participant withdrawals (4,569,117) (21,505) (22,806)
- --------------------------------------- ----------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 12,032,489 252,520 365,529
- --------------------------------------- ----------- ------------- ------------
TOTAL INCREASE IN NET ASSETS 12,833,840 305,529 370,249
- --------------------------------------- ----------- ------------- ------------
NET ASSETS AT DECEMBER 31, 1998 $12,833,840 $305,529 $370,249
- --------------------------------------- ----------- ------------- ------------
----------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (856) $ 31,366 $ (599)
Net realized gain (loss) on
investments 259 -- 5,876
Net change in unrealized appreciation
or depreciation on investments 6,838 -- 99,056
- --------------------------------------- ----------- ----------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,241 31,366 104,333
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 797,504 9,020,245 449,620
Participant withdrawals (35,597) (4,135,288) (31,756)
- --------------------------------------- ----------- ----------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 761,907 4,884,957 417,864
- --------------------------------------- ----------- ----------- ---------
TOTAL INCREASE IN NET ASSETS 768,148 4,916,323 522,197
- --------------------------------------- ----------- ----------- ---------
NET ASSETS AT DECEMBER 31, 1998 $768,148 $ 4,916,323 $ 522,197
- --------------------------------------- ----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes.
R-6
<PAGE>
<TABLE>
<CAPTION>
DELAWARE
BANKER'S PREMIUM DELAWARE FIDELITY FIDELITY
AIM AIM TRUST SMALL DELAWARE PREMIUM VIP VIP II
V.I. V.I. EQUITY CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 32,359 $ 27,280 $ 16,581 $ (396) $ (258) $ (250) $ (643) $ (217)
Net realized gain (loss) on
investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
Net change in unrealized appreciation
or depreciation on investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 114,679 113,752 125,964 38,401 30,260 6,887 53,657 9,111
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 530,958 615,727 1,356,215 270,284 359,010 139,569 647,390 234,377
Participant withdrawals (51,518) (48,176) (64,871) (16,136) (12,328) (12,021) (33,532) (6,369)
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 479,440 567,551 1,291,344 254,148 346,682 127,548 613,858 228,008
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
TOTAL INCREASE IN NET ASSETS 594,119 681,303 1,417,308 292,549 376,942 134,435 667,515 237,119
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET ASSETS AT DECEMBER 31, 1998 $594,119 $681,303 $1,417,308 $292,549 $376,942 $134,435 $667,515 $237,119
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
-------- -------- ---------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND
<S> <C> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (200) $ (314) $ 6,985 $ (122) $ (166) $ (703)
Net realized gain (loss) on
investments 103 43 280 32 120 402
Net change in unrealized appreciation
or depreciation on investments 6,369 11,452 13,659 4,507 11,550 53,289
- --------------------------------------- -------- -------- ------------- ------------- ------------- --------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,272 11,181 20,924 4,417 11,504 52,988
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 142,732 220,459 140,963 104,839 90,655 779,469
Participant withdrawals (8,826) (11,394) (13,510) (7,476) (1,916) (30,242)
- --------------------------------------- -------- -------- ------------- ------------- ------------- --------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 133,906 209,065 127,453 97,363 88,739 749,227
- --------------------------------------- -------- -------- ------------- ------------- ------------- --------------
TOTAL INCREASE IN NET ASSETS 140,178 220,246 148,377 101,780 100,243 802,215
- --------------------------------------- -------- -------- ------------- ------------- ------------- --------------
NET ASSETS AT DECEMBER 31, 1998 $140,178 $220,246 $148,377 $101,780 $100,243 $802,215
- --------------------------------------- -------- -------- ------------- ------------- ------------- --------------
-------- -------- ------------- ------------- ------------- --------------
<CAPTION>
TEMPLETON
VARIABLE
PRODUCTS
STOCK
FUND
<S> <C>
- ---------------------------------------
Changes From Operations:
Net investment income (loss) $ (70)
Net realized gain (loss) on
investments 124
Net change in unrealized appreciation
or depreciation on investments 1,631
- --------------------------------------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 1,685
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 39,230
Participant withdrawals (3,850)
- --------------------------------------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 35,380
- --------------------------------------- --------
TOTAL INCREASE IN NET ASSETS 37,065
- --------------------------------------- --------
NET ASSETS AT DECEMBER 31, 1998 $37,065
- --------------------------------------- --------
--------
</TABLE>
R-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT
Lincoln Life Flexible Premium Variable Life Account R (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance
Company (Lincoln Life) and is registered as a unit investment trust with the
Securities and Exchange Commission under the Investment Company Act of 1940,
as amended. The operations of the Variable Account, which commenced on June
18, 1998, are part of the operations of Lincoln Life.
The assets of the Variable Account are owned by Lincoln Life. The portion of
the Variable Account's assets supporting the variable life policies may not
be used to satisfy liabilities arising out of any other business of Lincoln
Life.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
The assets of the Variable Account are divided into variable sub-accounts
each of which is invested in shares of one of twenty portfolios of eight
diversified open-end management investment companies, each portfolio with
its own investment objective. The variable sub-accounts 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
Banker's Trust:
Banker's Trust Equity 500 Index Fund
Delaware Group:
Delaware Premium Small Cap Value Series
Delaware Premium Trend Series
Delaware Premium Emerging Markets Series
Fidelity Variable Insurance Products Fund:
Fidelity VIP Equity -- Income Portfolio
Fidelity Variable Insurance Products Fund II:
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Investment Grade Bond Portfolio
Lincoln National:
Lincoln National Money Market Account
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Templeton Variable Product Series Fund:
Templeton Variable Product Asset Allocation Fund
Templeton Variable Product International Fund
Templeton Variable Product Stock Fund
Investments in the variable sub-accounts are stated at the closing net asset
value per share on December 31, 1998, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. The cost of
investments sold is determined by the average cost method.
DIVIDENDS
Dividends paid to the Variable Account are automatically reinvested in
shares of the variable sub-accounts on the payable date. Dividend income is
recorded on the ex-dividend date.
FEDERAL INCOME TAXES
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a "life insurance company"
under the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue
Code. Using current federal income tax law, no federal income taxes are
payable with respect to the Variable Account's net investment income and the
net realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The
current rate of deduction, stated as an annual percentage, is .80%. The
mortality and expense risk charges for each of the variable sub-accounts are
reported in the statement of operations.
R-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load of 8% of each premium payment to cover state taxes
and federal income tax liabilities.
Lincoln Life charges a monthly administrative fee of $12.50 in the first
policy year and $5 in subsequent policy years. In addition, there is a
monthly charge of $0.09 per $1,000 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 charge of $0.01 per $1,000 of specified amount. This charge is for
items such as premium billing and collection, policy value calculation,
confirmations and periodic reports.
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the cost
of insurance and any charges for supplemental riders. The cost of insurance
charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
sub-account and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee for transfers between variable sub-accounts. For the period
ended December 31, 1998, no transfer fees were deducted from the variable
sub-accounts.
R-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
The fees charged by Lincoln Life for premium loads (deducted from premium
payments), administrative fees and the amount deducted for the cost of
insurance, both of which are included in participant withdrawals in the
statement of changes in net assets, for variable sub-accounts for the period
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF
PREMIUM ADMINISTRATIVE INSURANCE
VARIABLE SUB-ACCOUNTS LOADS FEES DEDUCTION
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund $ 16,862 $ 4,282 $ 235
-------------------------------------------------------------
AIM V.I. Diversified Income Fund 19,888 2,480 436
-------------------------------------------------------------
AIM V.I. Growth Fund 32,035 13,223 878
-------------------------------------------------------------
AIM V.I. Value Fund 37,485 9,642 1,025
-------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 47,031 14,143 563
-------------------------------------------------------------
Delaware Premium Small Cap Value Series 12,748 3,180 208
-------------------------------------------------------------
Delaware Premium Trend Series 10,213 1,826 288
-------------------------------------------------------------
Delaware Premium Emerging Markets Series 10,693 1,316 12
-------------------------------------------------------------
Fidelity VIP Equity -- Income Portfolio 25,421 7,784 327
-------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 4,818 1,513 37
-------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 28,547 6,535 507
-------------------------------------------------------------
Lincoln National Money Market Account 561,505 98,229 11,472
-------------------------------------------------------------
MFS Emerging Growth Series 24,535 6,409 802
-------------------------------------------------------------
MFS Total Return Series 3,858 2,869 606
-------------------------------------------------------------
MFS Utilities Series 9,139 1,912 331
-------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 9,893 3,433 123
-------------------------------------------------------------
OCC Accumulation Managed Portfolio 5,018 2,112 334
-------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 80 1,304 532
-------------------------------------------------------------
Templeton Variable Products International Fund 24,224 5,619 302
-------------------------------------------------------------
Templeton Variable Products Stock Fund 2,642 1,045 100
-------------------------------------------------------------
</TABLE>
Lincoln Life, upon full surrender of a policy, may charge a surrender
charge. This charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The amount of the
surrender charge, if any, will depend on the face amount of the policy and
the issue age of the policy. In no event will the surrender charge exceed
the maximum allowed by state or federal law. No surrender charge is imposed
on a partial surrender, but an administrative fee of $25 is imposed,
allocated pro-rata among the variable sub-accounts (and, where applicable,
the fixed account) from which the partial surrender proceeds are taken. For
the period ended December 31, 1998, no surrender charges and partial
surrender administrative charges were paid to Lincoln Life, attributable to
the variable sub-accounts.
R-10
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
R-11
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. NET ASSETS
The following is a summary of net assets owned at December
31, 1998.
<TABLE>
<CAPTION>
AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $12,032,489 $252,520 $365,529
- ---------------------------------------
Accumulated net investment income 132,984 7,065 16,142
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 20,588 1,131 5
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 647,779 44,813 (11,427)
- --------------------------------------- ----------- ------------- ------------
$12,833,840 $305,529 $370,249
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $761,907 $ 4,884,957 $ 417,864
- ---------------------------------------
Accumulated net investment income (856) 31,366 (599)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 259 -- 5,876
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 6,838 -- 99,056
- --------------------------------------- ----------- ----------- ---------
$768,148 $ 4,916,323 $ 522,197
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
R-12
<PAGE>
3. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
BANKER'S DELAWARE
TRUST PREMIUM DELAWARE FIDELITY FIDELITY
EQUITY SMALL DELAWARE PREMIUM VIP VIP II
AIM V.I. AIM V.I. 500 CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $479,440 $567,551 $1,291,344 $254,148 $346,682 $127,548 $613,858 $228,008
- ---------------------------------------
Accumulated net investment income 32,359 27,280 16,581 (396) (258) (250) (643) (217)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
$594,119 $681,303 $1,417,308 $292,549 $376,942 $134,435 $667,515 $237,119
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $ 133,906 $ 209,065 $ 127,453 $ 97,363 $ 88,739 $ 749,227 $ 35,380
- ---------------------------------------
Accumulated net investment income (200) (314) 6,985 (122) (166) (703) (70)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 103 43 280 32 120 402 124
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 6,369 11,452 13,659 4,507 11,550 53,289 1,631
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
R-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the
aggregate proceeds from investments sold were as follows for
1998.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
-----------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 279,683 $ 20,084
-------------------------------------------------------------------------
AIM V.I. Diversified Income Fund 382,801 1,105
-------------------------------------------------------------------------
AIM V.I. Growth Fund 529,779 17,967
-------------------------------------------------------------------------
AIM V.I. Value Fund 629,752 34,906
-------------------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 1,388,002 80,046
-------------------------------------------------------------------------
Delaware Premium Small Cap Value Series 256,824 3,060
-------------------------------------------------------------------------
Delaware Premium Trend Series 371,277 24,845
-------------------------------------------------------------------------
Delaware Premium Emerging Markets Series 128,327 1,020
-------------------------------------------------------------------------
Fidelity VIP Equity -- Income Portfolio 652,179 38,949
-------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 228,704 898
-------------------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 806,034 44,949
-------------------------------------------------------------------------
Lincoln National Money Market Account 7,334,359 2,417,919
-------------------------------------------------------------------------
MFS Emerging Growth Series 455,106 37,830
-------------------------------------------------------------------------
MFS Total Return Series 144,528 10,819
-------------------------------------------------------------------------
MFS Utilities Series 211,251 2,486
-------------------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 138,393 3,949
-------------------------------------------------------------------------
OCC Accumulation Managed Portfolio 109,896 12,648
-------------------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 90,538 1,946
-------------------------------------------------------------------------
Templeton Variable Products International Fund 756,392 7,851
-------------------------------------------------------------------------
Templeton Variable Products Stock Fund 53,502 18,190
------------------------------------------------------------------------- ----------- ----------
$14,947,327 $2,781,467
----------- ----------
----------- ----------
</TABLE>
R-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at December
31, 1998.
<TABLE>
<CAPTION>
SHARES NET ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 12,125 $ 25.20 $ 305,543 $ 260,730
---------------------------------------------
AIM V.I. Diversified Income Fund 33,846 10.94 370,274 381,701
---------------------------------------------
AIM V.I. Growth Fund 23,957 24.80 594,132 512,286
---------------------------------------------
AIM V.I. Value Fund 25,955 26.25 681,318 597,442
---------------------------------------------
Banker's Trust Equity 500 Index Fund 111,339 12.73 1,417,339 1,313,689
---------------------------------------------
Delaware Premium Small Cap Value Series 17,785 16.45 292,561 254,108
---------------------------------------------
Delaware Premium Trend Series 19,086 19.75 376,950 346,301
---------------------------------------------
Delaware Premium Emerging Markets Series 23,140 5.81 134,444 127,296
---------------------------------------------
Fidelity VIP Equity -- Income Portfolio 26,260 25.42 667,530 616,459
---------------------------------------------
Fidelity VIP II Asset Manager Portfolio 13,058 18.16 237,134 227,785
---------------------------------------------
Fidelity VIP II Investment Grade Bond
Portfolio 59,273 12.96 768,182 761,344
---------------------------------------------
Lincoln National Money Market Account 491,644 10.00 4,916,440 4,916,440
---------------------------------------------
MFS Emerging Growth Series 24,323 21.47 522,208 423,152
---------------------------------------------
MFS Total Return Series 7,736 18.12 140,181 133,812
---------------------------------------------
MFS Utilities Series 11,113 19.82 220,260 208,808
---------------------------------------------
OCC Accumulation Global Equity Portfolio 9,617 15.43 148,383 134,724
---------------------------------------------
OCC Accumulation Managed Portfolio 2,327 43.74 101,787 97,280
---------------------------------------------
Templeton Variable Products Asset Allocation
Fund 4,464 22.46 100,262 88,712
---------------------------------------------
Templeton Variable Products International Fund 38,774 20.69 802,232 748,943
---------------------------------------------
Templeton Variable Products Stock Fund 1,759 21.07 37,067 35,436
--------------------------------------------- ----------- -----------
$12,834,227 $12,186,448
----------- -----------
----------- -----------
</TABLE>
R-15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance
Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life
Account R
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
R ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. Value, Banker's Trust Equity 500 Index, Delaware Premium
Small Cap Value, Delaware Premium Trend, Delaware Premium
Emerging Markets, Fidelity VIP Equity-Income, Fidelity VIP II
Asset Manager, Fidelity VIP II Investment Grade Bond, Lincoln
National Money Market, MFS Emerging Growth, MFS Total Return,
MFS Utilities, OCC Accumulation Global Equity, OCC Accumulation
Managed, Templeton Variable Products Asset Allocation, Templeton
Variable Products International, and Templeton Variable Products
Stock subaccounts), as of December 31, 1998, and the related
statements of operations and changes in net assets for the
period from June 18, 1998 to December 31, 1998. These financial
statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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. Our
procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account R at December 31,
1998, and the results of their operations and the changes in
their net assets for the period from June 18, 1998 to December
31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 26, 1999
R-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</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, 1998, 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 ("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. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by 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 in which 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
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits 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 Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts 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.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items 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 repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to 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, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual 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, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
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, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. The cost or
amortized cost, gross unrealized gains and losses and the
fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<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 (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "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
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<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>
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 $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). 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, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 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, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. 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 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, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. 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 accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, 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 will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. 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 at December 31, 1998 relate to mortgage loan
pass-through certificates. 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. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December
31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve 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 and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, 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
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government 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 FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the 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.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
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.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. 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, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
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
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<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
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</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 affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being 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 to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's contract with the
Company under which it sells the Company's products and provides the service
that otherwise would be provided by a home office marketing department and
regional offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</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 $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</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 $1,962.6
- ----------------------------------------
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>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (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 Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management'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. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. 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. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
S-34
<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,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
S-35
<PAGE>
PROSPECTUS 2
<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
ADMINISTRATIVE OFFICE
PERSONAL SERVICE CENTER MVLI
350 CHURCH STREET
HARTFORD, CT 06103-1106
(800) 552-9898 (5/99-7/99)
(800) 444-2363 (8/99 AND LATER)
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A FLEXIBLE PREMIUM VARIABLE LIFE INSURANCE POLICY
BENEFITS PAYABLE ON DEATH OF SECOND OF TWO INSUREDS
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This Prospectus describes a flexible premium variable life insurance
contract (the "Policy"), offered by The Lincoln National Life Insurance Company
("Lincoln Life", "Company", "we", "us", "our"). The Policy provides death
benefits when the second of the two named Insureds dies (a "Second Death
Policy").
The Policy features:
- flexible premium payments;
- a choice of one of two death benefit options; and
- a choice of underlying investment options.
It may not be advantageous to replace existing insurance or supplement an
existing flexible premium variable life insurance contract with the Policy. This
Prospectus and the Prospectuses of the Funds, furnished with this Prospectus,
should be read carefully to understand the Policy being offered.
The mutual funds ("Funds") available through Lincoln Life's Separate Account
R ("Separate Account") are:
AIM VARIABLE INSURANCE FUNDS, INC.
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
BARON CAPITAL FUNDS TRUST
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC.
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
FIDELITY VARIABLE INSURANCE PRODUCTS FUND II
Contrafund Portfolio -- Service Class
FIDELITY VARIABLE INSURANCE PRODUCTS FUND III
Growth Opportunities Portfolio -- Service Class
JANUS ASPEN SERIES
Janus Aspen Balanced Portfolio
Janus Aspen Worldwide Growth Portfolio
LINCOLN NATIONAL (LN)
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc.
LN Equity-Income Fund, Inc.
LN Global Asset Allocation Fund, Inc.
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc.
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST
AMT Mid-Cap Growth Portfolio
AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
TO BE VALID, THIS PROSPECTUS MUST HAVE THE CURRENT MUTUAL FUNDS' PROSPECTUSES
WITH IT. KEEP ALL FOR FUTURE REFERENCE.
THE SECURITIES AND EXCHANGE COMMISSION HAS NOT APPROVED OR DISAPPROVED THESE
SECURITIES OR DETERMINED THIS PROSPECTUS IS ACCURATE OR COMPLETE. IT IS A
CRIMINAL OFFENSE TO STATE OTHERWISE.
THIS POLICY MAY NOT BE AVAILABLE IN ALL STATES, AND THIS PROSPECTUS ONLY OFFERS
THE POLICY FOR SALE IN JURISDICTIONS WHERE SUCH OFFER AND SALE ARE LAWFUL.
PROSPECTUS DATED: MAY 3, 1999
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TABLE OF CONTENTS
<TABLE>
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CONTENTS PAGE
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HIGHLIGHTS...................................... 3
Initial Choices To Be Made.................... 3
Level or Varying Death Benefit................ 3
Amount of Premium Payment..................... 4
Selection of Funding Vehicles................. 4
Charges and Fees.............................. 5
Changes in Specified Amount................... 5
LINCOLN LIFE, THE SEPARATE ACCOUNT AND THE
GENERAL ACCOUNT................................ 6
BUYING VARIABLE LIFE INSURANCE.................. 7
Replacements.................................. 8
APPLICATION..................................... 8
OWNERSHIP....................................... 9
BENEFICIARY..................................... 9
INSUREDS........................................ 9
THE POLICY...................................... 10
Policy Specifications......................... 10
PREMIUM FEATURES................................ 10
Planned Premiums; Additional Premiums......... 10
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......... 11
Allocation of Net Premium Payments............ 11
Transfers..................................... 11
Optional Sub-Account Allocation Programs...... 12
Dollar Cost Averaging....................... 12
Automatic Rebalancing....................... 13
POLICY VALUES................................... 13
Accumulation Value............................ 13
Separate Account Value........................ 14
Variable Accumulation Unit Value............ 14
Variable Accumulation Units................. 14
Fixed Account and Loan Account Value.......... 15
Net Accumulation Value........................ 15
FUNDS........................................... 15
Substitution of Securities.................... 19
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................................... 21
Fund Expenses................................. 22
Surrender Charges............................. 24
Transaction Fee for Excess Transfers.......... 25
DEATH BENEFITS.................................. 25
Death Benefit Options......................... 25
Changes in Death Benefit Options and Specified
Amount....................................... 26
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CONTENTS PAGE
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Federal Income Tax Definition of Life
Insurance.................................... 26
NOTICE OF DEATH OF INSUREDS..................... 26
PAYMENT OF DEATH BENEFIT PROCEEDS............... 27
POLICY LIQUIDITY................................ 28
Policy Loans.................................. 28
Partial Surrender............................. 29
Surrender of the Policy....................... 29
Surrender Value............................. 29
Deferral of Payment and Transfers............. 29
ASSIGNMENT; CHANGE OF OWNERSHIP................. 30
LAPSE AND REINSTATEMENT......................... 30
Lapse of a Policy............................. 30
No Lapse Provision.......................... 30
Reinstatement of a Lapsed Policy.............. 31
COMMUNICATIONS WITH LINCOLN LIFE................ 31
Proper Written Form........................... 31
Telephone Transaction Privileges.............. 31
OTHER POLICY PROVISIONS......................... 32
Issuance...................................... 32
Date of Coverage.............................. 32
Right to Exchange the Policy.................. 32
Incontestability.............................. 32
Misstatement of Age or Gender................. 33
Suicide....................................... 33
Nonparticipating Policies..................... 33
TAX ISSUES...................................... 33
Tax Treatment of Death Benefit................ 33
Federal Income Tax Considerations............. 33
Taxation of Lincoln Life...................... 34
Other Considerations.......................... 35
FAIR VALUE OF THE POLICY........................ 35
DIRECTORS AND OFFICERS OF LINCOLN LIFE.......... 35
DISTRIBUTION OF POLICIES........................ 37
CHANGES OF INVESTMENT POLICY.................... 37
OTHER CONTRACTS ISSUED BY LINCOLN LIFE.......... 38
STATE REGULATION................................ 38
REPORTS TO OWNERS............................... 38
Preparing for Year 2000....................... 38
ADVERTISING..................................... 38
LEGAL PROCEEDINGS............................... 40
EXPERTS......................................... 40
REGISTRATION STATEMENT.......................... 40
APPENDIX 1...................................... 41
CORRIDOR PERCENTAGES.......................... 41
APPENDIX 2...................................... 42
ILLUSTRATION OF ACCUMULATION VALUES, SURRENDER
VALUES, AND DEATH BENEFIT PROCEEDS........... 42
FINANCIAL STATEMENTS............................
Separate Account.............................. R-1
Lincoln Life.................................. S-1
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HIGHLIGHTS
This section is an overview of key Policy features.
(Regulations in your state may vary the provisions of your
own Policy.) Your Policy is a flexible premium variable life
insurance policy. Your Policy insures two Insureds. If one
of the Insureds dies, the Policy pays no death benefit. Your
Policy will pay the death benefit only when the second
Insured dies. A "second-to-die" policy might be suitable
when both of the Insureds have income of their own and only
want to provide financial support for their dependents if
both of them should die, or to provide liquidity to heirs
when the Second Insured dies. If replacement income or
immediate cash liquidity is needed upon the death of one
Insured, this type of policy may not be suitable.
The Policy's value may change on a:
1) fixed basis;
2) variable basis; or a
3) combination of both fixed and variable bases.
Review your personal financial objectives and discuss them
with a qualified financial counselor before you buy a
"second-to-die" variable life insurance policy. As a death
benefit is only paid upon the second Insured's death, this
Policy may, or may not, be appropriate for your financial
goals. The value of the Policy and, under one option, the
death benefit amount, depends on the investment results of
the funding options you select.
At all times, your Policy must qualify as life insurance
under the Internal Revenue Code of 1986 (the "Code") to
receive favorable tax treatment under Federal law. If these
requirements are met, you may benefit from such tax
treatment. Lincoln Life reserves the right to return your
premium payments if they result in your Policy failing to
meet Code requirements.
INITIAL CHOICES TO BE MADE
The Policy Owner (the "Owner" or "you") is the person named
in the "Policy Specifications" who has all of the Policy
ownership rights. You, as the Owner, have three important
choices to make when the Policy is first purchased. You need
to choose:
1) one of the two Death Benefit Options;
2) the amount of premium you want to pay; and
3) the amount of your Net Premium Payment to be placed in
each of the funding options you select. The Net Premium
Payment is the balance of your Premium Payment that
remains after certain charges are deducted from it.
LEVEL OR VARYING DEATH BENEFIT
The Death Benefit is the amount Lincoln pays to the
Beneficiary(ies) when the second Insured dies. Before we pay
the Beneficiary(ies), any outstanding loan account balances
or outstanding amounts due are subtracted from the Death
Benefit. We calculate the Death Benefit payable as of the
date of the second Insured's death.
When you purchase your Policy, you must choose one of two
Death Benefit Options:
1) a level death benefit; or
2) a varying death benefit.
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If you choose the level Death Benefit Option, the Death
Benefit will be the greater of:
1) the "Specified Amount", which is the amount of the death
benefit in effect for the Policy when the second Insured
died (The Specified Amount may be found on the Policy's
Specification Page); or
2) the "Corridor Death Benefit", which is the death benefit
calculated as a percentage of the Accumulation Value. The
Net Accumulation Value is the total of the balances in the
Fixed Account and the Separate Account minus any outstanding
Loan Account amounts.
If you choose the varying Death Benefit Option, the Death
Benefit will be the greater of:
1) the Specified Amount plus the Net Accumulation Value when
the second Insured died; or
2) the Corridor Death Benefit.
See page 25 for more details.
AMOUNT OF PREMIUM PAYMENT
When you apply for your Policy, you must decide how much
premium to pay. Premium payments may be changed within the
limits described on page 11.
You may use the value of the Policy to pay the premiums due
and continue the Policy in force if sufficient values are
available for premium payments. Be careful; if the
investment options you choose do not do as well as you
expect, there may not be enough value to continue the Policy
in force without more premium payments. Charges against
Policy values for the cost of insurance (see page 21)
increase as the Insureds get older.
If your Policy lapses because your Monthly Premium Deduction
is larger than the Net Accumulation Value, you may reinstate
your Policy. More information is on page 30.
When you first receive your Policy you will have 10 days to
look it over, unless state law requires a greater time. This
is called the "Right-to-Examine" time period. Use this time
to review your Policy and make sure that it meets your
needs. During this time period, your Initial Premium Payment
will be deposited in the Money Market Sub-Account. If you
then decide you do not want your Policy, we will return all
Premium Payments to you with no interest paid. See page 11.
SELECTION OF FUNDING VEHICLES
This Prospectus focuses on the Separate Account investment
information that makes up the "variable" part of the Policy.
If you put money into the variable funds, you take all the
investment risk on that money. This means that if the mutual
funds(s) you select go up in value, the value of your
Policy, net of charges and expenses, also goes up. If they
lose value, so does your Policy. Each fund has its own
investment objective. You should review each fund's
Prospectus before making your decision.
You must choose the Fund(s) in which you want to place each
Net Premium Payment. These "Sub-Accounts" make up the
Separate Account. Each Sub-Account invests in shares of a
certain Fund. A Sub-Account is not guaranteed and will
increase or decrease in value according to the particular
Fund's investment performance. See page 15.
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You may also use Lincoln Life's Fixed Account to fund your
Policy. Net Premium Payments made into the Fixed Account:
- become part of Lincoln Life's General Account;
- do not share the investment experience of the Separate
Account; and
- have a guaranteed minimum interest rate of 4% per year.
Interest beyond 4% is credited at Lincoln Life's discretion.
For additional information, see page 7.
CHARGES AND FEES
We deduct a premium load of 8% from each Premium Payment. We
make monthly deductions for administrative expenses
(currently, $12.50 per month for the first Policy Year and
$5 per month afterwards), the Cost of Insurance and any
riders that are placed on your Policy. For Policy Years
1-20, a monthly charge of $0.09 per $1,000 of Specified
Amount is deducted. If the No-Lapse Provision is selected,
there will be an additional monthly charge of $0.01 per
$1,000 of Specified Amount. (Note: the No-Lapse provision is
not available in IL, MA, MD, NJ and TX.) See page 21.
Daily deductions are subtracted from the Separate Account
for mortality and expense risk. Currently, this charge is at
an annual rate of .80%. See page 21.
Each Fund has its own management fee charge, also deducted
daily. Each Fund's expense levels will affect its investment
results. The table on page 22 shows you the current expense
levels for each Fund.
Each Policy Year you will be allowed to make 12 transfers
between funding options. Beyond 12, a $25 fee may apply. See
page 12.
You may surrender the Policy in full or withdraw part of its
value. A Surrender Charge is applied if the Policy is
surrendered totally and is the amount retained by us if the
Policy is surrendered. We charge you an administrative fee
of $25, but not more than 2% of the amount withdrawn, each
time you request a partial surrender of your Policy. If you
totally surrender your Policy within the first 15 years, a
surrender charge will be deducted in computing what will be
paid you. If you surrender your Policy within the first 15
years after an increase in the Specified Amount, a surrender
charge will also be imposed, in addition to any existing
surrender charge. See page 24.
You may borrow within described limits against the Policy.
If you borrow against your Policy, interest will be charged
to the Loan Account. Currently, the annual interest rate is
8%. For the first ten Policy Years interest will be credited
to the Loan Account Value at the annual rate of interest
charged for a loan minus 1%. For Policy Years eleven and
beyond, interest will be credited at an annual rate equal to
the current interest charged. See page 28.
CHANGES IN SPECIFIED AMOUNT
The Initial Specified Amount is the amount originally chosen
by the Policy Owner and is equal to the Death Benefit.
Within certain limits, you may decrease or, with
satisfactory evidence of insurability, increase the
Specified Amount. The minimum specified amount is currently
$250,000. Such changes will affect other aspects of your
Policy. See page 26.
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LINCOLN LIFE, THE SEPARATE ACCOUNT AND
THE GENERAL ACCOUNT
Lincoln Life, an Indiana life insurance company incorporated
in 1905, is among the nation's largest writers of annuities,
individual life insurance and life reinsurance. Wholly-owned
by Lincoln National Corporation ("LNC"), a publicly held
Indiana insurance holding company incorporated in 1968, it
is licensed in all states (except New York), the District of
Columbia, Guam, and the Commonwealth of the Northern Mariana
Islands. Its principal office is at 1300 South Clinton
Street, Fort Wayne, IN 46802. Lincoln Life, LNC and their
affiliates comprise the "Lincoln Financial Group" which
provides a variety of wealth accumulation and protection
products and services.
Lincoln Life Flexible Premium Variable Life Account R
("Account R") is a "separate account" of the company
established on December 2, 1997. Under Indiana law, the
assets of Account R attributable to the Policies, though our
property, are not chargeable with liabilities of any other
business of Lincoln Life and are available first to satisfy
our obligations under the Policies. Account R income, gains,
and losses are credited to or charged against Account R
without regard to our other income, gains, or losses. Its
values and investment performance are not guaranteed. It is
registered with the Securities and Exchange Commission
("Commission") as a "unit investment trust" under the 1940
Act and meets the 1940 Act's definition of "separate
account". Such registration does not involve supervision by
the Commission of Account R's or our management, investment
practices, or policies. We have numerous other registered
separate accounts which fund our variable life insurance
policies and variable annuity contracts.
Account R is divided into Sub-Accounts, each of which is
invested solely in the shares of one of the Funds available
as funding vehicles under the Policies. On each Valuation
Day (any day on which the New York Stock Exchange is open),
Net Premium Payments allocated to Account R will be invested
in Fund shares at net asset value, and monies necessary to
pay for deductions, charges, transfers and surrenders from
Account R are raised by selling Fund shares at net asset
value.
The Funds and their investment objectives, which they may or
may not achieve, are on pages 15-19. More Fund information
is in the Funds' prospectuses, which must accompany or
precede this prospectus and should be read carefully. Some
Funds have investment objectives and policies similar to
those of other funds managed by the same investment adviser.
Their investment results may be higher or lower than those
of the other funds, and there can be no assurance, and no
representation is made, that a Fund's investment results
will be comparable to the investment results of any other
fund.
We reserve the right to add, withdraw or substitute Funds,
subject to the conditions of the Policy and to compliance
with regulatory requirements if, in our sole discretion,
legal, regulatory, marketing, tax or investment
considerations so warrant or in the event a particular Fund
is no longer available for investment by the Sub-Accounts.
No substitution will take place without prior approval of
the Commission, to the extent required by law.
Shares of the Funds may be used by us and other insurance
companies to fund both variable annuity contracts and
variable life insurance policies. While this is not
perceived as problematic, the Funds' governing bodies
(Boards of Directors/Trustees) have agreed to monitor events
to identify any material irreconcilable conflicts which
might arise and
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to decide what responsive action might be appropriate. If a
Sub-Account were to withdraw its investment in a Fund
because of a conflict, a Fund might have to sell portfolio
securities at unfavorable prices.
A Policy may also be funded in whole or in part through the
"Fixed Account", part of Lincoln Life's General Account
supporting its insurance and annuity obligations. We will
credit interest on amounts held in the Fixed Account as we
determine from time to time, but not less than 4% per year.
Interest, once credited, and Fixed Account principal are
guaranteed. Interests in the Fixed Account have not been
registered under the 1933 Act in reliance on exemptive
provisions. The Commission has not reviewed Fixed Account
disclosures, but they are subject to securities law
provisions relating to accuracy and completeness.
BUYING VARIABLE LIFE INSURANCE
The Policies this Prospectus offers are variable life
insurance policies which provide death benefit protection.
Investors not needing death benefit protection should
consider other forms of investment, as there are extra costs
and expenses of providing the insurance feature. Further,
life insurance purchasers who are risk-aversive or want more
predictable premium levels and benefits may be more
comfortable buying more traditional, non-variable life
insurance. However, variable life insurance is a flexible
tool for financial and investment planning for persons
needing death benefit protection and willing to assume
investment risk and to monitor investment choices they have
made.
Flexibility starts with the ability to make differing levels
of premium payments. A young family just starting out may
only be able to pay modest premiums initially but hope to
increase premium payments over time. At first, this family
would be paying primarily for the insurance feature (perhaps
at ages where the insurance cost is relatively low) and
later use a Policy more as a savings vehicle. A customer at
peak earning capacity may wish to pay substantial premiums
for a limited number of years prior to retirement, after
which Policy values may suffice, based on future expected
return results, though not guaranteed, to keep the Policy
inforce for the expected lifetime and to provide, through
loans, supplemental retirement income. A customer may be
able to pay a large single premium, using the Policy
primarily as a savings and investment vehicle for potential
tax advantages.
Sufficient premiums must always be paid to keep a policy
inforce, and there is a risk of lapse if premiums are too
low in relation to the insurance amount and if investment
results are less favorable than anticipated. The No Lapse
Provision, if elected, may help to assure a death benefit
even if investment results are unfavorable.
Flexibility also results from being able to select, monitor
and change investment choices within a Policy. With the wide
variety of fund options available, it is possible to
finetune an investment mix and change it to meet changing
personal objectives or investment conditions. Policy owners
should be prepared to monitor their investment choices on an
ongoing basis.
Variable life insurance has significant tax advantages under
current tax law. A transfer of values from one fund to
another within the Policy generates no taxable gain or loss.
And any investment income and realized capital gains within
a fund are automatically reinvested without being taxed to
the Policy owners. Policy values therefore accumulate on a
tax-deferred basis. These situations would normally result
in immediate tax liabilities in the case of direct
investment in mutual funds.
While these tax deferral features also apply to variable
annuities, liquidity (the ability of Policy owners to access
Policy values) is normally more easily achieved with
variable
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life insurance. Unless a policy has become a "modified
endowment contract" (see page 33), an Owner can borrow
Policy values tax-free, without surrender charges and at
very low net interest cost. Policy loans can be a source of
retirement income. Variable annuity withdrawals are
generally taxable to the extent of accumulated income, may
be subject to surrender charges, and will result in penalty
tax if made before age 59 1/2.
Depending on the death benefit option chosen, accumulated
Policy values may also be part of the eventual death benefit
payable. If a Policy is heavily funded and investment
performance is very favorable, the death benefit may
increase even further because of tax law requirements that
the death benefit be a certain multiple of Policy value,
depending on the Insureds' ages (see page 25). The death
benefit is income-tax free and may, with proper estate
planning, be estate-tax free. A tax advisor should be
consulted.
Certain costs and expenses of variable life insurance
ownership which are directly related to Policy values (i.e.
asset based costs) are not unlike those incurred through
investment in mutual funds or variable annuities. A
significant additional cost of variable life insurance is
the "cost of insurance" charge which is imposed on the
"amount at risk" (the death benefit less Policy value) and
increases as the insured grows older. This charge varies by
age, underwriting classification, smoking status and in most
states by gender. The effect of its increase can be seen in
illustrations in this Prospectus (see Appendix 2) or in
personalized illustrations available upon request. Surrender
Charges, which decrease over time, are another significant
additional cost if the Policy is not retained.
REPLACEMENTS
Before purchasing the Policy to replace, or to be funded
with proceeds borrowed or withdrawn from, an existing life
insurance policy, a number of matters should be considered
by the applicant. Will any commission be paid to an agent or
any other person with respect to the replacement? Are
coverages and comparable values available from the Policy,
as compared to his or her existing policy? For example, the
Insureds may no longer be insurable, or the contestability
period may have elapsed with respect to the existing policy,
while the Policy could be contested. The Owner should
consider similar matters before deciding to replace the
Policy or withdraw funds from the Policy for the purchase of
funding a new policy of life insurance.
APPLICATION
Any person who wants to buy a Policy must first complete an
application on a form provided by Lincoln Life.
A complete application identifies the prospective Insureds
and provides sufficient information about them to permit
Lincoln Life to begin underwriting the risks under the
Policy. We require a medical history and examination of each
of the Insureds. 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, in
most states, 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
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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
entity. 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.
BENEFICIARY
The Beneficiary is designated by the owner or the Applicant
and is the person who will receive the Death Benefit
proceeds payable under the Policy. The person or persons
named in the application as "Beneficiary" are the
Beneficiaries of the Death Beneift 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 recorded. No change of Beneficiary will
affect, or prejudice Lincoln Life as to, any payment made or
action taken by Lincoln Life before it was recorded.
If any Beneficiary dies before the 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 assignee.
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.
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THE POLICY
The Policy is the life insurance contract described in the
Prospectus. The Date of Issue is the date on which we begin
life insurance coverage under a Policy. A Policy Year is the
twelve month period, beginning on the date of issue, during
which the Policy is in effect. The Policy Anniversary is the
day of the year the Policy was issued.
On issuance, a 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 (the date on which the
initial premium is applied to the Policy) and must be equal
to or exceed the amount necessary to provide for two Monthly
Deductions or, if selected, the No Lapse Premium.
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. We will no longer accept Premium
Payments, and will make no further monthly deductions.
Policy Values held in the Separate Account will be
transferred to the Fixed Account. We will no longer transfer
amounts to Sub-Accounts. The Policy will remain in force
until surrender or the Second Death.
PLANNED PREMIUMS; ADDITIONAL PREMIUMS
"Planned Premiums" are the amount of premium (as shown in
the Policy Specifications) the applicant chooses to pay
Lincoln Life on a scheduled basis. This is the amount for
which we send a premium reminder notice.
Any subsequent Premium Payments ("Additional Premiums") must
be sent directly to the Administrative Office. Additional
Premiums will be credited only when actually received by
Lincoln Life. Premium Payments may be billed with an annual,
semiannual, or quarterly frequency. Pre-authorized automatic
Additional Premium Payments can also be arranged at any
time.
Unless specifically otherwise directed, any payment received
(other than any Premium Payment necessary to prevent, or
cure, Policy Lapse) will be applied first to reduce Policy
indebtedness. There is no premium load on such payments to
the extent applied to reduce indebtedness.
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LIMITS ON RIGHT TO MAKE PAYMENTS OF ADDITIONAL AND PLANNED
PREMIUMS
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
(longer for Policies issued in replacement of other
insurance) and notice of surrender rights to the Owner,
Lincoln Life will refund to the Owner all Premium Payments.
Any Premium Payments received by Lincoln Life before the end
of the Right-to-Examine Period will be held in the Money
Market Sub-Account, and will be allocated to the Sub-
Accounts designated by the Owner at the end of a
Right-to-Examine Period. If the Policy is returned for
cancellation within the Right-to-Examine Period, we will
return any Premium Payments within seven days, although 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
Account and 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 or a Fixed Account
Value of less than $2,500. Lincoln Life, at its sole
discretion, may waive minimum balance requirements on the
Sub-Accounts.
TRANSFERS
The Owner may make transfers among the Sub-Accounts, on the
terms set forth below, at any time before the 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.
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Transfer of amounts of at least $500 from one Sub-Account to
another or from the Sub-Accounts to the Fixed Account are
possible at any time. Within 30 days after each anniversary
of the Date of Issue, the Owner may transfer up to 20% of
the Fixed Account Value (as of the preceding anniversary of
the Date of Issue) to one or more Sub-Accounts. 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 Sub-Accounts or to the Fixed Account
will result in the crediting and cancellation of
Accumulation Units based on the Accumulation Unit values
next determined after the Administrative Office receives a
request in proper written form or adequately authenticated
telephone transfer requests. Any transfer made which causes
the remaining value of Accumulation Units for a Sub-Account
or the Fixed Account to be less than $500 will result in
those remaining Accumulation Units being canceled and their
aggregate value reallocated proportionately among the other
Sub-Accounts and the Fixed Account to which Policy values
are then allocated.
OPTIONAL SUB-ACCOUNT ALLOCATION PROGRAMS
The Owner may elect to participate in programs providing for
Dollar Cost Averaging or Automatic Rebalancing, 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. These transfers do not
count against the free transfers available. By making
allocations on a regularly scheduled basis, instead of on a
lump sum basis, an Owner may reduce exposure to market
volatility. Dollar Cost Averaging will not assure a profit
or protect against a declining market.
If the Owner elects Dollar Cost Averaging, the value in the
Money Market Sub-Account must be at least $1,000 initially.
The minimum amount that may be allocated is $50 monthly.
An election for Dollar Cost Averaging is effective after the
Administrative Office receives a request from the Owner in
proper written form or by telephone, if adequately
authenticated. An election is effective within ten business
days, but only if there is sufficient value in the Money
Market Sub-Account. Lincoln Life may, in its sole
discretion, waive Dollar Cost Averaging minimum deposit and
transfer requirements.
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
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complete the next transfer; (3) within one week after the
Administrative Office receives a request for termination in
proper written form or by telephone, if adequately
authenticated; or (4) if the Policy is surrendered.
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 Sub-Account (e.g. 20% Money Market, 50%
Growth, 30% Utilities). The Fixed Account is not subject to
rebalancing. The pre-determined level is the allocation
initially selected on the application, until changed by the
Owner. If Automatic Rebalancing is elected, all Net Premium
Payments allocated to the Sub-Accounts will be subject to
Automatic Rebalancing.
The Owner may select Automatic Rebalancing on a quarterly,
semi-annual or annual basis. Automatic Rebalancing may be
elected, terminated or the allocation may be changed at any
time, effective within ten business days upon receipt by the
Administrative Office of a request in proper written form or
by telephone, if adequately authenticated.
Currently, there is no charge for Automatic Rebalancing, but
Lincoln Life reserves the right to impose a charge.
POLICY VALUES
The "Accumulation Value" is the sum of the Fixed Account
Value, Separate Account Value and the Loan Account Value.
The Accumulation Value of the Policy depends on the
performance of the underlying investments. Policy values are
used to fund Policy fees and expenses, including the Cost of
Insurance. Premium Payments to meet your objectives will
vary based on the investment performance of the underlying
investments. A market downturn, affecting the Sub-Accounts
upon which the Accumulation Value of a particular Policy
depends, may require Additional Premium Payments beyond
those expected (unless the No Lapse Provision requirements
have been satisfied) to maintain the level of coverage or to
avoid lapse of the Policy. We strongly suggest you review
periodic statements to determine if Additional Premium
Payments may be necessary to avoid lapse of the Policy.
We will tell you at least annually the Accumulation Value,
the number of Accumulation Units which remain credited to
the Policy, the current Accumulation Unit values, the
Sub-Account values, the Fixed Account Value and the Loan
Account Value.
ACCUMULATION VALUE
The portion of a Premium Payment, after the 8.0% reduction
for the premium load, is the "Net Premium Payment." It is
the Net Premium Payment that is available for allocation to
the Fixed Account or the Sub-Accounts.
We credit Net Premium Payments to the Policy as of the end
of the Valuation Period in which it is received at the
Administrative Office. The "Valuation Period" is the time
between Valuation Days, and a "Valuation Day" is every day
on which the New York Stock Exchange is open and trading is
unrestricted. Accumulation Units are valued on every
Valuation Day.
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The "Accumulation Value" of a Policy is determined by: (1)
multiplying the total number of Variable Accumulation Units
credited to the Policy for each Sub-Account by its
appropriate current Variable Accumulation Unit Value; (2) if
a combination of Sub-Accounts is elected, totaling the
resulting values; and (3) adding any values attributable to
the Fixed Account and the Loan Account. The Accumulation
Value will be affected by Monthly Deductions.
SEPARATE ACCOUNT VALUE
The "Separate Account Value" is the portion of the
Accumulation Value attributable to the Separate Account.
VARIABLE ACCUMULATION UNIT VALUE
All or a part of a Net Premium Payment allocated to a
Sub-Account is converted into Variable Accumulation Units by
dividing the amount allocated by the value of the Variable
Accumulation Unit for the Sub-Account next calculated after
it is received at the Administrative Office. The Variable
Accumulation Unit value for each Sub-Account was initially
established at $10.00. It may thereafter increase or
decrease from one Valuation Period to the next. Allocations
to Sub-Accounts are made only as of the end of a Valuation
Day.
VARIABLE ACCUMULATION UNITS
A "Variable Accumulation Unit" is a unit of measure used in
the calculation of the value of each 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 Sub-Account for any
later Valuation Period is determined as follows:
1.The total value of Fund shares held in the Sub-Account
is calculated by multiplying the number of Fund shares
owned by the Sub-Account at the beginning of the
Valuation Period by the net asset value per share of
the Fund at the end of the Valuation Period, and adding
any dividend or other distribution of the Fund if an
ex-dividend date occurs during the Valuation Period;
minus
2.The liabilities of the Sub-Account at the end of the
Valuation Period; such liabilities include daily
charges imposed on the Sub-Account, and may include a
charge or credit with respect to any taxes paid or
reserved for by Lincoln Life that Lincoln Life
determines result from the operations of the Separate
Account; and
3.The result of (2) is divided by the number of Variable
Accumulation Units outstanding at the beginning of the
Valuation Period.
The daily charges imposed on a Sub-Account for any Valuation
Period are equal to the daily mortality and expense risk
charge multiplied by the number of calendar days in the
Valuation Period. The amount of Monthly Deduction allocated
to each Sub-Account will result in the cancellation of
Variable Accumulation Units that have an aggregate value on
the date of such deduction equal to the total amount by
which the Sub-Account is reduced.
The number of Variable Accumulation Units credited to a
Policy will not be changed by any subsequent change in the
value of a Variable Accumulation Unit. Such value may vary
from Valuation Period to Valuation Period to reflect the
investment experience of the Fund used in a particular
Sub-Account and fees and charges under the Policy.
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FIXED ACCOUNT AND LOAN ACCOUNT VALUE
The Fixed Account Value and the Loan Account Value reflect
amounts allocated to Lincoln Life's general account through
payment of premiums or through transfers from the Separate
Account. Lincoln Life guarantees the Fixed Account Value.
NET ACCUMULATION VALUE
The "Net Accumulation Value" is the Accumulation Value less
the Loan Account Value. The Net Accumulation Value
represents the net value of the Policy and is the basis for
calculating the Surrender Value.
FUNDS
Each of the Sub-Accounts of the Separate Account is invested
solely in the shares of one of the Funds available under the
Policies. Each of the Funds is a series of one of sixteen
Massachusetts or Delaware business trusts or Maryland
corporations. Each such trust or corporation is registered
as an open-end management investment company under the 1940
Act. All of the Funds except for the Delaware Group REIT
Series and the Delaware Group Emerging Market Series are
diversified under the 1940 Act.
Listed below are the Trusts, their investment advisers and
distributors, and the Funds within each that are available
under the Policies:
AIM VARIABLE INSURANCE FUNDS, INC., managed by A I M
Advisors, Inc., and distributed by A I M Distributors Inc.,
11 Greenway Plaza, Suite 100, Houston, TX 77046-1173
AIM V.I. Growth Fund
AIM V.I. International Equity Fund
AIM V.I. Value Fund
BARON CAPITAL FUNDS TRUST, managed by BAMCO, Inc. and
distributed by Baron Capital Inc. , 767 Fifth Avenue, New
York, NY 10153
Baron Capital Asset Fund -- Insurance Shares
BT INSURANCE FUNDS TRUST, managed by Bankers Trust Company,
130 Liberty Street (One Bankers Trust Plaza), New York, NY
10006 and distributed by First Data Distributors, Inc., 4400
Computer Drive, Westborough, MA 01581
EAFE-Registered Trademark- Equity Index Fund
Equity 500 Index Fund
Small Cap Index Fund
DELAWARE GROUP PREMIUM FUND, INC., managed by Delaware
Management Company, Inc., One Commerce Square, Philadelphia,
PA 19103 and for International and Emerging Markets,
Delaware International Advisors, Ltd., 80 Cheapside, London,
England ECV2 6EE, and distributed by Delaware Distributors,
L.P., 1818 Market Street, Philadelphia, PA 19103
Delchester Series
Devon Series
Emerging Markets Series
REIT Series
Small Cap Value Series
Trend Series
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FIDELITY VARIABLE INSURANCE PRODUCTS FUND II, AND VARIABLE
INSURANCE PRODUCTS FUND III, managed by Fidelity Management
& Research Company and distributed by Fidelity Distributors
Corporation, 82 Devonshire Street, Boston, MA 02109
Fidelity VIP II Contrafund Portfolio -- Service Class
Fidelity VIP III Growth Opportunities Portfolio --
Service Class
JANUS ASPEN SERIES, managed by Janus Capital, 100 Fillmore
St. Denver, CO 80206-4928, and self-distributed.
Janus Aspen Series Balanced Portfolio
Janus Aspen Series Worldwide Growth Portfolio
LINCOLN NATIONAL FUNDS, managed by Lincoln Investment
Management, Inc., 200 East Berry Street, Fort Wayne IN
46802, and distributed by Lincoln Financial Advisors, Inc.,
350 Church Street, Hartford, CT 06103. Sub-advisors are also
noted.
LN Bond Fund, Inc.
LN Capital Appreciation Fund, Inc. (Sub-advised by Janus
Capital Corp.)
LN Equity-Income Fund, Inc. (Sub-advised by Fidelity
Management Trust Co.)
LN Global Asset Allocation Fund, Inc. (Sub-advised by
Putnam Investment Management, Inc.)
LN Money Market Fund, Inc.
LN Social Awareness Fund, Inc. (Sub-advised by Vantage
Investment Advisors Inc.)
MFS-REGISTERED TRADEMARK- VARIABLE INSURANCE TRUST, managed
by Massachusetts Financial Services Company and distributed
by MFS Fund Distributors, Inc., 500 Boylston Street, Boston,
MA 02116
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
NEUBERGER BERMAN ADVISERS MANAGEMENT TRUST, managed and
distributed by NB Management Incorporated, 605 Third Avenue,
2nd Floor, New York, NY 10158-0006
NB AMT Mid-Cap Growth Portfolio
NB AMT Partners Portfolio
TEMPLETON VARIABLE PRODUCTS SERIES FUND, managed by
Templeton Investment Counsel, Inc. and its Templeton and
Franklin affiliates and distributed by Franklin Templeton
Distributors, Inc., 100 Fountain Parkway, St. Petersburg, FL
33716-1205
Templeton International Fund -- Class 2
Templeton Stock Fund -- Class 2
The investment advisory fees charged the Funds by their
advisers are shown on page 22 of this Prospectus.
Below is a brief description of the investment objective and
program of each Fund. There can be no assurance that any of
the stated investment objectives will be achieved.
AIM V.I. GROWTH FUND (Large Cap Stocks): Seeks growth of
capital primarily by investing in seasoned and better
capitalized companies considered to have strong earnings
momentum. Current income will not be a criterion of
investment selection, and any such income should be
considered incidental.
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AIM V.I. INTERNATIONAL EQUITY FUND (Large Cap Stocks --
International): Seeks to provide long-term growth of capital
by investing in a diversified portfolio of international
equity securities whose issuers are considered to have
strong earnings momentum. The fund seeks to meet this
objective by investing at least 70% of its total assets in
marketable equity securities of foreign companies that are
listed on a recognized foreign securities exchange or traded
in a foreign over-the-counter market.
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 investment advisor to be
undervalued relative to the investment advisor's appraisal
of current or projected earnings of the companies issuing
the securities, or relative to current market values of
assets owned by the companies issuing the securities or
relative to the equity markets generally. Income is a
secondary objective and would be satisfied principally from
the interest (interest and dividends) generated by the
common stocks, convertible bonds and convertible preferred
stocks that make up the Fund's portfolio.
BARON CAPITAL ASSET FUND -- INSURANCE SHARES (Small/Medium
Cap U.S. Stocks): Seeks capital appreciation through
investments in securities of small sized companies with
market capitalizations of approximately $100 million to $1.5
billion, and medium sized companies with market
capitalizations of $1.5 billion to $5 billion, with
undervalued assets or favorable growth prospects.
BT EAFE-REGISTERED TRADEMARK- FUND (Large Cap Stocks --
International): Seeks to replicate as closely as possible
(before the deduction of Expenses) the total return of the
Europe, Australia, Far East Index (the
EAFE-Registered Trademark- Index) , a
capitalization-weighted index containing approximately 1,100
equity securities of companies located outside the United
States.
BT EQUITY 500 INDEX FUND (Large Cap U.S. Stocks): Seeks to
replicate as closely as possible the performance of the
Standard & Poor's 500 Composite Stock Price Index, before
the deduction of Fund expenses.
BT SMALL CAP INDEX FUND (Small/Medium Cap U.S. Stocks):
Seeks to replicate as closely as possible (before the
deduction of Expenses) the total return of the Russell 2000
Small Stock Index (the "Russell 2000"), an index consisting
of approximately 2,000 small-capitalization common stocks.
DELAWARE GROUP DELCHESTER SERIES (High Yield Bonds): Seeks
as high a current income as possible by investing in rated
and unrated corporate bonds (including high yield bonds
commonly known as junk bonds), U. S. government securities
and commercial paper. An investment in this Series may
involve greater risks than an investment in a portfolio
comprised primarily of investment grade bonds.
DELAWARE GROUP DEVON SERIES (Large Cap U.S. Stocks): Seeks
current income and capital appreciation by investing
primarily in income-producing common stocks, with a focus on
common stocks that the investment manager believes have the
potential for above-average dividend increases over time.
Under normal circumstances, the Series will invest at least
65% of its total assets in dividend paying common stocks.
DELAWARE GROUP EMERGING MARKETS SERIES (Emerging Markets
Stocks): Seeks to achieve long-term capital appreciation by
investing primarily in equity securities of issuers located
or operating in emerging counties. The Series is an
international fund. As such, 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
emerging or developing.
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<PAGE>
DELAWARE GROUP REIT SERIES (Specialty): Seeks to achieve
maximum long-term total return. Capital appreciation is a
secondary objective. It seeks to achieve its objectives by
investing in securities of companies primarily engaged in
the real estate industry.
DELAWARE GROUP SMALL CAP VALUE SERIES (Small/Medium Cap U.S.
Stocks): Seeks capital appreciation by investing primarily
in small cap common stocks whose market value appears low
relative to their underlying value or future earnings and
growth potential. Emphasis will also be placed on securities
of companies that may be temporarily out of favor or whose
value is not yet recognized by the market.
DELAWARE GROUP TREND SERIES (Small/Medium Cap U.S. 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 CONTRAFUND PORTFOLIO -- SERVICE CLASS (Large
Cap U.S. Stocks): Seeks capital appreciation by investing
primarily in securities of companies whose value the advisor
believes is not fully recognized by the public.
FIDELITY VIP III GROWTH OPPORTUNITIES PORTFOLIO -- SERVICE
CLASS (Large Cap U.S. Stocks): Seeks capital growth by
investing primarily in common stocks.
JANUS ASPEN SERIES BALANCED PORTFOLIO (Balanced): Seeks long
term growth of capital, consistent with the preservation of
capital and balanced by current income. The Portfolio
normally invests 40-60% of its assets in securities selected
primarily for their growth potential and 40-60% of its
assets in securities selected primarily for their income
potential.
JANUS ASPEN SERIES WORLDWIDE GROWTH PORTFOLIO (Large Cap
Stocks -- Global): Seeks long-term growth of capital in a
manner consistent with the preservation of capital by
investing primarily in common stocks of foreign and domestic
insurers.
LINCOLN NATIONAL BOND FUND (Investment Grade Bonds): Seeks
maximum current income consistent with prudent investment
strategy. The fund invests primarily in medium-and long-term
corporate and government bonds.
LINCOLN NATIONAL CAPITAL APPRECIATION FUND (Large Cap U.S.
Stocks): Seeks long-term growth of capital in a manner
consistent with preservation of capital. The fund invests in
a large number of companies of all sizes if the companies
are competing well and if their products and services are in
high demand. It may also buy some money market securities
and bonds, including junk (high risk) bonds.
LINCOLN NATIONAL EQUITY-INCOME FUND (Large Cap U.S. Stocks):
Seeks to achieve reasonable income by investing primarily in
income-producing equity securities. The fund invests mostly
in high-yielding bonds (including junk bonds)
LINCOLN NATIONAL GLOBAL ASSET ALLOCATION FUND (Balanced --
International): Seeks long-term total return consistent with
preservation of capital. The fund allocates its assets among
several categories of equity and fixed-income securities,
both of U.S. and foreign insurers.
LINCOLN NATIONAL MONEY MARKET FUND (Money Market): Seeks
maximum current income consistent with the preservation of
capital. The fund invests in short term obligations issued
by U.S. corporations, the U.S. government, and
federally-chartered banks and U.S. branches of foreign
banks.
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LINCOLN NATIONAL SOCIAL AWARENESS FUND (Large Cap
Stock/Specialty): Seeks to achieve long-term capital
appreciation, by investing in stocks of established
companies which adhere to certain specific social criteria.
MFS EMERGING GROWTH SERIES (Small/Medium Cap U.S. Stocks):
Seeks to provide long-term growth of capital.
MFS TOTAL RETURN SERIES (Balanced): Seeks primarily to
provide above-average income (compared to a portfolio
invested entirely in equity securities) consistent with the
prudent employment of capital, and secondarily to provide a
reasonable opportunity for growth of capital and income.
MFS UTILITIES SERIES (Small/Medium Cap U.S.
Stocks/Specialty): Seeks capital growth and current income
(income above that available from a portfolio invested
entirely in equity securities).
NB AMT MID-CAP GROWTH PORTFOLIO (Small/Medium Cap U.S.
Stocks): Seeks growth of capital through an investment
approach that is designed to increase capital with
reasonable risk. It invests mainly in common stocks of
mid-to-large capitalization companies.
NB AMT PARTNERS PORTFOLIO (Small/Medium Cap U.S. Stocks):
Seeks growth of capital and invests mainly in common stocks
of mid-to-large capitalization companies, using the
value-oriented investment approach.
TEMPLETON INTERNATIONAL FUND -- CLASS 2 (Large Cap Stocks --
International): Seeks long-term capital growth. It invests
primarily in stocks of companies outside the United States,
including emerging markets. Any income realized will be
incidental.
TEMPLETON STOCK FUND -- CLASS 2 (Large Cap Stocks --
Global): Seeks long-term capital growth. Invests primarily
in equity securities issued by companies, large and small,
in various nations throughout the world, including the
United States and emerging markets.
Several of the Funds may invest in non-investment grade,
high-yield, high-risk debt securities (commonly referred to
as "junk bonds"), as detailed in the individual Fund
Prospectuses. Please review the Prospectuses carefully.
There is no assurance that the investment objective of any
of the Funds will be met. You assume all of the investment
performance risk for the Sub-Accounts you select. There is
investment performance risk in each of the Sub-Accounts,
although the amount of such risk varies significantly among
the Sub-Accounts. Owners should read each Fund's prospectus
carefully and understand the risks before making or changing
investment choices. Additional Funds may, from time to time,
be made available as underlying investments. The right to
select among Funds will be limited by the terms and
conditions imposed by Lincoln Life (SEE Allocation of Net
Premium Payments).
SUBSTITUTION OF SECURITIES
If the shares of any Fund should no longer be available for
investment by the Separate Account or if, in the judgment of
Lincoln Life, further investment in such shares should cease
to be appropriate in view of the purpose of the Separate
Account or in view of legal, regulatory or federal income
tax restrictions, Lincoln Life may substitute shares of
another Fund. There will be no substitution of securities in
any Sub-Account without prior approval of the Commission.
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VOTING RIGHTS
Lincoln Life will vote the shares of each Fund held in the
Separate Account at special meetings of the shareholders of
the particular Fund in accordance with instructions received
by the Administrative Office in proper written form from
persons having a voting interest in the Separate Account.
Lincoln Life will vote shares for which it has not received
instructions in the same proportion as it votes shares in
the Separate Account for which it has received instructions.
The Funds do not hold regular meetings of shareholders.
The number of shares which a person has a right to vote will
be determined as of a date to be chosen by the appropriate
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.
FUND PARTICIPATION AGREEMENTS
Lincoln Life has entered into agreements with the various
Trusts and their advisers or distributors under which
Lincoln Life makes the Funds available under the Policies
and performs certain administrative services. In some cases,
the advisers or distributors may compensate Lincoln Life at
annual rates of between .10% and .25% of assets in a
particular Fund attributable to the Policies.
CHARGES AND FEES
Lincoln Life deducts charges in connection with the Policy
to compensate it for providing the insurance benefit set
forth in the Policy, administering the Policy, assuming
certain risks in connection with the Policy and for
incurring expenses associated with the distribution of the
Policy.
The nature and amount of these charges are as follows:
DEDUCTIONS MADE MONTHLY
We make various expense deductions 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.
For 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 Accumulation Value. The Monthly Deductions
are made on the Monthly Anniversary Day, the Date of Issue,
and the same day of each month thereafter, or if there is no
such date in a given month, the first Valuation Day of the
next month. If the day that would otherwise be a Monthly
Anniversary Day is not a Valuation Day, then the Monthly
Anniversary Day is the next Valuation Day.
If the Net Accumulation Value is insufficient to cover the
current Monthly Deduction, you have a 61-day period ("Grace
Period"), to make a payment sufficient to cover that
deduction. (See Lapse and Reinstatement: Lapse of a Policy).
If 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 Separate Account Value will be transferred to the Fixed
Account. The Policy will then remain in force until
surrender or the Second Death.
20
<PAGE>
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 after the first Policy Year).
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. (Note: the No Lapse provision is not
available in IL, MA, MD, NJ and TX.)
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 is the portion of the Monthly
Deduction designed to compensate Lincoln Life for the
anticipated cost of paying Death Benefits in excess of the
Accumulation Value, not including riders, supplementary
benefits or monthly expense charges.
The Cost of Insurance charge depends on the Age,
underwriting category and gender (in accordance with state
law) of both Insureds and the current "Net Amount at Risk"
(Death Benefit minus the Accumulated Value). 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.
MORTALITY AND EXPENSE RISK CHARGE
Lincoln Life deducts a daily charge as a percentage of the
assets of the Separate Account as a mortality and expense
risk charge. The mortality risk assumed is that insureds may
live for a shorter period than estimated, and therefore, a
greater amount of death benefit will be payable. The expense
risk assumed is that expenses incurred is issuing and
administering the policies will be greater than estimated.
The mortality and expense risk charge is currently at an
annual rate of 0.80% per year, and is guaranteed not to
exceed 0.90% per year.
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<PAGE>
FUND EXPENSES
The investment advisor for each of the Funds deducts a daily
charge as a percent of the net assets in each fund as an
asset management charge. The charge reflects asset
management fees of the investment advisor (Management Fees),
and other expenses incurred by the funds (including 12b-1
fees for Class 2 shares and Other Expenses). The charge has
the effect of reducing the investment results credited to
the Sub-Accounts. Future Fund expenses will vary.
<TABLE>
<CAPTION>
TOTAL ANNUAL
FUND
OPERATING TOTAL FUND
EXPENSES OPERATING
WITHOUT TOTAL WAIVERS EXPENSES WITH
MANAGEMENT 12b-1 OTHER WAIVERS OR AND WAIVERS OR
FUND FEES FEES EXPENSES REDUCTIONS REDUCTIONS REDUCTIONS
- ------------------------------ --------------- ----- ----------- ------------- ------------- -------------
<S> <C> <C> <C> <C> <C> <C>
AIM V.I. Growth Fund.......... 0.64% -- 0.08% 0.72% -- 0.72%
AIM V.I. International Equity
Fund........................ 0.75% -- 0.16% 0.91% -- 0.91%
AIM V.I. Value Fund........... 0.61% -- 0.05% 0.66% -- 0.66%
Baron Capital Asset
Fund--Insurance Shares
(1)......................... 1.00% 0.25% 6.37% 7.62% (6.17%) 1.45%
BT EAFE Index Fund (2)........ 0.45% -- 1.21% 1.66% (1.01%) 0.65%
BT Equity 500 Index Fund
(2)......................... 0.20% -- 0.99% 1.19% (0.89%) 0.30%
BT Small Cap Index Fund (2)... 0.35% -- 1.23% 1.58% (1.13%) 0.45%
Delaware Group Delchester
Series (3).................. 0.65% -- 0.10% 0.75% -- 0.75%
Delaware Group Devon Series
(3)......................... 0.65% -- 0.06% 0.71% -- 0.71%
Delaware Group Emerging
Markets Series (4).......... 1.25% -- 0.42% 1.67% (0.17%) 1.50%
Delaware Group REIT Series
(5)......................... 0.75% -- 0.27% 1.02% (0.17%) 0.85%
Delaware Group Small Cap Value
Series (6).................. 0.75% -- 0.10% 0.85% -- 0.85%
Delaware Group Trend Series
(6)......................... 0.75% 0.10% 0.85% (0.04%) 0.81%
Fidelity VIPII Contrafund
Portfolio -- Service Class
(7)......................... 0.59% 0.10% 0.11% 0.80% -- 0.80%
Fidelity VIPIII Growth
Opportunities Portfolio --
Service Class (7)........... 0.59% 0.10% 0.11% 0.80% -- 0.80%
Janus Aspen Series Balanced
Portfolio (8)............... 0.72% -- 0.02% 0.74% -- 0.74%
Janus Aspen Series Worldwide
Growth Portfolio (8)........ 0.67% -- 0.07% 0.74% (0.02%) 0.72%
LN Bond Fund.................. 0.44% -- 0.13% 0.57% -- 0.57%
LN Capital Appreciation
Fund........................ 0.76% -- 0.07% 0.83% -- 0.83%
LN Equity Income Fund......... 0.72% -- 0.07% 0.79% 0.79%
LN Global Asset Allocation
Fund........................ 0.72% -- 0.19% 0.91% -- 0.91%
LN Money Market Fund.......... 0.48% -- 0.11% 0.59% -- 0.59%
LN Social Awareness Fund...... 0.34% -- 0.04% 0.38% -- 0.38%
MFS Emerging Growth Series
(9)......................... 0.75% -- 0.10% 0.85% -- 0.85%
MFS Total Return Series (9)... 0.75% -- 0.16% 0.91% -- 0.91%
MFS Utilities Series (9)...... 0.75% -- 0.26% 1.01% -- 1.01%
AMT MidCap Growth Portfolio
(10)(11).................... 0.85% -- 0.58% 1.43% (0.43%) 1.00%
AMT Partners Portfolio
(10)(11).................... 0.78% -- 0.06% 0.84% -- 0.84%
Templeton International Fund
-- Class 2 (12)............. 0.69% 0.25% 0.17% 1.11% -- 1.11%
Templeton Stock Fund -- Class
2 (12)...................... 0.70% 0.25% 0.19% 1.14% -- 1.14%
</TABLE>
---------------------------------------------------
(1) The Adviser is contractually obligated to reduce its
fee to the extent required to limit Baron Capital Asset
Fund's total operating expenses to 1.5% for the first
$250 million of assets in the Fund, 1.35% for Fund
22
<PAGE>
assets over $250 million, and 1.25% for Fund assets
over $500 million. Without the expense limitations,
total operating expenses for the Fund for the period
October 1, 1998 through December 31, 1998 would have
been 7.62%
(2) Under the Advisory Agreement with Bankers Trust Company
(the "Advisor"), the Funds will pay an advisory fee at
an annual percentage rate of 0.45%, 0.20% and 0.35% of
the average daily net assets of the Funds for the EAFE
Equity Index Fund, Equity 500 Index Fund and Small Cap
Index Fund, respectively. These fees are accrued daily
and paid monthly. The Advisor has voluntarily
undertaken to waive its fees and to reimburse the Funds
for certain expenses so that the Funds' total operating
expenses will not exceed 0.65%, 0.30% and 0.45% of
average daily net assets for the EAFE Equity Index
Fund, Equity 500 Index Fund and Small Cap Index Fund,
respectively.
(3) The investment advisor for the Devon Series and
Delchester Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fees and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.80%
for the Devon Series and 0.80% for the Delchester
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.65% on the first $500 million, 0.60% on the next $500
million, 0.55% on the next $1,500 million, 0.50% on
assets in excess of $2,500 million; all per year.
(4) The investment advisor for the Emerging Markets Series
is Delaware International Advisors, Limited ("DIAL").
Effective May 1, 1999 through October 31, 1999, DIAL
has voluntarily agreed to waive its management fees and
reimburse the Series for expenses to the extent that
total expenses will not exceed 1.50% for the Emerging
Market Series. Pursuant to a vote of the Fund's
shareholders on March 17, 1999, a new management fee
structure based on average daily net assets was
approved as follows: 1.25% on the first $500 million,
1.20% on the next $500 million, 1.15% on the next
$1,500 million, 1.10% on assets in excess of $2,500
million; all per year.
(5) The investment advisor for the REIT Series is Delaware
Management Company, Inc. ("DMC"). Effective May 1, 1999
through October 31, 1999, DMC has voluntarily agreed to
waive its management fees and reimburse the Series for
expenses to the extent that total expenses will not
exceed 0.85% for the REIT Series. There is no change to
the current management fee structure.
(6) The investment advisor for the Trend Series and Small
Cap Value Series is Delaware Management Company, Inc.
("DMC"). Effective May 1, 1999 through October 31,
1999, DMC has voluntarily agreed to waive its
management fee and reimburse each Series for expenses
to the extent that total expenses will not exceed 0.85%
for the Trend Series and 0.85% for the Small Cap Value
Series. Pursuant to a vote of the Fund's shareholders
on March 17, 1999, a new management fee structure based
on average daily net assets was approved as follows:
0.75% on the first $500 million, 0.70% on the next $500
million, 0.65% on the next $1,500 million, 0.60% on
assets in excess of $2,500 million; all per year.
(7) A portion of the brokerage commissions that certain
funds pay was used to reduce funds expenses. In
addition, certain funds, or Fidelity Management &
Research on behalf of certain funds, have entered into
arrangements with their custodian whereby realized as a
result of uninvested cash balances were used to reduce
custodian expenses. Including these reductions, the
total operating expenses presented in the table would
have been 0.75% for the VIP II Contrafund Portfolio and
0.79% for the VIP III Growth Opportunities Portfolio.
(8) All expenses are stated both with and without
contractual waivers and fee reductions by Janus
Capital. Fee reductions for the Worldwide Growth and
Balanced Portfolios reduce the Management Fee to the
level of the corresponding Janus retail fund. Other
waivers, if applicable, are first applied against the
Management Fee and then against Other Expenses. Janus
Capital has agreed to continue the waivers and fee
reductions until at least the annual renewal of the
advisory agreement.
(9) 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
disbursing agent. Each series may enter into other such
arrangements and directed brokerage arrangements, which
would also have the effect of reducing the series'
expenses. Expenses do not take into account these
expense reductions, and are therefore higher than the
actual expenses of the series.
(10) Neuberger Berman Advisers Management Trust is divided
into portfolios ("Portfolios"), each of which invests
all of its net investable assets in a corresponding
series ("Series") of Advisers Managers Trust.
23
<PAGE>
The figures reported under "Investment Management and
Administration Fees" include the aggregate of the
administration fees paid by the Portfolio and the
management fees paid by its corresponding Series.
Similarly, "Other Expenses" includes all other
expenses of the Portfolio and its corresponding
Series.
(11) NBMI has undertaken to reimburse certain operating
expenses, including the compensation of NBMI (except
with respect to Partners Portfolio) and excluding
taxes, interest, extraordinary expenses, brokerage
commissions and transaction costs, that exceed, in the
aggregate, 1% of the Mid-Cap Growth and Partners
Portfolios' average daily net asset value. These
expense reimbursement agreements are subject to
termination upon 60 days written notice with respect
to the Mid-Cap Growth and Partners Portfolios, and
there can be no assurance that these policies will be
continued thereafter.
(12) Class 2 of the Fund has a distribution plan or "Rule
12b-1 plan" which is described in the Fund's
prospectus.
SURRENDER CHARGES
A generally declining 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 2 by
subtracting "Surrender Value" from "Total Accumulation
Value" on any chosen set of investment return assumptions.
The surrender charge under a Policy is proportional to the
face amount of the Policy. Expressed as a percentage of face
amount, it is higher for older than for younger issue ages.
For example, assuming issue ages 80 (the oldest possible
issue ages for a Policy), the first year surrender charge is
$37.40 per $1000 of face amount. At issue ages 65 it is
$25.10 per $1000 of face amount, at issue ages 55 it is
$13.68 per $1000 of face amount, and at issue ages 25 it is
$2.87 per $1000 of face amount. These calculations assume
both insureds are the same age. The surrender charge cannot
exceed Policy value but may equal Policy value, especially
during the first two Policy years. All surrender charges
decline to zero over the 15 years following issuance of the
Policy. See, for example, the illustrations in Appendix 2
for issue ages 55 and 65.
If the Specified Amount is increased, a new Surrender Charge
will be applicable, in addition to any existing Surrender
Charge. The Surrender Charge applicable to the increase
would be equal to the Surrender Charge on a new Policy whose
Specified Amount was equal to the amount of the increase.
Supplemental Policy Specifications will be sent to the Owner
upon an increase in Specified Amount reflecting the maximum
additional Surrender Charge in the Table of Surrender
Charges. The minimum allowable increase in Specified Amount
is $1,000. Lincoln Life may change this at any time.
If the Specified Amount is decreased while the Surrender
Charge applies, the Surrender Charge will remain the same.
No Surrender Charge is imposed on a partial surrender, but
an administrative fee of $25 (not to exceed 2% of the amount
surrendered) is imposed, allocated pro-rata among the
Sub-Accounts from which the partial surrender proceeds are
taken.
Any surrenders, full or partial, 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
24
<PAGE>
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 Death Benefit Proceeds is the amount payable to the
Beneficiary upon the Second Death (the death of the second
of the two Insureds to die), in accordance with the Death
Benefit Option elected. Loans (if any) and overdue
deductions are deducted from the Death Benefit Proceeds
prior to payment.
The applicant must select the Specified Amount of the Death
Benefit, which may not be less than $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 Death Benefit Proceeds payable under the Policy
is the greater of (a) the Corridor Death Benefit or (b) the
amount determined under the Death Benefit Option in effect
on the date of the Second Death, less (in each case) any
indebtedness under the Policy. In the case of Death Benefit
Option 1, the Specified Amount is reduced by the amount of
any partial surrender. The "Corridor Death Benefit" is the
applicable percentage (the "Corridor Percentage") of the
Accumulation Value (rather than by reference to the
Specified Amount) required to maintain the Policy as a "life
insurance contract" for Federal income tax purposes. The
Corridor Percentage is 250% through the time the younger
Insured reaches or would have reached Age 40 and decreases
in accordance with the table in Appendix I 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 date 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
25
<PAGE>
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.
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. A table of
Corridor Percentages is in Appendix I.
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"
26
<PAGE>
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 Separate Account
values cannot be determined.
SETTLEMENT OPTIONS
There are several ways in which the Beneficiary may receive
the Death Benefit Proceeds, or in which the Owner may choose
to receive payments upon surrender of the Policy.
The Owner may elect 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.
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.
27
<PAGE>
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. The Loan Account is the
account in which Policy indebtedness (outstanding Loans and
interest) accrues once it is transferred out of the Fixed
Account or Sub-Accounts. Interest on Policy Loans accrues at
an annual rate of 8%, and 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.
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 the Fixed Account and each 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.
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.
28
<PAGE>
PARTIAL SURRENDER
You may make a partial surrender 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.
If Death Benefit Option 2 has been elected, a partial
surrender would reduce the Accumulation Value, but would not
reduce the Specified Amount. The reduction in the
Accumulation Value reduces the amount of the Death Benefit
Proceeds.
If the Net Accumulation Value is distributed among more than
one of the Sub-Accounts, surrenders from each will be made
in proportion to the assets in each Sub-Account at the time
of the surrender, unless Lincoln Life is instructed
otherwise in proper written form at the Administrative
Office. Lincoln Life may at its discretion decline any
request for a partial surrender.
SURRENDER OF THE POLICY
You may surrender the Policy at any time. On surrender of
the Policy, Lincoln Life will pay you, or assignee, the
Surrender Value next computed after receipt of the request
in proper written form at the Administrative Office. 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 Appendix 2.
DEFERRAL OF PAYMENT AND TRANSFERS
Payment of loans or of the Surrender Value from any
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.
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<PAGE>
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, 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 is not paid to
Lincoln Life on or before the day that is the later of (a)
31 days after the date of mailing of the notice, and (b) 61
days after the date of the Monthly Anniversary Day with
respect to which such notice was sent (together, the "Grace
Period"), then the policy shall terminate and all coverage
under the policy shall lapse without value. 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
(Note: the No Lapse provision is not available in IL, MA,
MD, NJ and TX).
30
<PAGE>
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 (the cumulative premium required to have been
paid by each Monthly Anniversary Day, 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 you fail to
meet the premium requirements, if there is an increase in
Specified Amount or if you change the Death Benefit Option.
Once the No Lapse Provision terminates, it cannot be
reinstated.
REINSTATEMENT OF A LAPSED POLICY
After the Policy has lapsed due to the failure to make a
necessary payment before the end of an applicable Grace
Period, it may be reinstated provided (a) it has not been
surrendered, (b) there is an application for reinstatement
in proper written form, (c) evidence of insurability of 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.
If the Policy is reinstated, such reinstatement is effective
on the Monthly Anniversary Day following Lincoln Life
approval. The Accumulation Value at reinstatement will be
the Net Premium Payment then made less all Monthly
Deductions due.
If the Surrender Value is not sufficient to cover the full
Surrender Charge at the time of lapse, the remaining portion
of the Surrender Charge will also be reinstated at the time
of Policy reinstatement.
COMMUNICATIONS WITH LINCOLN LIFE
PROPER WRITTEN FORM
When ever this Prospectus refers to a communication "in
proper written form," it means in 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.
31
<PAGE>
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 Insureds 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 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
32
<PAGE>
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.
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
33
<PAGE>
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 Separate
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 Sub-Account must meet certain tests.
Lincoln Life believes the Separate 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
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 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 Separate 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.
34
<PAGE>
Lincoln Life does not initially expect to incur any Federal
income tax liability that would be chargeable to the
Separate Account. Based upon these expectations, no charge
is currently being made against the Separate 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 Separate 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 sometimes necessary for tax and other reasons to
determine the "fair value" of the Policy. The fair value of
the Policy is measured differently for different purposes.
It is not necessarily the same as the Accumulation Value or
the Net Accumulation Value, although the amount of the Net
Accumulation Value will typically be important in valuing
the Policy for this purpose. For some but not all purposes,
the fair value of the Policy may be the Surrender Value of
the Policy. The fair value of the Policy may be impacted by
developments other than the performance of the underlying
investments. For example, without regard to any other
factor, it increases as the Insureds grow older. Moreover,
on the death of the first of the Insureds to die, it tends
to increase significantly. The Owner should consult with his
or her advisors for guidance as to the appropriate
methodology for determining the fair value of the Policy for
a particular purpose.
DIRECTORS AND OFFICERS OF LINCOLN LIFE
The following persons are Directors and Officers of Lincoln
Life. Except as indicated below, the address of each is 1300
South Clinton Street, Fort Wayne, Indiana 46802 and each has
been employed by Lincoln Life or its affiliates for more
than five years.
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ----------------------------------------------------
<S> <C>
NANCY J. ALFORD Vice President [4/96-present], (formerly Second Vice
VICE PRESIDENT 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, Chief Executive Officer and Director,
DIRECTOR Lincoln National Corp. [1/98-present] (Formerly:
200 East Berry Street President and Chief Executive Officer [10/96-1/98]
Fort Wayne, Ind. 46802 and Chief Operating Officer [5/94-10/96]), Lincoln
National Life Insurance Co.; President [7/91-5/94]
Lincoln Investment Management, Inc.
</TABLE>
35
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ----------------------------------------------------
<S> <C>
JOHN GOTTA Senior Vice President and General Manager (formerly
SENIOR VICE PRESIDENT AND Vice President) [1/98-present] Lincoln National Life
ASSISTANT SECRETARY Insurance Co. Formerly: Senior Vice President,
350 Church Street Connecticut General Life Insurance Company
Hartford, Ct. 06103 [3/96-12/97]; Vice President, Connecticut Mutual
Life Insurance Company [8/94-3/96]; Vice President,
CIGNA [3/93-8/94]
J. MICHAEL HEMP President [11/96-Present], Lincoln Financial
SENIOR VICE PRESIDENT Advisors Corp.; Senior Vice President (formerly Vice
350 Church Street President) [10/95-Present], Lincoln National Life
Hartford, Ct. 06103 Insurance Co. Formerly: Regional Chief Executive
Officer [11/79-10/95], Lincoln Dallas RMO.
STEPHEN H. LEWIS Senior Vice President, [5/94-present] Lincoln
SENIOR VICE PRESIDENT National Life Insurance Co. Formerly: President
[2/85-5/94], First Penn-Pacific Life Insurance Co.
H. THOMAS MCMEEKIN President [5/94-present], Lincoln Investment
DIRECTOR Management, Inc.; Executive Vice President
200 East Berry Street [5/94-Present], Lincoln National Corporation
Fort Wayne, Ind. 46802 (formerly Senior Vice President [11/92-5/94])
ARTHUR S. ROSS Vice President, Lincoln National Life Insurance Co.
VICE PRESIDENT
LAWRENCE T. ROWLAND Executive Vice President [10/96-present] (formerly
EXECUTIVE VICE PRESIDENT AND Senior Vice President [1/93-10/96]), Lincoln
DIRECTOR National Life Insurance Co.
One Reinsurance Place
1700 Magnavox Way
Fort Wayne, Ind. 46804
KEITH J. RYAN Vice President and Controller [4/99-present]
VICE PRESIDENT AND CONTROLLER Formerly: Senior Vice President [2/98-4/99]; Vice
President, Chief Financial Officer and Assistant
Treasurer [1/96-present]; Controller [6/95-12/95],
Business Controls Director [11/90-6/95], Lincoln
National Life Insurance Company
GABRIEL L. SHAHEEN President and Chief Executive Officer
PRESIDENT, CHIEF EXECUTIVE [1/98-present], Lincoln National Life Insurance Co.
OFFICER AND DIRECTOR Formerly: Chairman and Managing 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]
TODD R. STEPHENSON Senior Vice President, Chief Financial Officer and
SENIOR VICE PRESIDENT, Assistant Treasurer [4/99-present] Formerly: Vice
CHIEF FINANCIAL OFFICER President and Assistant Secretary [1/98-4/99],
AND ASSISTANT TREASURER Senior Vice President, Lincoln Financial Advisors
Corporation [1/98-4/99], Senior Vice President,
Treasurer and Chief Financial Officer, American
States Insurance Company [2/95-12/97], and Vice
President -- Corp. Acct., American States Insurance
Company [5/92-2/95]
</TABLE>
36
<PAGE>
<TABLE>
<CAPTION>
NAME, ADDRESS AND
POSITION(S) WITH REGISTRANT PRINCIPAL OCCUPATIONS LAST FIVE YEARS
- --------------------------------- ----------------------------------------------------
<S> <C>
RICHARD C. VAUGHAN Executive Vice President and Chief Financial Officer
DIRECTOR [1/95-present] (formerly Senior Vice President
200 East Berry Street [4/92-1/95]), Lincoln National Corp.
Fort Wayne, Ind. 46802
MICHAEL R. WALKER Vice President [1/96-present], Lincoln National Life
VICE PRESIDENT Insurance Co. Formerly: Vice President [3/93-1/96],
Employers Health Insurance Co.
ROY V. WASHINGTON Vice President [7/96-present], Lincoln National Life
VICE PRESIDENT 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>
DISTRIBUTION OF POLICIES
Lincoln Life intends to offer the Policy in all
jurisdictions where it is licensed to do business. Lincoln
Life, also 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 may be sold by individuals, who in addition to
being appointed as life insurance agents for Lincoln Life,
are also registered representatives of Lincoln Life or other
broker-dealers. These representatives ordinarily receive
commission and service fees up to 60% of the first year
premium, plus up to 5% of all other premiums paid. In lieu
of premium-based commission, Lincoln Life may pay equivalent
amounts based on Accumulation Value. The selling office
receives additional compensation on the first year premium
and all additional premiums. In some situations, the selling
office may elect to share its commission with the registered
representative. Selling representatives are also eligible
for bonuses and non-cash compensation if certain production
levels are reached. All compensation is paid from Lincoln
Life's resources, which include sales charges made under
this Policy.
CHANGES OF INVESTMENT POLICY
Lincoln Life may materially change the investment policy of
the Separate Account. Lincoln Life must inform the Owners
and obtain all necessary regulatory approvals. Any change
must be submitted to the various state insurance departments
which shall disapprove it if deemed detrimental to the
interests of the Owners or if it renders Lincoln Life's
operations hazardous to the public. If an Owner objects, the
Policy may be converted to a substantially comparable fixed
benefit life insurance policy offered by Lincoln Life on the
life of the Insureds. 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.
37
<PAGE>
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 Separate Account and annual and
semi-annual reports of the Funds as required by the 1940
Act.
In addition, Owners will receive statements of significant
transactions, such as changes in Specified Amount, changes
in Death Benefit Option, transfers among Sub-Accounts,
Premium Payments, loans, loan repayments, reinstatement and
termination.
ADVERTISING
We are also ranked and rated by independent financial rating
services, including Moody's, Standard & Poor's, Duff &
Phelps and A.M. Best Company. The purpose of these ratings
is to reflect our financial strength or claims-paying
ability. The ratings are not intended to reflect the
investment experience or financial strength of the Variable
Account. We may advertise these ratings from time to time.
In addition, we may include in certain advertisements,
endorsements in the form of a list of organizations,
individuals or other parties which recommend Lincoln Life or
the Policies. Furthermore, we may occasionally include in
advertisements comparisons of currently taxable and tax
deferred investment programs, based on selected tax
brackets, or discussions of alternative investment vehicles
and general economic conditions.
We are a member of the Insurance Marketplace Standards
Association ("IMSA") and may include the IMSA logo and
information about IMSA membership in our advertisement.
Companies that belong to IMSA subscribe to a set of ethical
standards covering the various aspects of sales and services
for individually sold life insurance and annuities.
PREPARING FOR YEAR 2000
Many existing computer programs use only two digits in the
date field to identify the year. If left uncorrected these
programs, which were designed and developed without
38
<PAGE>
considering the impact of the upcoming change in the
century, could fail to operate or could produce erroneous
results when processing dates after December 31, 1999. For
example, a bond with a stated maturity date of July 1, 2000,
a computer program could read and store the maturity date as
July 1, 1900. This problem is known by many names, such as
the "Year 2000 Problem", "Y2K" and the "Millenium Bug."
The Year 2000 Problem affects virtually all computer
programs worldwide. It can cause a computer system to
suddenly stop operating. It can also result in a computer
corrupting vital company records, and the program could go
undetected for a long time. For our products, if left
unchecked it could cause such problems as purchase payment,
collection and deposit errors; claim payment difficulties;
accounting errors; erroneous unit values; and difficulties
or delays in processing transfers, surrenders and
withdrawals. In a worst case scenario, this could result in
a material disruption to the operations both of Lincoln Life
and of Delaware Service Company, Inc. (Delaware), the
provider of the accounting and valuation services for the
Separate Account.
However, both companies are wholly owned by Lincoln National
Corporation (LNC), which has had Year 2000 processes in
place since 1996. LNC projects aggregate expenditures in
excess of $92 million for its Y2K efforts through the year
2000. Both Lincoln Life and Delaware have dedicated Year
2000 teams and steering committees that are answerable to
their counterparts in LNC.
In light of the potential problems discussed above, Lincoln
Life, as part of its Year 2000 updating process, has assumed
responsibility for correcting all high-priority Information
Technology (IT) systems which service the Separate Account.
Delaware is responsible for updating all its high-priority
IT systems to support these vital services. The Year 2000
effort, for both IT and non-IT systems, is organized into
four phases:
- awareness-raising and inventory of all assets (including
third-party agent and vendor relationships;
- assessment and high-level planning and strategy;
- remediation of affected systems and equipment; and
- testing to verify Year 2000 readiness.
Both companies are currently on schedule to have their
high-priority IT systems remediated and tested to
demonstrate readiness by June 30, 1999. During the third and
fourth quarters of 1999 additional testing of the
environment will continue. Both companies are currently on
schedule to have their high-priority non-IT systems
(elevators, heating and ventilation, security systems, etc.)
remediated and tested by October 31, 1999.
The work on Year 2000 issues has not suffered significant
delays; however, some uncertainty remains. Specific factors
that give rise to this uncertainty include (but are
certainly not limited to) a possible loss of technical
resources to perform the work; failure to identify all
susceptible systems; and non-compliance by third parties
whose systems and operations impact Lincoln Life. In a
report dated February 26, 1999, entitled INVESTIGATING THE
IMPACT OF THE YEAR 2000 TECHNOLOGY PROBLEM, S. Rpt. 106-10,
the U.S. Senate Special Committee on the Year 2000
Technology Problem expressed its concern that "Financial
services firms ... are particularly vulnerable to ... the
risk that a material customer or business partner will fail,
as a result of the computer problems, to meet its
obligations."
One important source of uncertainty is the extent to which
the key trading partners of Lincoln Life and of Delaware
will be successful in their own remediation and testing
efforts. Lincoln Life and Delaware have been monitoring the
progress of their trading partners; however, the efforts of
these partners are beyond our control.
39
<PAGE>
Lincoln Life and Delaware expect to have completed their
necessary remediation and testing efforts prior to December
31, 1999. However, given the nature and complexity of the
problem, there can be no guarantee by either company that
there will not be significant computer problems after
December 31, 1999.
LEGAL PROCEEDINGS
Lincoln Life is involved in various pending or threatened
legal proceedings arising from the conduct of its business.
Most of these proceedings are routine and in the ordinary
course of business. In some instances they include claims
for unspecified or substantial punitive damages and similar
types of relief in addition to amounts for equitable relief.
After consultation with legal counsel and a review of
available facts, it is management's opinion that the
ultimate liability, if any, under these suits will not have
a material adverse effect on the financial position of
Lincoln Life.
Lincoln Life is presently defending three lawsuits in which
Plaintiffs seek to represent national classes of
policyholders in connection with alleged fraud, breach of
contract and other claims relating to the sale of
interest-sensitive universal and participating whole life
insurance policies. As of the date of this prospectus, the
courts have not certified a class in any of the suits.
Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. Although the
relief sought in these cases is substantial, the cases are
in the preliminary stages of litigation, and it is premature
to make assessments about potential loss, if any. Management
is defending these suits vigorously. The amount of
liability, if any, which may ultimately arise as a result of
these suits cannot be reasonably determined at this time.
EXPERTS
The financial statements of the Separate Account and the
statutory-basis financial statements of Lincoln Life
appearing in this prospectus and Registration Statement have
been audited by Ernst & Young LLP, independent auditors, as
set forth in their reports which also appears elsewhere in
this document and in the Registration Statement. The
financial statements audited by Ernst & Young LLP have been
included in this document in reliance on their reports given
on their authority as experts in accounting and auditing.
Actuarial matters included in this prospectus have been
examined by Vaughn W. Robbins, FSA as stated in the Opinion
filed as an Exhibit to the Registration Statement.
Legal matters in connection with the Policies described
herein are being passed upon by Robert A. Picarello, Esq.,
as stated in the Opinion filed as an Exhibit to the
Registration Statement.
REGISTRATION STATEMENT
A Registration Statement has been filed with the Securities
and Exchange Commission under the Securities Act of 1933, as
amended, with respect to the Policies offered hereby. This
Prospectus does not contain all the information set forth in
the Registration Statement and amendments thereto and
exhibits filed as a part thereof, to all of which reference
is hereby made for further information concerning the
Separate Account, Lincoln Life, and the Policies offered
hereby. Statements contained in this Prospectus as to the
content of Policies and other legal instruments are
summaries. For a complete statement of the terms thereof,
reference is made to such instruments as filed.
40
<PAGE>
APPENDIX 1
CORRIDOR PERCENTAGES
<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
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>
41
<PAGE>
APPENDIX 2
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 show 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 charges are made and
expenses applied which lower investment return on the assets
held in the Sub-Accounts. Daily charges are made against the
assets of the Sub-Accounts for assuming mortality and
expense risks. The current mortality and expense risk
charges are equivalent to an annual effective rate of 0.80%
of the daily net asset value of the Separate Account. The
mortality and expense risk charge is guaranteed never to
exceed an annual effective rate of 0.90% of the daily net
asset value of the Separate Account. In addition, the
amounts shown also reflect the deduction of Fund investment
advisory fees and other expenses which will vary depending
on which funding vehicle is chosen but which are assumed for
purposes of these illustrations to be equivalent to an
annual effective rate of 0.82% of the daily net asset value
of the Separate Account. This rate reflects an arithmetic
average of total Fund portfolio annual expenses for the year
ending December 31, 1998.
Considering charges for mortality and expense risks and the
assumed Fund expenses, gross annual rates of 0%, 6% and 12%
correspond to net investment experience at annual rates of
-1.62%, 4.38% and 10.38% on a current basis, -1.72%, 4.28%
and 10.28% on a guaranteed basis.
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, and are
shown in the illustrations.
In addition, the illustrations reflect the fact that the
Company deducts a monthly administrative charge at the
beginning of each Policy Month. This monthly administrative
expense charge is a flat dollar charge of $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.
42
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,471 1,000,000 1,000,000 1,000,000 11,172 11,884 12,597 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,020 24,135 26,337 8,754 10,869 13,071 13,266
3 45,620 1,000,000 1,000,000 1,000,000 32,492 36,709 41,274 19,739 23,956 28,521 12,753
4 62,372 1,000,000 1,000,000 1,000,000 42,564 49,591 57,504 30,358 37,385 45,298 12,206
5 79,962 1,000,000 1,000,000 1,000,000 52,211 62,762 75,128 40,484 51,034 63,400 11,728
6 98,431 1,000,000 1,000,000 1,000,000 61,399 76,196 94,253 50,287 65,084 83,141 11,112
7 117,824 1,000,000 1,000,000 1,000,000 70,084 89,854 114,987 60,206 79,976 105,110 9,877
8 138,186 1,000,000 1,000,000 1,000,000 78,202 103,680 137,439 69,560 95,038 128,796 8,643
9 159,567 1,000,000 1,000,000 1,000,000 85,672 117,596 161,711 78,264 110,188 154,303 7,408
10 182,016 1,000,000 1,000,000 1,000,000 92,398 131,511 187,916 86,224 125,338 181,742 6,173
11 205,588 1,000,000 1,000,000 1,000,000 98,278 145,325 216,182 93,339 140,386 211,244 4,939
12 230,338 1,000,000 1,000,000 1,000,000 103,208 158,936 246,668 99,504 155,232 242,964 3,704
13 256,326 1,000,000 1,000,000 1,000,000 107,083 172,240 279,565 104,613 169,771 277,095 2,469
14 283,614 1,000,000 1,000,000 1,000,000 109,798 185,135 315,110 108,563 183,900 313,875 1,235
15 312,266 1,000,000 1,000,000 1,000,000 111,212 197,484 353,564 111,212 197,484 353,564 0
20 478,501 1,000,000 1,000,000 1,000,000 88,571 241,528 600,910 88,571 241,528 600,910 0
25 690,664 0 1,000,000 1,065,112 0 215,810 1,014,392 0 215,810 1,014,392 0
30 961,443 0 0 1,787,824 0 0 1,702,690 0 0 1,702,690 0
</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. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.82% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
43
<PAGE>
MALE AGE 55/FEMALE AGE 55 NONSMOKER
STANDARD -- $13,782 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF SURRENDER
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% CHARGE
- ------ ----------- ---------- ---------- ---------- -------- -------- ---------- -------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 14,471 1,000,000 1,000,000 1,000,000 11,246 11,961 12,676 0 0 0 13,676
2 29,666 1,000,000 1,000,000 1,000,000 22,377 24,509 26,728 9,110 11,243 13,462 13,266
3 45,620 1,000,000 1,000,000 1,000,000 33,302 37,576 42,199 20,549 24,822 29,446 12,753
4 62,372 1,000,000 1,000,000 1,000,000 44,022 51,180 59,232 31,816 38,973 47,026 12,206
5 79,962 1,000,000 1,000,000 1,000,000 54,536 65,340 77,985 42,809 53,613 66,258 11,728
6 98,431 1,000,000 1,000,000 1,000,000 64,844 80,079 98,632 53,732 68,967 87,519 11,112
7 117,824 1,000,000 1,000,000 1,000,000 74,942 95,415 121,362 65,065 85,537 111,485 9,877
8 138,186 1,000,000 1,000,000 1,000,000 84,831 111,371 146,390 76,189 102,728 137,747 8,643
9 159,567 1,000,000 1,000,000 1,000,000 94,508 127,969 173,947 87,100 120,561 166,539 7,408
10 182,016 1,000,000 1,000,000 1,000,000 103,969 145,232 204,293 97,796 139,059 198,119 6,173
11 205,588 1,000,000 1,000,000 1,000,000 113,213 163,184 237,712 108,274 158,246 232,773 4,939
12 230,338 1,000,000 1,000,000 1,000,000 122,161 181,779 274,455 118,457 178,075 270,751 3,704
13 256,326 1,000,000 1,000,000 1,000,000 130,779 201,012 314,844 128,310 198,543 312,375 2,469
14 283,614 1,000,000 1,000,000 1,000,000 138,998 220,846 359,213 137,763 219,611 357,978 1,235
15 312,266 1,000,000 1,000,000 1,000,000 146,785 241,280 407,974 146,785 241,280 407,974 0
20 478,501 1,000,000 1,000,000 1,000,000 175,594 350,409 735,049 175,594 350,409 735,049 0
25 690,664 1,000,000 1,000,000 1,343,332 180,770 472,005 1,279,364 180,770 472,005 1,279,364 0
30 961,443 1,000,000 1,000,000 2,269,016 121,765 590,664 2,160,968 121,765 590,664 2,160,968 0
</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 amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 22 of this Prospectus.
44
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
GUARANTEED BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- ----------- ----------- ----------- -------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,799 1,000,000 1,000,000 1,000,000 18,058 19,195 20,332 0 0 0
2 46,737 1,000,000 1,000,000 1,000,000 35,031 38,404 41,915 10,971 14,344 17,855
3 71,873 1,000,000 1,000,000 1,000,000 50,771 57,463 64,711 27,781 34,473 41,721
4 98,265 1,000,000 1,000,000 1,000,000 65,166 76,238 88,726 43,213 54,285 66,773
5 125,977 1,000,000 1,000,000 1,000,000 78,084 94,575 113,961 57,201 73,692 93,077
6 155,074 1,000,000 1,000,000 1,000,000 89,357 112,281 140,394 69,511 92,435 120,549
7 185,627 1,000,000 1,000,000 1,000,000 98,752 129,097 167,964 81,111 111,457 150,324
8 217,707 1,000,000 1,000,000 1,000,000 105,947 144,674 196,550 90,512 129,239 181,115
9 251,391 1,000,000 1,000,000 1,000,000 110,521 158,561 225,970 97,290 145,331 212,739
10 286,759 1,000,000 1,000,000 1,000,000 111,977 170,228 256,022 100,951 159,203 244,996
11 323,896 1,000,000 1,000,000 1,000,000 109,766 179,093 286,522 100,945 170,273 277,702
12 362,889 1,000,000 1,000,000 1,000,000 103,287 184,514 317,331 96,672 177,899 310,716
13 403,832 1,000,000 1,000,000 1,000,000 91,890 185,792 348,374 87,480 181,382 343,964
14 446,822 1,000,000 1,000,000 1,000,000 74,832 182,126 379,645 72,626 179,921 377,440
15 491,962 1,000,000 1,000,000 1,000,000 51,143 172,481 411,144 51,143 172,481 411,144
20 753,859 0 0 1,000,000 0 0 570,383 0 0 570,383
25 1,088,113 0 0 1,000,000 0 0 771,432 0 0 771,432
30 1,514,716 0 0 1,289,785 0 0 1,277,015 0 0 1,277,015
<CAPTION>
END OF
POLICY SURRENDER
YEAR CHARGE
- ------ ---------
<S> <C>
1 25,098
2 24,060
3 22,991
4 21,953
5 20,883
6 19,845
7 17,640
8 15,435
9 13,230
10 11,025
11 8,820
12 6,615
13 4,410
14 2,205
15 0
20 0
25 0
30 0
</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. Guaranteed cost of insurance
rates assumed. Guaranteed mortality and
expense risk charges, administrative fees and
premium load assumed.
These investment results are illustrative only
and should not be considered a representation
of past or future investment results. Actual
investment results may be more or less than
those shown and will depend on a number of
factors, including the Policy Owner's
allocations and the Funds' rates of return.
Accumulation Values and Surrender Values for a
Policy would be different from those shown if
the actual investment rates of return averaged
0%, 6% and 12% over a period of years, but
fluctuated above or below those averages for
individual Policy Years. No representations
can be made that these rates of return will in
fact be achieved for any one year or sustained
over a period of time.
The amounts shown in these illustrations
reflect (1) the deduction of guaranteed
mortality and expense risk charges and (2)
assumed Fund total expenses of 0.82% per year.
See "Fund Expenses" at page 22 of this
Prospectus.
45
<PAGE>
MALE AGE 65/FEMALE AGE 65 NONSMOKER
STANDARD -- $21,713 ANNUAL PREMIUM
FACE AMOUNT $1,000,000
DEATH BENEFIT OPTION 1
CURRENT BASIS
<TABLE>
<CAPTION>
PREMIUMS
ACCUMULATED
END OF AT DEATH BENEFIT PROCEEDS TOTAL ACCUMULATION VALUE SURRENDER VALUE
POLICY 5% INTEREST ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF ANNUAL INVESTMENT RETURN OF
YEAR PER YEAR GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12% GROSS 0% GROSS 6% GROSS 12%
- ------ ----------- ----------- ----------- ----------- -------- --------- ----------- -------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1 22,799 1,000,000 1,000,000 1,000,000 18,364 19,511 20,660 0 0 0
2 46,737 1,000,000 1,000,000 1,000,000 36,370 39,806 43,381 12,311 15,747 19,321
3 71,873 1,000,000 1,000,000 1,000,000 53,947 60,840 68,295 30,956 37,849 45,305
4 98,265 1,000,000 1,000,000 1,000,000 71,077 82,621 95,608 49,124 60,669 73,656
5 125,977 1,000,000 1,000,000 1,000,000 87,754 105,172 125,559 66,870 84,288 104,675
6 155,074 1,000,000 1,000,000 1,000,000 103,967 128,510 158,409 84,122 108,665 138,563
7 185,627 1,000,000 1,000,000 1,000,000 119,708 152,660 194,453 102,068 135,020 176,813
8 217,707 1,000,000 1,000,000 1,000,000 134,966 177,644 234,021 119,530 162,209 218,586
9 251,391 1,000,000 1,000,000 1,000,000 149,728 203,489 277,480 136,498 190,259 264,249
10 286,759 1,000,000 1,000,000 1,000,000 163,982 230,222 325,242 152,957 219,197 314,216
11 323,896 1,000,000 1,000,000 1,000,000 177,714 257,874 377,771 168,894 249,054 368,951
12 362,889 1,000,000 1,000,000 1,000,000 190,447 286,055 435,236 183,832 279,440 428,621
13 403,832 1,000,000 1,000,000 1,000,000 202,060 314,707 498,176 197,650 310,297 493,766
14 446,822 1,000,000 1,000,000 1,000,000 212,192 343,573 567,096 209,987 341,368 564,891
15 491,962 1,000,000 1,000,000 1,000,000 220,393 372,347 642,645 220,393 372,347 642,645
20 753,859 1,000,000 1,000,000 1,217,751 215,894 506,279 1,159,763 215,894 506,279 1,159,763
25 1,088,113 1,000,000 1,000,000 2,107,579 115,282 636,208 2,007,219 115,282 636,208 2,007,219
30 1,514,716 0 1,000,000 3,411,907 0 772,921 3,378,126 0 772,921 3,378,126
<CAPTION>
END OF
POLICY SURRENDER
YEAR CHARGE
- ------ ---------
<S> <C>
1 25,098
2 24,060
3 22,991
4 21,953
5 20,883
6 19,845
7 17,640
8 15,435
9 13,230
10 11,025
11 8,820
12 6,615
13 4,410
14 2,205
15 0
20 0
25 0
30 0
</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 amounts shown in these illustrations
reflect (1) the deduction of current mortality
and expense risk charges and (2) assumed Fund
total expenses of 0.82% per year. See "Fund
Expenses" at page 22 of this Prospectus.
46
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
R-1
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF ASSETS AND LIABILITY
DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ 5,720,395 $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 7,113,832 305,543 370,274
- --------------------------- ----------- ------------- ------------
TOTAL ASSETS 12,834,227 305,543 370,274
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 387 14 25
- --------------------------- ----------- ------------- ------------
NET ASSETS $12,833,840 $305,529 $370,249
- --------------------------- ----------- ------------- ------------
----------- ------------- ------------
Percent of net assets 100.00% 2.38% 2.88%
- --------------------------- ----------- ------------- ------------
----------- ------------- ------------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 27,777 37,234
Unit value $ 10.999 $ 9.944
- --------------------------- ------------- ------------
NET ASSETS $305,529 $370,249
- --------------------------- ------------- ------------
------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ 4,916,440 $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 768,182 -- 522,208
- --------------------------- ----------- ----------- ---------
TOTAL ASSETS 768,182 4,916,440 522,208
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 34 117 11
- --------------------------- ----------- ----------- ---------
NET ASSETS $768,148 $ 4,916,323 $ 522,197
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
Percent of net assets 5.98% 38.31% 4.07%
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 73,335 480,881 45,653
Unit value $ 10.475 $ 10.224 $ 11.438
- --------------------------- ----------- ----------- ---------
NET ASSETS $768,148 $ 4,916,323 $ 522,197
- --------------------------- ----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes.
R-2
<PAGE>
<TABLE>
<CAPTION>
BANKER'S DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM TRUST PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. EQUITY SMALL CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ -- $ -- $ 292,561 $ 376,950 $ 134,444 $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 594,132 681,318 1,417,339 -- -- -- 667,530 237,134
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 594,132 681,318 1,417,339 292,561 376,950 134,444 667,530 237,134
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 13 15 31 12 8 9 15 15
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 594,119 $ 681,303 $1,417,308 $ 292,549 $ 376,942 $ 134,435 $ 667,515 $ 237,119
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Percent of net assets 4.63% 5.31% 11.04% 2.28% 2.94% 1.05% 5.20% 1.85%
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 51,058 58,567 127,426 30,132 34,193 17,590 65,221 22,332
Unit value $ 11.636 $ 11.633 $ 11.123 $ 9.709 $ 11.024 $ 7.643 $ 10.235 $ 10.618
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 594,119 $ 681,303 $1,417,308 $ 292,549 $ 376,942 $ 134,435 $ 667,515 $ 237,119
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
ASSETS
Investments at Market --
Affiliated (Cost
$6,542,303) $ -- $ -- $ -- $ -- $ -- $ -- $ --
Investments at Market --
Unaffiliated (Cost
$5,644,145) 140,181 220,260 148,383 101,787 100,262 802,232 37,067
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
TOTAL ASSETS 140,181 220,260 148,383 101,787 100,262 802,232 37,067
- ---------------------------
LIABILITY--
Payable to The Lincoln
National Life Insurance
Company 3 14 6 7 19 17 2
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
Percent of net assets 1.09% 1.72% 1.16% 0.79% 0.78% 6.25% 0.29%
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS ARE REPRESENTED BY:
Units in accumulation
period 13,495 20,411 15,148 10,412 10,158 83,612 4,003
Unit value $ 10.387 $ 10.791 $ 9.795 $ 9.775 $ 9.868 $ 9.595 $ 9.258
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
NET ASSETS $ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
- --------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
R-3
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF OPERATIONS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- -------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ 59,265 $ 405 $12,573
Dividends from net
realized gains on
investments 89,117 7,166 4,012
Mortality and expense
guarantees (15,398) (506) (443)
- --------------------------- -------- ------------- ------------
NET INVESTMENT INCOME
(LOSS) 132,984 7,065 16,142
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 20,588 1,131 5
Net change in unrealized
appreciation or
depreciation on
investments 647,779 44,813 (11,427)
- --------------------------- -------- ------------- ------------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 668,367 45,944 (11,422)
- --------------------------- -------- ------------- ------------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $801,351 $53,009 $ 4,720
- --------------------------- -------- ------------- ------------
-------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ----------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $37,695 $ --
Dividends from net
realized gains on
investments -- -- --
Mortality and expense
guarantees (856) (6,329) (599)
- --------------------------- ----------- --------- ---------
NET INVESTMENT INCOME
(LOSS) (856) 31,366 (599)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 259 -- 5,876
Net change in unrealized
appreciation or
depreciation on
investments 6,838 -- 99,056
- --------------------------- ----------- --------- ---------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 7,097 -- 104,932
- --------------------------- ----------- --------- ---------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $6,241 $31,366 $ 104,333
- --------------------------- ----------- --------- ---------
----------- --------- ---------
</TABLE>
See accompanying notes.
R-4
<PAGE>
<TABLE>
<CAPTION>
DELAWARE DELAWARE FIDELITY FIDELITY
AIM AIM BANKER'S PREMIUM DELAWARE PREMIUM VIP VIP II
V.I. V.I. TRUST EQUITY SMALL CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- -------------------------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ 1,681 $ 2,872 $ 2,407 $ -- $ -- $ -- $ -- $ --
Dividends from net
realized gains on
investments 31,515 25,401 15,403 -- -- -- -- --
Mortality and expense
guarantees (837) (993) (1,229) (396) (258) (250) (643) (217)
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET INVESTMENT INCOME
(LOSS) 32,359 27,280 16,581 (396) (258) (250) (643) (217)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
Net change in unrealized
appreciation or
depreciation on
investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 82,320 86,472 109,383 38,797 30,518 7,137 54,300 9,328
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 114,679 $ 113,752 $125,964 $38,401 $30,260 $6,887 $ 53,657 $9,111
- --------------------------- ---------- ---------- ------------- ---------- --------- --------- -------- --------
---------- ---------- ------------- ---------- --------- --------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------
Net Investment Income:
Dividends from investment
income $ -- $ -- $ 1,632 $ 0 $ -- $ -- $ --
Dividends from net
realized gains on
investments -- -- 5,620 -- -- -- --
Mortality and expense
guarantees (200) (314) (267) (122) (166) (703) (70)
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET INVESTMENT INCOME
(LOSS) (200) (314) 6,985 (122) (166) (703) (70)
- ---------------------------
Net Realized and Unrealized
Gain (Loss) on
Investments:
Net realized gain (loss)
on investments 103 43 280 32 120 402 124
Net change in unrealized
appreciation or
depreciation on
investments 6,369 11,452 13,659 4,507 11,550 53,289 1,631
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET REALIZED AND UNREALIZED
GAIN (LOSS) ON
INVESTMENTS 6,472 11,495 13,939 4,539 11,670 53,691 1,755
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
NET INCREASE IN NET ASSETS
RESULTING FROM
OPERATIONS $ 6,272 $ 11,181 $20,924 $4,417 $11,504 $52,988 $1,685
- --------------------------- ------- -------- ------------- ------ ---------- ------- ----------
------- -------- ------------- ------ ---------- ------- ----------
</TABLE>
R-5
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
STATEMENT OF CHANGES IN NET ASSETS
PERIOD FROM JUNE 18, 1998 TO DECEMBER 31, 1998
<TABLE>
<CAPTION>
AIM AIM
V.I. V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 132,984 $ 7,065 $ 16,142
Net realized gain (loss) on
investments 20,588 1,131 5
Net change in unrealized appreciation
or depreciation on investments 647,779 44,813 (11,427)
- --------------------------------------- ----------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 801,351 53,009 4,720
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 16,601,606 274,025 388,335
Participant withdrawals (4,569,117) (21,505) (22,806)
- --------------------------------------- ----------- ------------- ------------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 12,032,489 252,520 365,529
- --------------------------------------- ----------- ------------- ------------
TOTAL INCREASE IN NET ASSETS 12,833,840 305,529 370,249
- --------------------------------------- ----------- ------------- ------------
NET ASSETS AT DECEMBER 31, 1998 $12,833,840 $305,529 $370,249
- --------------------------------------- ----------- ------------- ------------
----------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (856) $ 31,366 $ (599)
Net realized gain (loss) on
investments 259 -- 5,876
Net change in unrealized appreciation
or depreciation on investments 6,838 -- 99,056
- --------------------------------------- ----------- ----------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,241 31,366 104,333
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 797,504 9,020,245 449,620
Participant withdrawals (35,597) (4,135,288) (31,756)
- --------------------------------------- ----------- ----------- ---------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 761,907 4,884,957 417,864
- --------------------------------------- ----------- ----------- ---------
TOTAL INCREASE IN NET ASSETS 768,148 4,916,323 522,197
- --------------------------------------- ----------- ----------- ---------
NET ASSETS AT DECEMBER 31, 1998 $768,148 $ 4,916,323 $ 522,197
- --------------------------------------- ----------- ----------- ---------
----------- ----------- ---------
</TABLE>
See accompanying notes.
R-6
<PAGE>
<TABLE>
<CAPTION>
DELAWARE
BANKER'S PREMIUM DELAWARE FIDELITY FIDELITY
AIM AIM TRUST SMALL DELAWARE PREMIUM VIP VIP II
V.I. V.I. EQUITY CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE 500 INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- --------------------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ 32,359 $ 27,280 $ 16,581 $ (396) $ (258) $ (250) $ (643) $ (217)
Net realized gain (loss) on
investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
Net change in unrealized appreciation
or depreciation on investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 114,679 113,752 125,964 38,401 30,260 6,887 53,657 9,111
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 530,958 615,727 1,356,215 270,284 359,010 139,569 647,390 234,377
Participant withdrawals (51,518) (48,176) (64,871) (16,136) (12,328) (12,021) (33,532) (6,369)
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 479,440 567,551 1,291,344 254,148 346,682 127,548 613,858 228,008
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
TOTAL INCREASE IN NET ASSETS 594,119 681,303 1,417,308 292,549 376,942 134,435 667,515 237,119
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
NET ASSETS AT DECEMBER 31, 1998 $594,119 $681,303 $1,417,308 $292,549 $376,942 $134,435 $667,515 $237,119
- --------------------------------------- -------- -------- ---------- -------- -------- -------- -------- --------
-------- -------- ---------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
Changes From Operations:
Net investment income (loss) $ (200) $ (314) $ 6,985 $ (122) $ (166) $ (703) $ (70)
Net realized gain (loss) on
investments 103 43 280 32 120 402 124
Net change in unrealized appreciation
or depreciation on investments 6,369 11,452 13,659 4,507 11,550 53,289 1,631
- --------------------------------------- -------- -------- ---------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM OPERATIONS 6,272 11,181 20,924 4,417 11,504 52,988 1,685
- ---------------------------------------
Change From Unit Transactions:
Participant purchases 142,732 220,459 140,963 104,839 90,655 779,469 39,230
Participant withdrawals (8,826) (11,394) (13,510) (7,476) (1,916) (30,242) (3,850)
- --------------------------------------- -------- -------- ---------- -------- -------- -------- --------
NET INCREASE IN NET ASSETS RESULTING
FROM UNIT TRANSACTIONS 133,906 209,065 127,453 97,363 88,739 749,227 35,380
- --------------------------------------- -------- -------- ---------- -------- -------- -------- --------
TOTAL INCREASE IN NET ASSETS 140,178 220,246 148,377 101,780 100,243 802,215 37,065
- --------------------------------------- -------- -------- ---------- -------- -------- -------- --------
NET ASSETS AT DECEMBER 31, 1998 $140,178 $220,246 $ 148,377 $101,780 $100,243 $802,215 $37,065
- --------------------------------------- -------- -------- ---------- -------- -------- -------- --------
-------- -------- ---------- -------- -------- -------- --------
</TABLE>
R-7
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS
1. ACCOUNTING POLICIES & ACCOUNT INFORMATION
THE ACCOUNT
Lincoln Life Flexible Premium Variable Life Account R (the Variable Account)
is a segregated investment account of The Lincoln National Life Insurance
Company (Lincoln Life) and is registered as a unit investment trust with the
Securities and Exchange Commission under the Investment Company Act of 1940,
as amended. The operations of the Variable Account, which commenced on June
18, 1998, are part of the operations of Lincoln Life.
The assets of the Variable Account are owned by Lincoln Life. The portion of
the Variable Account's assets supporting the variable life policies may not
be used to satisfy liabilities arising out of any other business of Lincoln
Life.
BASIS OF PRESENTATION
The accompanying financial statements have been prepared in accordance with
generally accepted accounting principles for unit investment trusts.
INVESTMENTS
The assets of the Variable Account are divided into variable sub-accounts
each of which is invested in shares of one of twenty portfolios (the Funds)
of eight diversified open-end management investment companies, each
portfolio with its own investment objective. The Funds in which the
sub-accounts invest are as follows:
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
Banker's Trust:
Banker's Trust Equity 500 Index Fund
Delaware Group:
Delaware Premium Small Cap Value Series
Delaware Premium Trend Series
Delaware Premium Emerging Markets Series
Fidelity Variable Insurance Products Fund:
Fidelity VIP Equity -- Income Portfolio
Fidelity Variable Insurance Products Fund II:
Fidelity VIP II Asset Manager Portfolio
Fidelity VIP II Investment Grade Bond Portfolio
Lincoln National:
Lincoln National Money Market Account
MFS Variable Insurance Trust:
MFS Emerging Growth Series
MFS Total Return Series
MFS Utilities Series
OCC Accumulation Trust:
OCC Accumulation Global Equity Portfolio
OCC Accumulation Managed Portfolio
Templeton Variable Product Series Fund:
Templeton Variable Product Asset Allocation Fund
Templeton Variable Product International Fund
Templeton Variable Product Stock Fund
Investments in the variable sub-accounts are stated at the closing net asset
value per share on December 31, 1998, which approximates fair value. The
difference between cost and fair value is reflected as unrealized
appreciation and depreciation of investments.
Investment transactions are accounted for on a trade date basis. The cost of
investments sold is determined by the average cost method.
DIVIDENDS
Dividends paid to the Variable Account are automatically reinvested in
shares of the funds on the payable date. Dividend income is recorded on the
ex-dividend date.
FEDERAL INCOME TAXES
Operations of the Variable Account form a part of and are taxed with
operations of Lincoln Life, which is taxed as a "life insurance company"
under the Internal Revenue Code. The Variable Account will not be taxed as a
regulated investment company under Subchapter M of the Internal Revenue
Code. Using current federal income tax law, no federal income taxes are
payable with respect to the Variable Account's net investment income and the
net realized gain on investments.
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
Amounts are paid to Lincoln Life for mortality and expense guarantees at a
percentage of the current value of the Variable Account each day. The
current rate of deduction, stated as an annual percentage, is .80%. The
mortality and expense risk charges for each of the variable sub-accounts are
reported in the statement of operations.
R-8
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
Prior to the allocation of premiums to the Variable Account, Lincoln Life
deducts a premium load of 8% of each premium payment to cover state taxes
and federal income tax liabilities.
Lincoln Life charges a monthly administrative fee of $12.50 in the first
policy year and $5 in subsequent policy years. In addition, there is a
monthly charge of $0.09 per $1,000 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 charge of $0.01 per $1,000 of specified amount. This charge is for
items such as premium billing and collection, policy value calculation,
confirmations and periodic reports.
Lincoln Life assumes responsibility for providing the insurance benefit
included in the policy. Lincoln Life charges a monthly deduction of the cost
of insurance and any charges for supplemental riders. The cost of insurance
charge depends on the attained age, risk classification, gender
classification (in accordance with state law) and the current net amount at
risk. On a monthly basis, the administrative fee and the cost of insurance
charge are deducted proportionately for the value of each variable
sub-account and/or fixed account funding options. The fixed account is part
of the general account of Lincoln Life and is not included in these
financial statements.
Under certain circumstances, Lincoln Life reserves the right to charge a
transfer fee for transfers between variable sub-accounts. For the period
ended December 31, 1998, no transfer fees were deducted from the variable
sub-accounts.
R-9
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
2. MORTALITY AND EXPENSE GUARANTEES & OTHER TRANSACTIONS WITH AFFILIATES
(CONTINUED)
The fees charged by Lincoln Life for premium loads (deducted from premium
payments), administrative fees and the amount deducted for the cost of
insurance, both of which are included in participant withdrawals in the
statement of changes in net assets, for variable sub-accounts for the period
ended December 31, 1998 were as follows:
<TABLE>
<CAPTION>
COST OF
PREMIUM ADMINISTRATIVE INSURANCE
VARIABLE SUB-ACCOUNTS LOADS FEES DEDUCTION
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AIM V.I. Capital Appreciation Fund $ 16,862 $ 4,282 $ 235
-------------------------------------------------------------
AIM V.I. Diversified Income Fund 19,888 2,480 436
-------------------------------------------------------------
AIM V.I. Growth Fund 32,035 13,223 878
-------------------------------------------------------------
AIM V.I. Value Fund 37,485 9,642 1,025
-------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 47,031 14,143 563
-------------------------------------------------------------
Delaware Premium Small Cap Value Series 12,748 3,180 208
-------------------------------------------------------------
Delaware Premium Trend Series 10,213 1,826 288
-------------------------------------------------------------
Delaware Premium Emerging Markets Series 10,693 1,316 12
-------------------------------------------------------------
Fidelity VIP Equity -- Income Portfolio 25,421 7,784 327
-------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 4,818 1,513 37
-------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 28,547 6,535 507
-------------------------------------------------------------
Lincoln National Money Market Account 561,505 98,229 11,472
-------------------------------------------------------------
MFS Emerging Growth Series 24,535 6,409 802
-------------------------------------------------------------
MFS Total Return Series 3,858 2,869 606
-------------------------------------------------------------
MFS Utilities Series 9,139 1,912 331
-------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 9,893 3,433 123
-------------------------------------------------------------
OCC Accumulation Managed Portfolio 5,018 2,112 334
-------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 80 1,304 532
-------------------------------------------------------------
Templeton Variable Products International Fund 24,224 5,619 302
-------------------------------------------------------------
Templeton Variable Products Stock Fund 2,642 1,045 100
-------------------------------------------------------------
</TABLE>
Lincoln Life, upon full surrender of a policy, may charge a surrender
charge. This charge is in part a deferred sales charge and in part a
recovery of certain first year administrative costs. The amount of the
surrender charge, if any, will depend on the face amount of the policy and
the issue age of the policy. In no event will the surrender charge exceed
the maximum allowed by state or federal law. No surrender charge is imposed
on a partial surrender, but an administrative fee of $25 is imposed,
allocated pro-rata among the variable sub-accounts (and, where applicable,
the fixed account) from which the partial surrender proceeds are taken. For
the period ended December 31, 1998, no surrender charges and partial
surrender administrative charges were paid to Lincoln Life, attributable to
the variable sub-accounts.
R-10
<PAGE>
THIS PAGE WAS INTENTIONALLY LEFT BLANK.
R-11
<PAGE>
Lincoln Life Flexible Premium Variable Life Account R
Notes to financial statements (continued)
3. NET ASSETS
The following is a summary of net assets owned at December
31, 1998.
<TABLE>
<CAPTION>
AIM V.I. AIM V.I.
CAPITAL DIVERSIFIED
APPRECIATION INCOME
COMBINED FUND FUND
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $12,032,489 $252,520 $365,529
- ---------------------------------------
Accumulated net investment income
(loss) 132,984 7,065 16,142
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 20,588 1,131 5
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 647,779 44,813 (11,427)
- --------------------------------------- ----------- ------------- ------------
$12,833,840 $305,529 $370,249
----------- ------------- ------------
----------- ------------- ------------
</TABLE>
<TABLE>
<CAPTION>
FIDELITY LINCOLN
VIP II NATIONAL MFS
INVESTMENT MONEY EMERGING
GRADE BOND MARKET GROWTH
PORTFOLIO ACCOUNT SERIES
<S> <C> <C> <C>
- ------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $761,907 $ 4,884,957 $ 417,864
- ---------------------------------------
Accumulated net investment income
(loss) (856) 31,366 (599)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 259 -- 5,876
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 6,838 -- 99,056
- --------------------------------------- ----------- ----------- ---------
$768,148 $ 4,916,323 $ 522,197
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
R-12
<PAGE>
3. NET ASSETS (CONTINUED)
<TABLE>
<CAPTION>
BANKER'S DELAWARE
TRUST PREMIUM DELAWARE FIDELITY FIDELITY
EQUITY SMALL DELAWARE PREMIUM VIP VIP II
AIM V.I. AIM V.I. 500 CAP PREMIUM EMERGING EQUITY- ASSET
GROWTH VALUE INDEX VALUE TREND MARKETS INCOME MANAGER
FUND FUND FUND SERIES SERIES SERIES PORTFOLIO PORTFOLIO
<S> <C> <C> <C> <C> <C> <C> <C> <C>
- ------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $479,440 $567,551 $1,291,344 $254,148 $346,682 $127,548 $613,858 $228,008
- ---------------------------------------
Accumulated net investment income
(loss) 32,359 27,280 16,581 (396) (258) (250) (643) (217)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 474 2,596 5,733 344 (131) (11) 3,229 (21)
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 81,846 83,876 103,650 38,453 30,649 7,148 51,071 9,349
- --------------------------------------- -------- -------- -------- -------- -------- -------- -------- --------
$594,119 $681,303 $1,417,308 $292,549 $376,942 $134,435 $667,515 $237,119
-------- -------- -------- -------- -------- -------- -------- --------
-------- -------- -------- -------- -------- -------- -------- --------
</TABLE>
<TABLE>
<CAPTION>
TEMPLETON
OCC VARIABLE TEMPLETON TEMPLETON
MFS ACCUMULATION OCC PRODUCTS VARIABLE VARIABLE
TOTAL MFS GLOBAL ACCUMULATION ASSET PRODUCTS PRODUCTS
RETURN UTILITIES EQUITY MANAGED ALLOCATION INTERNATIONAL STOCK
SERIES SERIES PORTFOLIO PORTFOLIO FUND FUND FUND
<S> <C> <C> <C> <C> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------------------
UNIT TRANSACTIONS:
- ---------------------------------------
Accumulation units $ 133,906 $ 209,065 $ 127,453 $ 97,363 $ 88,739 $ 749,227 $ 35,380
- ---------------------------------------
Accumulated net investment income
(loss) (200) (314) 6,985 (122) (166) (703) (70)
- ---------------------------------------
Accumulated net realized gain (loss) on
investments 103 43 280 32 120 402 124
- ---------------------------------------
Net unrealized appreciation
(depreciation) on investments 6,369 11,452 13,659 4,507 11,550 53,289 1,631
- --------------------------------------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 140,178 $ 220,246 $ 148,377 $ 101,780 $ 100,243 $ 802,215 $ 37,065
---------- ---------- ---------- ---------- ---------- ---------- ----------
---------- ---------- ---------- ---------- ---------- ---------- ----------
</TABLE>
R-13
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
4. PURCHASES AND SALES OF INVESTMENTS
The aggregate cost of investments purchased and the
aggregate proceeds from investments sold were as follows for
1998.
<TABLE>
<CAPTION>
AGGREGATE AGGREGATE
COST OF PROCEEDS
PURCHASES FROM SALES
-----------------------
<S> <C> <C>
AIM V.I. Capital Appreciation Fund $ 279,683 $ 20,084
-------------------------------------------------------------------------
AIM V.I. Diversified Income Fund 382,801 1,105
-------------------------------------------------------------------------
AIM V.I. Growth Fund 529,779 17,967
-------------------------------------------------------------------------
AIM V.I. Value Fund 629,752 34,906
-------------------------------------------------------------------------
Banker's Trust Equity 500 Index Fund 1,388,002 80,046
-------------------------------------------------------------------------
Delaware Premium Small Cap Value Series 256,824 3,060
-------------------------------------------------------------------------
Delaware Premium Trend Series 371,277 24,845
-------------------------------------------------------------------------
Delaware Premium Emerging Markets Series 128,327 1,020
-------------------------------------------------------------------------
Fidelity VIP Equity -- Income Portfolio 652,179 38,949
-------------------------------------------------------------------------
Fidelity VIP II Asset Manager Portfolio 228,704 898
-------------------------------------------------------------------------
Fidelity VIP II Investment Grade Bond Portfolio 806,034 44,949
-------------------------------------------------------------------------
Lincoln National Money Market Account 7,334,359 2,417,919
-------------------------------------------------------------------------
MFS Emerging Growth Series 455,106 37,830
-------------------------------------------------------------------------
MFS Total Return Series 144,528 10,819
-------------------------------------------------------------------------
MFS Utilities Series 211,251 2,486
-------------------------------------------------------------------------
OCC Accumulation Global Equity Portfolio 138,393 3,949
-------------------------------------------------------------------------
OCC Accumulation Managed Portfolio 109,896 12,648
-------------------------------------------------------------------------
Templeton Variable Products Asset Allocation Fund 90,538 1,946
-------------------------------------------------------------------------
Templeton Variable Products International Fund 756,392 7,851
-------------------------------------------------------------------------
Templeton Variable Products Stock Fund 53,502 18,190
------------------------------------------------------------------------- ----------- ----------
$14,947,327 $2,781,467
----------- ----------
----------- ----------
</TABLE>
R-14
<PAGE>
LINCOLN LIFE FLEXIBLE PREMIUM VARIABLE LIFE ACCOUNT R
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS
The following is a summary of investments owned at December
31, 1998.
<TABLE>
<CAPTION>
SHARES NET ASSET VALUE OF COST OF
OUTSTANDING VALUE SHARES SHARES
------------------------------------------------
<S> <C> <C> <C> <C>
AIM V.I. Capital Appreciation Fund 12,125 $ 25.20 $ 305,543 $ 260,730
---------------------------------------------
AIM V.I. Diversified Income Fund 33,846 10.94 370,274 381,701
---------------------------------------------
AIM V.I. Growth Fund 23,957 24.80 594,132 512,286
---------------------------------------------
AIM V.I. Value Fund 25,955 26.25 681,318 597,442
---------------------------------------------
Banker's Trust Equity 500 Index Fund 111,339 12.73 1,417,339 1,313,689
---------------------------------------------
Delaware Premium Small Cap Value Series 17,785 16.45 292,561 254,108
---------------------------------------------
Delaware Premium Trend Series 19,086 19.75 376,950 346,301
---------------------------------------------
Delaware Premium Emerging Markets Series 23,140 5.81 134,444 127,296
---------------------------------------------
Fidelity VIP Equity -- Income Portfolio 26,260 25.42 667,530 616,459
---------------------------------------------
Fidelity VIP II Asset Manager Portfolio 13,058 18.16 237,134 227,785
---------------------------------------------
Fidelity VIP II Investment Grade Bond
Portfolio 59,273 12.96 768,182 761,344
---------------------------------------------
Lincoln National Money Market Account 491,644 10.00 4,916,440 4,916,440
---------------------------------------------
MFS Emerging Growth Series 24,323 21.47 522,208 423,152
---------------------------------------------
MFS Total Return Series 7,736 18.12 140,181 133,812
---------------------------------------------
MFS Utilities Series 11,113 19.82 220,260 208,808
---------------------------------------------
OCC Accumulation Global Equity Portfolio 9,617 15.43 148,383 134,724
---------------------------------------------
OCC Accumulation Managed Portfolio 2,327 43.74 101,787 97,280
---------------------------------------------
Templeton Variable Products Asset Allocation
Fund 4,464 22.46 100,262 88,712
---------------------------------------------
Templeton Variable Products International Fund 38,774 20.69 802,232 748,943
---------------------------------------------
Templeton Variable Products Stock Fund 1,759 21.07 37,067 35,436
--------------------------------------------- ----------- -----------
$12,834,227 $12,186,448
----------- -----------
----------- -----------
</TABLE>
R-15
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors of The Lincoln National Life Insurance
Company
and
Contract Owners of Lincoln Life Flexible Premium Variable Life
Account R
We have audited the accompanying statement of assets and
liability of Lincoln Life Flexible Premium Variable Life Account
R ("Variable Account") (comprised of the AIM V.I. Capital
Appreciation, AIM V.I. Diversified Income, AIM V.I. Growth, AIM
V.I. Value, Banker's Trust Equity 500 Index, Delaware Premium
Small Cap Value, Delaware Premium Trend, Delaware Premium
Emerging Markets, Fidelity VIP Equity-Income, Fidelity VIP II
Asset Manager, Fidelity VIP II Investment Grade Bond, Lincoln
National Money Market, MFS Emerging Growth, MFS Total Return,
MFS Utilities, OCC Accumulation Global Equity, OCC Accumulation
Managed, Templeton Variable Products Asset Allocation, Templeton
Variable Products International, and Templeton Variable Products
Stock subaccounts), as of December 31, 1998, and the related
statements of operations and changes in net assets for the
period from June 18, 1998 to December 31, 1998. These financial
statements are the responsibility of the Variable Account's
management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit 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. Our
procedures included confirmation of investments owned as of
December 31, 1998, by correspondence with the custodian. An
audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the financial position
of each of the respective subaccounts constituting the Lincoln
Life Flexible Premium Variable Life Account R at December 31,
1998, and the results of their operations and the changes in
their net assets for the period from June 18, 1998 to December
31, 1998, in conformity with generally accepted accounting
principles.
/s/ Ernst & Young LLP
Fort Wayne, Indiana
March 26, 1999
R-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
BALANCE SHEETS -- STATUTORY BASIS
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------- ---------
(IN MILLIONS)
--------------------
<S> <C> <C>
ADMITTED ASSETS
CASH AND INVESTMENTS:
Bonds $23,830.9 $18,560.7
- ------------------------------------------------------------------------------------
Preferred stocks 236.0 257.3
- ------------------------------------------------------------------------------------
Unaffiliated common stocks 259.3 436.0
- ------------------------------------------------------------------------------------
Affiliated common stocks 322.1 412.1
- ------------------------------------------------------------------------------------
Mortgage loans on real estate 3,932.9 3,012.7
- ------------------------------------------------------------------------------------
Real estate 473.8 584.4
- ------------------------------------------------------------------------------------
Policy loans 1,606.0 660.5
- ------------------------------------------------------------------------------------
Other investments 434.4 335.5
- ------------------------------------------------------------------------------------
Cash and short-term investments 1,725.4 2,133.0
- ------------------------------------------------------------------------------------ --------- ---------
Total cash and investments 32,820.8 26,392.2
- ------------------------------------------------------------------------------------
Premiums and fees in course of collection 33.3 42.4
- ------------------------------------------------------------------------------------
Accrued investment income 432.8 343.5
- ------------------------------------------------------------------------------------
Reinsurance recoverable 171.6 71.1
- ------------------------------------------------------------------------------------
Funds withheld by ceding companies 53.7 44.1
- ------------------------------------------------------------------------------------
Federal income taxes recoverable from parent company 64.7 6.9
- ------------------------------------------------------------------------------------
Goodwill 49.5 52.4
- ------------------------------------------------------------------------------------
Other admitted assets 89.3 85.6
- ------------------------------------------------------------------------------------
Separate account assets 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total admitted assets $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
LIABILITIES AND CAPITAL AND SURPLUS
LIABILITIES:
Future policy benefits and claims $12,310.6 $ 5,872.9
- ------------------------------------------------------------------------------------
Other policyholder funds 16,647.5 16,360.1
- ------------------------------------------------------------------------------------
Amounts withheld or retained by Company as agent or trustee 897.6 878.2
- ------------------------------------------------------------------------------------
Funds held under reinsurance treaties 795.8 720.4
- ------------------------------------------------------------------------------------
Asset valuation reserve 484.5 450.0
- ------------------------------------------------------------------------------------
Interest maintenance reserve 159.7 135.4
- ------------------------------------------------------------------------------------
Other liabilities 504.5 294.7
- ------------------------------------------------------------------------------------
Short-term loan payable to parent company 140.0 120.0
- ------------------------------------------------------------------------------------
Net transfers due from separate accounts (789.0) (761.9)
- ------------------------------------------------------------------------------------
Separate account liabilities 36,907.0 31,330.9
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities 68,058.2 55,400.7
- ------------------------------------------------------------------------------------
CAPITAL AND SURPLUS:
Common stock, $2.50 par value:
Authorized, issued and outstanding shares -- 10 million (owned by Lincoln National
Corporation) 25.0 25.0
- ------------------------------------------------------------------------------------
Surplus notes due to Lincoln National Corporation 1,250.0 --
- ------------------------------------------------------------------------------------
Paid-in surplus 1,930.1 1,821.8
- ------------------------------------------------------------------------------------
Unassigned surplus (deficit) (640.6) 1,121.6
- ------------------------------------------------------------------------------------ --------- ---------
Total capital and surplus 2,564.5 2,968.4
- ------------------------------------------------------------------------------------ --------- ---------
Total liabilities and capital and surplus $70,622.7 $58,369.1
- ------------------------------------------------------------------------------------ --------- ---------
--------- ---------
</TABLE>
See accompanying notes. S-1
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
STATEMENTS OF OPERATIONS -- STATUTORY BASIS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
PREMIUMS AND OTHER REVENUES:
Premiums and deposits $12,737.6 $ 5,589.0 $ 7,268.5
- ----------------------------------------------------------------------------
Net investment income 2,107.2 1,847.1 1,756.3
- ----------------------------------------------------------------------------
Amortization of interest maintenance reserve 26.4 41.5 27.2
- ----------------------------------------------------------------------------
Commissions and expense allowances on reinsurance ceded 179.9 99.7 90.9
- ----------------------------------------------------------------------------
Expense charges on deposit funds 134.6 119.3 100.7
- ----------------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- ----------------------------------------------------------------------------
Other income 31.3 21.3 16.8
- ---------------------------------------------------------------------------- --------- --------- ---------
Total revenues 15,613.3 8,043.4 9,505.0
- ----------------------------------------------------------------------------
BENEFITS AND EXPENSES:
Benefits and settlement expenses 13,964.1 4,522.1 5,989.9
- ----------------------------------------------------------------------------
Underwriting, acquisition, insurance and other expenses 2,919.4 3,053.9 3,123.1
- ---------------------------------------------------------------------------- --------- --------- ---------
Total benefits and expenses 16,883.5 7,576.0 9,113.0
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before dividends to policyholders, income taxes
and net realized gain on investments (1,270.2) 467.4 392.0
- ----------------------------------------------------------------------------
Dividends to policyholders 67.9 27.5 27.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before federal income taxes and net realized
gain on investments (1,338.1) 439.9 364.7
- ----------------------------------------------------------------------------
Federal income taxes (credit) (141.0) 78.3 83.6
- ---------------------------------------------------------------------------- --------- --------- ---------
Gain (loss) from operations before net realized gain on investments (1,197.1) 361.6 281.1
- ----------------------------------------------------------------------------
Net realized gain on investments, net of income tax expense and excluding
net transfers to the interest maintenance reserve 46.8 31.3 53.3
- ---------------------------------------------------------------------------- --------- --------- ---------
Net income (loss) $(1,150.3) $ 392.9 $ 334.4
- ---------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
--------- --------- ---------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Capital and surplus at beginning of year $ 2,968.4 $ 1,962.6 $ 1,732.9
- -----------------------------------------------------------------------------
Correction of prior year's asset valuation reserve -- (37.6) --
- -----------------------------------------------------------------------------
Correction of prior year's admitted assets -- (57.0) --
- ----------------------------------------------------------------------------- --------- --------- ---------
2,968.4 1,868.0 1,732.9
CAPITAL AND SURPLUS INCREASE (DECREASE):
Net income (loss) (1,150.3) 392.9 334.4
- -----------------------------------------------------------------------------
Difference in cost and admitted investment amounts (304.8) (36.2) 38.6
- -----------------------------------------------------------------------------
Nonadmitted assets (17.1) (0.4) (3.0)
- -----------------------------------------------------------------------------
Regulatory liability for reinsurance (35.2) (3.9) 0.6
- -----------------------------------------------------------------------------
Life policy reserve valuation basis (0.4) (0.9) (0.4)
- -----------------------------------------------------------------------------
Asset valuation reserve (34.5) (36.9) (105.5)
- -----------------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------------
Paid-in surplus, including contribution of common stock of affiliated
company in 1997 108.4 938.4 100.0
- -----------------------------------------------------------------------------
Separate account receivable due to change in valuation -- (2.6) --
- -----------------------------------------------------------------------------
Dividends to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------------- --------- --------- ---------
Capital and surplus at end of year $ 2,564.5 $ 2,968.4 $ 1,962.6
- ----------------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</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
1998 1997 1996
---------- ---------- ----------
(IN MILLIONS)
----------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Premiums, policy proceeds and other considerations received $ 13,495.2 $ 6,364.3 $ 8,059.4
- -----------------------------------------------------------------------
Allowances and reserve adjustments paid on reinsurance ceded (632.4) (649.2) (767.5)
- -----------------------------------------------------------------------
Investment income received 2,003.9 1,798.8 1,700.6
- -----------------------------------------------------------------------
Separate account investment management and administration service fees 396.3 325.5 244.6
- -----------------------------------------------------------------------
Benefits paid (7,395.8) (5,345.2) (4,050.4)
- -----------------------------------------------------------------------
Insurance expenses paid (2,909.7) (3,193.0) (3,216.8)
- -----------------------------------------------------------------------
Federal income taxes recovered (paid) 84.2 (87.0) (72.3)
- -----------------------------------------------------------------------
Dividends to policyholders (12.9) (28.4) (27.7)
- -----------------------------------------------------------------------
Other income received and expenses paid, net 207.0 (8.7) 117.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) operating activities 5,235.8 (822.9) 1,986.9
- -----------------------------------------------------------------------
INVESTING ACTIVITIES
Sale, maturity or repayment of investments 10,926.5 12,142.6 12,542.0
- -----------------------------------------------------------------------
Purchase of investments (16,950.0) (10,345.0) (14,175.4)
- -----------------------------------------------------------------------
Other sources (uses) including reinsured policy loans (778.3) 529.1 (377.2)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) investing activities (6,801.8) 2,326.7 (2,010.6)
- -----------------------------------------------------------------------
FINANCING ACTIVITIES
Surplus paid-in 108.4 -- 100.0
- -----------------------------------------------------------------------
Proceeds from surplus notes from shareholder 1,250.0 -- --
- -----------------------------------------------------------------------
Proceeds from borrowings from shareholder 140.0 120.0 100.0
- -----------------------------------------------------------------------
Repayment of borrowings from shareholder (120.0) (100.0) (63.0)
- -----------------------------------------------------------------------
Dividends paid to shareholder (220.0) (150.0) (135.0)
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net cash provided by (used in) financing activities 1,158.4 (130.0) 2.0
- ----------------------------------------------------------------------- ---------- ---------- ----------
Net increase (decrease) in cash and short-term investments (407.6) 1,373.8 (21.7)
- -----------------------------------------------------------------------
Cash and short-term investments at beginning of year 2,133.0 759.2 780.9
- ----------------------------------------------------------------------- ---------- ---------- ----------
Cash and short-term investments at end of year $ 1,725.4 $ 2,133.0 $ 759.2
- ----------------------------------------------------------------------- ---------- ---------- ----------
---------- ---------- ----------
</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, 1998, 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 ("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. Real estate owned and occupied by the Company is
classified as a real estate investment rather than reported as an operating
asset, and investment income and operating expenses include rent for the
Company's occupancy of those properties. Changes between cost and admitted
asset investment amounts are credited or charged directly to unassigned
surplus rather than to a separate surplus account.
Under a formula prescribed by the NAIC, the Company defers the portion of
realized capital gains and losses on sales of fixed income investments,
principally bonds and mortgage loans, attributable to changes in the general
level of interest rates and amortizes those deferrals over the remaining
period to maturity of the individual security sold. The net deferral is
reported as the Interest Maintenance Reserve ("IMR") in the accompanying
balance sheets. Realized capital gains and losses are reported in income net
of federal income tax and transfers to the IMR. The asset valuation reserve
("AVR") is determined by 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 in which 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
S-5
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
period of the related policies using assumptions consistent with those used
in computing policy benefit reserves. For universal life insurance, annuity
and other investment-type products, deferred policy acquisition costs, to
the extent recoverable from future gross profits, are amortized generally in
proportion to the present value of expected gross profits from surrender
charges and investment, mortality and expense margins.
NONADMITTED ASSETS
Certain assets designated as "nonadmitted," principally furniture and
equipment and certain receivables, are excluded from the accompanying
balance sheets and are charged directly to unassigned surplus.
PREMIUMS
Revenues for universal life policies consist of the entire premium received.
Under GAAP, premiums received in excess of policy charges are not recognized
as premium revenue.
Premiums and deposits with respect to annuity and other investment-type
contracts are reported as premium revenues; whereas, under GAAP, such
premiums and deposits are treated as liabilities and policy charges
represent revenues.
BENEFIT RESERVES
Certain policy reserves are calculated based on statutorily required
interest and mortality assumptions rather than on estimated expected
experience or actual account balances as would be required under GAAP.
Death benefits paid, policy and contract withdrawals, and the change in
policy reserves on universal life policies, annuity and other
investment-type contracts are reported as benefits and settlement expenses
in the accompanying statements of income; whereas, under GAAP, withdrawals
are treated as a reduction of the policy or contract liabilities and
benefits 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 Insurance Department to assume such business. Changes to
those amounts are credited or charged directly to unassigned surplus. Under
GAAP, an allowance for amounts deemed uncollectible is established through a
charge to income.
Commissions on business ceded are reported as income when received rather
than deferred and amortized with deferred policy acquisition costs. Business
assumed under 100% indemnity and assumption reinsurance agreements is
accounted for as a purchase for GAAP reporting purposes and the ceding
commission represents the purchase price. Under purchase accounting, assets
acquired and liabilities assumed are reported at fair value at the date of
the transaction and the excess of the purchase price over the sum of the
amounts assigned to assets acquired less liabilities assumed is recorded as
goodwill. On a statutory-basis, the ceding commission is expensed when paid
and reinsurance premiums and benefits are accounted for on bases consistent
with those used in accounting for the original policies issued and the terms
of the reinsurance contracts.
Certain reinsurance contracts meeting risk transfer requirements under
statutory-basis accounting practices have been accounted for using
traditional reinsurance accounting whereas such contracts 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.
S-6
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
SURPLUS NOTES DUE TO LNC
Surplus notes due to LNC are reported as surplus rather than as liabilities.
On a statutory-basis, interest on surplus notes is not accrued until
approval is received from the Indiana Insurance Commissioner whereas under
GAAP, interest would be accrued periodically based on the outstanding
principal and the interest rate.
STATEMENTS OF CASH FLOWS
Cash and short-term investments in the statements of cash flows represent
cash balances and investments with initial maturities of one year or less.
Under GAAP, the corresponding captions of cash and cash equivalents include
cash balances and investments with initial maturities of three months or
less.
A reconciliation of the Company's net income (loss) and capital and surplus
determined on a statutory-basis with amounts determined in accordance with
GAAP is as follows:
<TABLE>
<CAPTION>
CAPITAL AND SURPLUS NET INCOME (LOSS)
-----------------------------------------------------
DECEMBER 31 YEAR ENDED DECEMBER 31
1998 1997 1998 1997 1996
-----------------------------------------------------
(IN MILLIONS)
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Amounts reported on a statutory-basis $ 2,564.5 $ 2,968.4 $(1,150.3) $ 392.9 $ 334.4
- -------------------------------------------
GAAP adjustments:
Deferred policy acquisition costs,
present value of future profits and
goodwill 3,085.2 958.3 48.5 (98.9) 66.7
----------------------------------------
Policy and contract reserves (2,299.9) (1,672.9) 1,743.4 (48.6) (57.1)
----------------------------------------
Interest maintenance reserve 159.7 135.4 24.4 58.7 (39.7)
----------------------------------------
Deferred income taxes 181.6 (13.0) (218.6) 70.3 1.8
----------------------------------------
Policyholders' share of earnings and
surplus on participating business (132.8) (79.8) 3.2 5.3 (.3)
----------------------------------------
Asset valuation reserve 484.5 450.0 -- -- --
----------------------------------------
Net realized gain (loss) on investments (174.1) (91.5) (116.7) (20.4) 78.7
----------------------------------------
Unrealized gain on investments 1,335.1 1,245.5 -- -- --
----------------------------------------
Nonadmitted assets, including nonadmitted
investments 119.1 61.0 -- -- --
----------------------------------------
Investments in subsidiary companies 490.4 188.8 41.3 (80.5) 29.9
----------------------------------------
Surplus notes and related interest (1,251.5) -- (1.5) -- --
----------------------------------------
Other, net (120.1) (162.5) 103.6 (35.0) (82.6)
---------------------------------------- --------- --------- --------- --------- ---------
Net increase (decrease) 1,877.2 1,019.3 1,627.6 (149.1) (2.6)
- ------------------------------------------- --------- --------- --------- --------- ---------
Amounts on a GAAP basis $ 4,441.7 $ 3,987.7 $ 477.3 $ 243.8 $ 331.8
- ------------------------------------------- --------- --------- --------- --------- ---------
--------- --------- --------- --------- ---------
</TABLE>
S-7
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
Other significant accounting practices are as follows:
INVESTMENTS
Bonds not backed by loans are principally stated at amortized cost and the
discount or premium is amortized using the interest method.
Mortgage-backed bonds are valued at amortized cost and income is recognized
using a constant effective yield based on anticipated prepayments and the
estimated economic life of the securities. When actual prepayments differ
significantly from anticipated prepayments, the effective yield is
recalculated to reflect actual payments to date and anticipated future
payments. The net investment in the securities is adjusted to the amount
that would have existed had the new effective yield been applied since the
acquisition of the securities.
Short-term investments include investments with maturities of less than one
year at the date of acquisition. The carrying amounts for these investments
approximate their fair values.
Preferred stocks are reported at cost or amortized cost.
Unaffiliated common stocks are reported at fair value as determined by the
Securities Valuation Office of the NAIC and the related unrealized gains
(losses) are reported in unassigned surplus without adjustment for federal
income taxes.
Policy loans are reported at unpaid balances.
The Company uses various derivative instruments as part of its overall
liability-asset management program for certain investments and life
insurance and annuity products. The Company values all derivative
instruments on a basis consistent with that of the hedged item. Upon
termination, gains and losses on those instruments are included in the
carrying values of the underlying hedged items 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 repurchase price. It is the Company's
policy to take possession of securities with a market value at least equal
to 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, subject to certain limitations, of
the ceding commission over statutory-basis net assets of business purchased
S-8
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
under an assumption reinsurance agreement, is amortized on a straight-line
basis over ten years.
PREMIUMS
Life insurance and annuity premiums are recognized as revenue when due.
Accident and health premiums are earned pro rata over the contract term of
the policies.
BENEFITS
Life, annuity and accident and health benefit reserves are developed by
actuarial methods and are determined based on published tables using
statutorily specified interest rates and valuation methods that will
provide, in the aggregate, reserves that are greater than or equal to the
minimum or guaranteed policy cash values or the amounts required by the
Insurance Department. The Company waives deduction of deferred fractional
premiums on the death of life and annuity policy insureds and returns any
premium beyond the date of death, except for policies issued prior to March
1977. Surrender values on policies do not exceed the corresponding benefit
reserves. Additional reserves are established when the results of cash flow
testing under various interest rate scenerios indicate the need for such
reserves. If net premiums exceed the gross premiums on any insurance
in-force, additional reserves are established. Benefit reserves for policies
underwritten on a substandard basis are determined using the multiple table
reserve method.
The tabular interest, tabular less actual 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, benefits and claims and claim adjustment expenses are
accounted for on bases consistent with those used in accounting for the
original policies issued and the terms of the reinsurance contracts. Certain
business is transacted on a funds withheld basis and investment income on
investments managed by the Company are reported in net investment income.
PENSION BENEFITS
Costs associated with the Company's defined benefit pension plans are
systematically accrued during the expected period of active service of the
covered employees.
INCOME TAXES
The Company and eligible subsidiaries have elected to file consolidated
federal and state income tax returns with LNC and certain LNC subsidiaries.
Pursuant to an intercompany tax sharing agreement with LNC, the Company
provides for income taxes on a separate return filing basis. The tax sharing
agreement also provides that the Company will receive benefit for net
operating losses, capital losses and tax credits which are not usable on a
separate return basis to the extent such items may be utilized in the
consolidated income tax returns of LNC.
STOCK OPTIONS
The Company recognizes compensation expense for its stock option incentive
plans using the intrinsic value method of accounting. Under the terms of
S-9
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (CONTINUED)
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
measurement date, over the amount an employee must pay to acquire the stock.
ASSETS HELD IN SEPARATE ACCOUNTS AND LIABILITIES RELATED TO SEPARATE
ACCOUNTS
Separate account assets and liabilities reported in the accompanying balance
sheets represent funds that are separately administered for variable life
and variable annuity contracts and for which the contractholder, rather than
the Company, bears the investment risk. Separate account assets are reported
at fair value. The operations of the separate accounts are not included in
the accompanying financial statements. Policy administration and investment
management fees charged on separate account policyholder deposits are
included in income from separate account investment management and
administration service fees. Mortality charges on variable universal life
contracts are included in income from expense charges on deposit funds. Fees
charged relative to variable annuity and variable universal life
administration agreements for separate account products sold by other
insurance companies and not recorded on the Company's financial statements
are included in income from separate account investment management and
administration service fees.
RECLASSIFICATION
Certain amounts in the 1997 financial statements have been reclassified to
conform with the 1998 presentation. These reclassifications had no effect on
unassigned surplus or net income previously reported.
2. PERMITTED STATUTORY ACCOUNTING PRACTICES
The Company's statutory-basis financial statements are prepared in
accordance with accounting practices prescribed or permitted by the
Insurance Department. "Prescribed" statutory accounting practices are
interspersed throughout state insurance laws and regulations, the NAIC's
ACCOUNTING PRACTICES AND PROCEDURES MANUAL and a variety of other NAIC
publications. "Permitted" statutory accounting practices encompass all
accounting practices that are not prescribed; such practices may differ from
state to state, may differ from company to company within a state and may
change in the future.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent,
prescribed statutory accounting practices and may result in changes to the
accounting practices that the Company uses to prepare its statutory-basis
financial statements. Codification will require adoption by the various
states before it becomes the prescribed statutory-basis of accounting for
insurance companies domesticated within those states. Accordingly, before
Codification becomes effective for the Company, the state of Indiana must
adopt Codification as the prescribed basis of accounting on which domestic
insurers must report their statutory-basis results to the Insurance
Department. At this time, it is anticipated that Indiana will adopt
Codification, however, based on current guidance, management believes that
the impact of Codification will not be material to the Company's
statutory-basis financial statements.
The Company has received written approval from the Insurance 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Income:
Bonds $ 1,714.3 $ 1,524.4 $ 1,442.2
----------------------------------------------------------------
Preferred stocks 19.7 23.5 9.6
----------------------------------------------------------------
Unaffiliated common stocks 10.6 8.3 6.5
----------------------------------------------------------------
Affiliated common stocks 5.2 15.0 9.5
----------------------------------------------------------------
Mortgage loans on real estate 323.6 257.2 269.3
----------------------------------------------------------------
Real estate 81.4 92.2 114.4
----------------------------------------------------------------
Policy loans 86.5 37.5 35.0
----------------------------------------------------------------
Other investments 26.5 28.2 22.4
----------------------------------------------------------------
Cash and short-term investments 104.7 70.3 48.9
---------------------------------------------------------------- --------- --------- ---------
Total investment income 2,372.5 2,056.6 1,957.8
- -------------------------------------------------------------------
Expenses:
Depreciation 19.3 21.0 25.0
----------------------------------------------------------------
Other 246.0 188.5 176.5
---------------------------------------------------------------- --------- --------- ---------
Total investment expenses 265.3 209.5 201.5
- ------------------------------------------------------------------- --------- --------- ---------
Net investment income $ 2,107.2 $ 1,847.1 $ 1,756.3
- ------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
Nonadmitted accrued investment income at December 31, 1997
amounted to $2,600,000, consisting principally of interest
on bonds in default and mortgage loans. No accrued
investment income was nonadmitted at December 31, 1998.
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, 1998:
Corporate $17,658.4 $ 1,159.8 $ 148.2 $18,670.0
------------------------------------------------
U.S. government 900.7 88.8 3.4 986.1
------------------------------------------------
Foreign government 947.8 59.9 61.2 946.5
------------------------------------------------
Mortgage-backed 4,312.1 171.6 33.4 4,450.3
------------------------------------------------
State and municipal 11.9 .7 -- 12.6
------------------------------------------------ --------- ----------- ----------- ---------
$23,830.9 $ 1,480.8 $ 246.2 $25,065.5
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
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
--------- ----------- ----------- ---------
--------- ----------- ----------- ---------
</TABLE>
The carrying amount of bonds in the balance sheets at
December 31, 1998 and 1997 reflects adjustments of
$11,800,000 and $5,500,000, respectively, to decrease
amortized cost as a result of the Securities Valuation
Office of the NAIC ("SVO") designating certain investments
as low or lower quality.
A summary of the cost or amortized cost and fair value of
investments in bonds at December 31, 1998, by contractual
maturity, is as follows:
<TABLE>
<CAPTION>
COST OR
AMORTIZED FAIR
COST VALUE
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Maturity:
In 1999 $ 705.6 $ 712.6
--------------------------------------------------------------------------
In 2000-2003 4,041.9 4,142.8
--------------------------------------------------------------------------
In 2004-2008 6,652.0 6,860.1
--------------------------------------------------------------------------
After 2008 8,119.3 8,899.7
--------------------------------------------------------------------------
Mortgage-backed securities 4,312.1 4,450.3
-------------------------------------------------------------------------- --------- ---------
Total $23,830.9 $25,065.5
- ----------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
S-12
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The expected maturities may differ from the contractual
maturities in the foregoing table because certain borrowers
may have the right to call or prepay obligations with or
without call or prepayment penalties.
Proceeds from sales of investments in bonds during 1998,
1997 and 1996 were $9,395,000,000, $9,715,000,000 and
$10,996,900,000, respectively. Gross gains during 1998, 1997
and 1996 of $186,300,000, $218,100,000 and $169,700,000,
respectively, and gross losses of $138,000,000, $78,000,000
and $177,000,000, respectively, were realized on those
sales.
At December 31, 1998 and 1997, investments in bonds, with an
admitted asset value of $97,800,000 and $76,200,000,
respectively, were on deposit with state insurance
departments to satisfy regulatory requirements.
Unrealized gains and losses on investments in unaffiliated
common stocks and preferred stocks are reported directly in
unassigned surplus and do not affect operations. The cost or
amortized cost, gross unrealized gains and losses and the
fair value of investments in unaffiliated common stocks and
preferred stocks are as follows:
<TABLE>
<CAPTION>
COST OR GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------------------------------------------
(IN MILLIONS)
--------------------------------------------
<S> <C> <C> <C> <C>
At December 31, 1998:
Preferred stocks $236.0 $ 8.9 $ 2.4 $242.5
- ----------------------------------------
Unaffiliated common stocks 223.3 62.0 26.0 259.3
- ----------------------------------------
At December 31, 1997:
Preferred stocks $257.3 $12.1 $ .7 $268.7
- ----------------------------------------
Unaffiliated common stocks 357.0 98.5 19.5 436.0
- ----------------------------------------
</TABLE>
The carrying amount of preferred stocks in the balance
sheets at December 31, 1998 and 1997 reflects adjustments of
$5,800,000 and $4,000,000, respectively, to decrease
amortized cost as a result of the SVO designating certain
investments as low or lower quality.
During 1998, the minimum and maximum lending rates for
mortgage loans were 6.41% and 8.08%, respectively. At the
issuance of a loan, the percentage of loan to value on any
one loan does not exceed 75%. At December 31, 1998, 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.
S-13
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
The components of the Company's real estate are summarized
as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Occupied by the Company:
Land $ 2.5 $ 2.5
--------------------------------------------------------------------------------
Buildings 9.0 8.4
--------------------------------------------------------------------------------
Less accumulated depreciation (1.7) (1.2)
-------------------------------------------------------------------------------- --------- ---------
Net real estate occupied by the Company 9.8 9.7
- -----------------------------------------------------------------------------------
Other:
Land 93.2 124.1
--------------------------------------------------------------------------------
Buildings 413.0 491.6
--------------------------------------------------------------------------------
Other 7.9 8.1
--------------------------------------------------------------------------------
Less accumulated depreciation (50.1) (49.1)
-------------------------------------------------------------------------------- --------- ---------
Net other real estate 464.0 574.7
- ----------------------------------------------------------------------------------- --------- ---------
Net real estate $ 473.8 $ 584.4
- ----------------------------------------------------------------------------------- --------- ---------
--------- ---------
</TABLE>
Realized capital gains are reported net of federal income
taxes and amounts transferred to the IMR as follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Realized capital gains $ 179.7 $ 209.3 $ 69.3
- ------------------------------------------------------------------------
Less amount transferred to IMR (net of related taxes (credit) of $27.3,
$54.0 and $(6.7) in 1998, 1997 and 1996, respectively) 50.8 100.2 (12.4)
- ------------------------------------------------------------------------ --------- --------- ---------
128.9 109.1 81.7
Less federal income taxes on realized gains 82.1 77.8 28.4
- ------------------------------------------------------------------------ --------- --------- ---------
Net realized capital gains $ 46.8 $ 31.3 $ 53.3
- ------------------------------------------------------------------------ --------- --------- ---------
--------- --------- ---------
</TABLE>
S-14
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES
Statutory-basis financial information related to the
Company's four wholly owned insurance subsidiaries is
summarized as follows (in millions):
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Cash and invested assets $ 1,221.1 $ 333.9 $ 403.6 $ 1,938.0
- ---------------------------------------------------------
Other assets 40.3 31.3 490.0 270.2
- --------------------------------------------------------- --------- ----------- --------- ---------
Total admitted assets $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
Insurance reserves $ 1,149.8 $ 266.3 $ 281.8 $ 1,814.5
- ---------------------------------------------------------
Other liabilities 42.0 24.0 553.7 45.1
- ---------------------------------------------------------
Liabilities related to separate accounts -- -- -- 236.9
- ---------------------------------------------------------
Capital and surplus 69.6 74.9 58.1 111.7
- --------------------------------------------------------- --------- ----------- --------- ---------
Total liabilities and capital and surplus $ 1,261.4 $ 365.2 $ 893.6 $ 2,208.2
- --------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1998
--------------------------------------------
FIRST
PENN LNH&C LNRAC LLANY
--------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 310.4 $ 165.0 $ 150.3 $ 1,402.6
- -----------------------------------------------------------
Expenses 310.6 164.4 139.5 1,656.1
- -----------------------------------------------------------
Net realized gains (losses) (0.3) 0.9 (0.1) (0.7)
- ----------------------------------------------------------- --------- ----------- --------- ---------
Net income (loss) $ (0.5) $ 1.5 $ 10.7 $ (254.2)
- ----------------------------------------------------------- --------- ----------- --------- ---------
--------- ----------- --------- ---------
</TABLE>
<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>
S-15
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
4. SUBSIDIARIES (CONTINUED)
<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 (loss) $ 5.1 $ (108.2) $ 10.6 $ 5.5
- ------------------------------------------------------------- --------- --------- ----------- -----------
--------- --------- ----------- -----------
</TABLE>
The Company also owns three non-insurance subsidiaries, all
of which were formed or acquired in 1998. AnnuityNet, Inc.
was formed for the distribution of variable annuities over
the internet and is valued on the equity method with an
admitted asset value of $1,500,000 at December 31, 1998.
Lincoln National Insurance Associates was purchased for
$600,000 and is valued on the equity method with an admitted
asset value of $600,000 at December 31, 1998. Sagemark
Consulting, Inc. ("Sagemark") was purchased in 1998 and is a
broker dealer acquired in connection with a reinsurance
transaction completed in 1998. Sagemark is valued on the
equity method with an admitted asset value of $5,700,000 at
December 31, 1998.
The carrying value of all affiliated common stocks, was
$322,100,000 and $412,100,000 at December 31, 1998 and 1997,
respectively. The insurance affiliates are carried at
statutory-basis net equity while other affiliates are
recorded at GAAP basis net equity, adjusted for certain
items which would be non-admitted under statutory accounting
principles. The cost basis of investments in subsidiaries as
of December 31, 1998 and 1997 was $631,100,000 and
$466,200,000, respectively.
During 1998, 1997 and 1996 the Company's insurance
subsidiaries paid dividends of $5,200,000, $15,000,000 and
$10,500,000, respectively.
5. FEDERAL INCOME TAXES
The effective federal income tax rate in the accompanying
statements of operations differs from the prevailing
statutory tax rate principally due to tax-exempt investment
income, dividends received tax deductions and differences
between statutory accounting and tax return recognition
relative to policy acquisition costs, policy and contract
liabilities and reinsurance ceding commissions.
In 1997 and 1996, federal income taxes incurred totaled
$78,300,000 and $83,600,000, respectively. In 1998, a
federal income tax net operating loss of $103,800,000 and
tax credits of $19,300,000 were incurred and carried back to
recover taxes paid in prior years.
The Company paid $2,300,000, $164,500,000 and $100,400,000
to LNC in 1998, 1997 and 1996, respectively, for federal
income taxes.
Under prior income tax law, one-half of the excess of a life
insurance company's income from operations over its taxable
investment income was not taxed, but was set aside in a
special tax account designated as "Policyholders' Surplus."
The Company has approximately $187,000,000 of untaxed
"Policyholders' Surplus" on which no payment of federal
income taxes will be required unless it is distributed as a
dividend, or under other specified conditions. Barring the
passage of unfavorable legislation, the Company does not
believe that any significant portion of the account will be
taxed in the foreseeable future and no related tax liability
has been recognized. If the entire balance of the account
S-16
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
5. FEDERAL INCOME TAXES (CONTINUED)
became taxable under the current federal income tax rate,
the tax would be approximately $65,500,000.
6. SUPPLEMENTAL FINANCIAL DATA
The balance sheet caption, "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
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Insurance ceded $ 4,081.8 $ 1,431.0
- -------------------------------------------------------------------------------
Amounts recoverable from other insurers 79.9 35.9
- -------------------------------------------------------------------------------
</TABLE>
Reinsurance transactions, excluding assumption reinsurance,
included in the income statement caption, "Premiums and
deposits," are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 9,018.9 $ 727.2 $ 241.3
- ----------------------------------------------------------------------
Insurance ceded 877.1 302.9 193.3
- ---------------------------------------------------------------------- --------- --------- ---------
Net amount included in premiums $ 8,141.8 $ 424.3 $ 48.0
- ---------------------------------------------------------------------- --------- --------- ---------
--------- --------- ---------
</TABLE>
The income statement caption, "Benefits and settlement
expenses," is net of reinsurance recoveries of
$2,098,800,000, $1,240,500,000 and $787,900,000 for 1998,
1997 and 1996, respectively.
Details underlying the balance sheet caption "Other
policyholder funds" are as follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Premium deposit funds $16,285.2 $16,201.8
- -----------------------------------------------------------------------------
Undistributed earnings on participating business 348.4 142.0
- -----------------------------------------------------------------------------
Other 13.9 16.3
- ----------------------------------------------------------------------------- --------- ---------
$16,647.5 $16,360.1
--------- ---------
--------- ---------
</TABLE>
S-17
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
6. SUPPLEMENTAL FINANCIAL DATA (CONTINUED)
Deferred and uncollected life insurance premiums and annuity
considerations included in the balance sheet caption,
"Premiums and fees in course of collection," are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1998
-----------------------------------
NET OF
GROSS LOADING LOADING
-----------------------------------
(IN MILLIONS)
-----------------------------------
<S> <C> <C> <C>
Ordinary new business $ 9.5 $ 3.4 $ 6.1
- -----------------------------------------------------------------------
Ordinary renewal (13.7) 11.3 (25.0)
- -----------------------------------------------------------------------
Group life 14.2 .2 14.0
- ----------------------------------------------------------------------- --------- ----- -----------
$ 10.0 $ 14.9 $ (4.9)
--------- ----- -----------
--------- ----- -----------
</TABLE>
<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>
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 $11,900,000 and $13,400,000 in 1998 and 1997,
respectively. During 1996, LNC Administrative Services
Corporation, an affiliate, entered into a similar agreement
with the Company with direct premiums written amounting to
$7,000,000 and $7,200,000 in 1998 and 1997, respectively.
Authority granted by the managing general agents agreements
include underwriting, claims adjustment and claims payment
services.
S-18
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
7. ANNUITY RESERVES
At December 31, 1998, the Company's annuity reserves and
deposit fund liabilities, including separate accounts, that
are subject to discretionary withdrawal with adjustment,
subject to discretionary withdrawal without adjustment and
not subject to discretionary withdrawal provisions are
summarized as follows:
<TABLE>
<CAPTION>
AMOUNT PERCENT
----------------------
(IN MILLIONS)
----------------------
<S> <C> <C>
Subject to discretionary withdrawal with adjustment:
With market value adjustment $ 2,659.5 5%
-----------------------------------------------------------------------------
At book value, less surrender charge 2,959.2 5
-----------------------------------------------------------------------------
At market value 35,472.0 63
----------------------------------------------------------------------------- --------- ---
41,090.7 73
Subject to discretionary withdrawal without adjustment at book value with
minimal or no charge or adjustment 12,747.3 22
- --------------------------------------------------------------------------------
Not subject to discretionary withdrawal 2,625.1 5
- -------------------------------------------------------------------------------- --------- ---
Total annuity reserves and deposit fund liabilities -- before reinsurance 56,463.1 100%
- -------------------------------------------------------------------------------- ---
---
Less reinsurance 1,683.8
- -------------------------------------------------------------------------------- ---------
Net annuity reserves and deposit fund liabilities, including separate accounts $54,779.3
- -------------------------------------------------------------------------------- ---------
---------
</TABLE>
A reconciliation of the total net annuity reserves and
deposit fund liabilities to the amounts reported in the
Company's 1998 Annual Statement and the Company's Separate
Accounts Annual Statement is as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
1998
-------------
(IN MILLIONS)
-------------
<S> <C>
Per 1998 Annual Statement:
Exhibit 8, Section B -- Total (net) $ 2,554.6
- ----------------------------------------------------------------
Exhibit 8, Section C -- Total (net) 26.0
- ----------------------------------------------------------------
Exhibit 10, Column 1, Line 19 16,579.6
- ---------------------------------------------------------------- -------------
19,160.2
- ---------------------------------------------------------------- -------------
Per Separate Accounts Annual Statement
Exhibit 6, Column 2, Line 0299999 146.4
- ----------------------------------------------------------------
Page 3, Line 3 35,472.7
- ---------------------------------------------------------------- -------------
35,619.1
- ---------------------------------------------------------------- -------------
Total net annuity reserves and deposit fund liabilities $54,779.3
- ---------------------------------------------------------------- -------------
-------------
</TABLE>
8. CAPITAL AND SURPLUS
In 1998, the Company issued two surplus notes to LNC in return for cash of
$1,250,000,000. The first note for $500,000,000 was issued to LNC in
connection with the CIGNA indemnity reinsurance transaction on January 5,
1998. This note calls for the Company to pay the principal amount of the
notes on or before March 31, 2028 and interest to be paid quarterly at an
annual rate of 6.56%. Subject to approval by the Indiana Insurance
Commissioner, LNC also has a right to redeem the note for immediate
repayment in total or in part once per year on the anniversary date of the
note, but not before January 5, 2003. Any payment of interest or
S-19
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
8. CAPITAL AND SURPLUS (CONTINUED)
repayment of principal may be paid only out of the Company's earnings, only
if the Company's surplus exceeds specified levels ($2,315,700,000 at
December 31, 1998), and subject to approval by the Indiana Insurance
Commissioner. No interest payments were approved by the Indiana Insurance
Commissioner as of December 31, 1998 and, thus, no amounts were accrued at
that date.
The second note for $750,000,000 was issued on December 18, 1998 to LNC in
connection with the Aetna indemnity reinsurance transaction. This note calls
for the Company to pay the principal amount of the notes on or before
December 31, 2028 and interest to be paid quarterly at an annual rate of
6.03%. Subject to approval by the Indiana Insurance Commissioner, LNC also
has a right to redeem the note for immediate repayment in total or in part
once per year on the anniversary date of the note, but not before December
18, 2003. Any payment of interest or repayment of principal may be paid only
out of the Company's earnings, only if the Company's surplus exceeds
specified levels ($2,379,600,000 at December 31, 1998), and subject to
approval by the Indiana Insurance Commissioner. No interest payments were
approved by the Indiana Insurance Commissioner as of December 31, 1998 and,
thus, no amounts were accrued at that date.
A summary of the terms of these surplus notes follows:
<TABLE>
<CAPTION>
CURRENT YEAR
PRINCIPAL PRINCIPAL INTEREST
DATE ISSUED AMOUNT OF NOTE OUTSTANDING PAID
------------------------------- -------------- ------------- ------------
<S> <C> <C> <C>
January 5, 1998 $500,000,000 $ 500,000,000 $ 32,300,000
-------------------------------
December 18, 1998 750,000,000 750,000,000 --
-------------------------------
</TABLE>
Life insurance companies are subject to certain Risk-Based Capital ("RBC")
requirements as specified by the NAIC. Under those requirements, the amount
of capital and surplus maintained by a life insurance company is to be
determined based on the various risk factors related to it. At December 31,
1998, the Company exceeds the RBC requirements.
The payment of dividends by the Company is limited and cannot be made except
from earned profits. The maximum amount of dividends that may be paid by
life insurance companies without prior approval of the Indiana Insurance
Commissioner is subject to restrictions relating to statutory surplus and
net gain from operations. In January 1998, the Company assumed a block of
individual life insurance and annuity business from CIGNA and in October
1998, the Company assumed a block of individual life insurance business from
Aetna (SEE NOTE 10). The statutory accounting regulations do not allow
goodwill to be recognized on indemnity reinsurance transactions and
therefore, the related ceding commission was expensed in the accompanying
Statement of Operations and resulted in the reduction of unassigned surplus.
As a result of these transactions, the Company's statutory-basis unassigned
surplus is negative as of December 31, 1998 and it will be necessary for the
Company to obtain prior approval of the Indiana Insurance Commissioner
before paying any dividends to LNC until such time as statutory-basis
unassigned surplus is positive. It is expected that statutory-basis
unassigned surplus will return to a positive position within two to three
years from the closing of the Aetna transaction assuming a level of
statutory-basis earnings coinciding with recent earnings patterns. If
statutory-basis earnings are less then recent patterns due to adverse
operating conditions or further indemnity reinsurance transactions of this
nature or other factors, or if dividends are approved and paid at amounts
higher than recent history, the statutory-basis unassigned surplus may not
return to a positive position as soon as expected. Although no assurance can
be given, management believes that the approvals for the payment of such
dividends in amounts consistent with those paid in the past can be obtained.
S-20
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYEE BENEFIT PLANS
LNC maintains defined benefit pension plans for its employees (including
Company employees) and a defined contribution plan for the Company's agents.
LNC also maintains 401(k) plans, deferred compensation plans and
postretirement medical and life insurance plans for its employees and agents
(including the Company's employees and agents). 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, 1998, 885,252 and 504,369 shares of LNC common stock were
subject to options granted to Company employees and agents, respectively,
under the stock option incentive plans of which 430,053 and 87,160,
respectively, were exercisable on that date. The exercise prices of the
outstanding options range from $23.50 to $96.41. During 1998, 1997 and 1996,
136,469, 170,789 and 72,405 options were exercised, respectively, and
18,288, 1,846 and 10,950 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, 1998 and 1997 is a net
liability of $670,100,000 and $516,900,000, respectively. This liability is
based on the assumption that the recent experience will continue in the
future. If incidence levels and/or claim termination rates fluctuate
significantly from the assumptions underlying reserves, adjustments to
reserves could be required in the future. Accordingly, this liability may
prove to be deficient or excessive. The Company reviews reserve levels on an
ongoing basis. However, it is management's opinion that such future
development will not materially affect the financial position of the
Company.
During 1997, the Company conducted an in-depth review of loss experience on
its disability income business. As a result of this study, the reserve level
was deemed to be inadequate to meet future obligations if current incident
levels were to continue in the future. In order to address this situation,
the Company strengthened its disability income reserves by $80,000,000 in
1997.
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
S-21
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 1998, 1997 and 1996 was
$34,000,000, $29,300,000 and $26,400,000, respectively. Future minimum
rental commitments are as follows (in millions):
<TABLE>
<S> <C>
1999 $ 18.9
- --------------------------------------
2000 18.4
- --------------------------------------
2001 18.7
- --------------------------------------
2002 18.7
- --------------------------------------
2003 18.6
- --------------------------------------
Thereafter 116.6
- -------------------------------------- ---------
$ 209.9
---------
---------
</TABLE>
INFORMATION TECHNOLOGY COMMITMENT
In February 1998, the Company signed a seven-year contract with IBM Global
Services for information technology services for the Fort Wayne operations.
Total costs incurred in 1998 were $54,800,000. Future minimum annual costs
range from $33,600,000 to $56,800,000, however future costs are dependent on
usage and could exceed these amounts.
INSURANCE CEDED AND ASSUMED
The Company cedes insurance to other companies, including certain
affiliates. The portion of risks exceeding the Company's retention limit is
reinsured with other insurers. 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 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, 1998, the reserves associated with
these reinsurance arrangements totaled $1,608,500,000. 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 accompanying statutory-basis financial statements reflect
premiums, benefits and policy acquisition expenses net of reinsurance ceded.
The Company remains liable if its reinsurers are unable to meet their
contractual obligations under the applicable reinsurance agreements.
Proceeds from the sale of common stock of American Statements Financial
Corporation ("American States") and proceeds from the January 5, 1998
surplus note, were used to finance an indemnity reinsurance transaction
whereby the Company and LLANY reinsured 100% of a block of individual life
insurance and annuity business from CIGNA Corporation ("CIGNA"). The Company
paid $1,264,400,000 to CIGNA on January 2, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$1,127,700,000 in 1998, which is included in the Statement of Operations
line item "Underwriting, acquisition, insurance and other expenses." At the
time of closing, this block of business had statutory liabilities of
$4,658,200,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities.
Pursuant to the terms of the reinsurance agreement, the Company, LLANY and
CIGNA are in the final stages of agreeing to the statutory-basis values of
these assets and liabilities. Any changes to these values that may occur in
future periods will not be material to the Company's financial position.
Subsequent to this transaction, the Company and LLANY announced that they
had reached an agreement to sell the administration rights to a variable
S-22
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
annuity portfolio that had been acquired as part of the block of business
assumed on January 2, 1998. This sale closed on October 12, 1998 with an
effective date of August 1, 1998.
In connection with the completion of the CIGNA reinsurance transaction, the
Company recorded a charge of $31,000,000 to cover certain costs of
integrating the existing operations with the new block of business.
On October 1, 1998, the Company and LLANY entered into an indemnity
reinsurance transaction whereby the Company and LLANY reinsured 100% of a
block of individual life insurance business from Aetna, Inc. The Company
paid $856,300,000 to Aetna on October 1, 1998 under the terms of the
reinsurance agreement and recognized a ceding commission expense of
$815,300,000 in 1998, which is included in the Statement of Operations line
item "Underwriting, acquisition, insurance and other expenses." At the time
of closing, this block of business had statutory liabilities of
$2,813,300,000 that became the Company's obligation. The Company also
received assets, measured on a historical statutory basis, equal to the
liabilities. The Company financed this reinsurance transaction with proceeds
from short-term debt borrowings from LNC until the December 18, 1998 surplus
note was approved by the Insurance Department. Subsequent to the Aetna
transaction, the Company and LLANY announced that they had reached an
agreement to retrocede the sponsored life business assumed for $87,600,000.
The retrocession agreement closed on October 14, 1998 with an effective date
of October 1, 1998.
The Company assumes insurance from other companies, including certain
affiliates. At December 31, 1998, the Company has provided $44,900,000 of
statutory-basis surplus relief to other insurance companies under
reinsurance transactions. The Company has retroceded 100% of this accepted
surplus relief to its off-shore reinsurance affiliates. Generally, such
amounts are offset by corresponding receivables from the ceding company,
which are secured by future profits on the reinsured business. However, the
Company is subject to the risk that the ceding company may become insolvent
and the right of offset would not be permitted.
The regulatory required liability for unsecured reserves ceded to
unauthorized reinsurers was $43,400,000 and $8,200,000 at December 31, 1998
and 1997, respectively.
VULNERABILITY FROM CONCENTRATIONS
At December 31, 1998, the Company did not have a material concentration of
financial instruments in a single investee or industry. The Company's
investments in mortgage loans principally involve commercial real estate. At
December 31, 1998, 25% of such mortgages ($980,500,000) involved properties
located in Texas and California. Such investments consist of first mortgage
liens on completed income-producing properties and the mortgage outstanding
on any individual property does not exceed $58,200,000.
At December 31, 1998, 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 will depend on the specific facts of each
proceeding. In some instances, these proceedings include claims for
compensatory and punitive damages and similar types of relief in addition to
amounts for alleged contractual liability or requests for equitable relief.
After consultation with legal counsel and a review of available facts, it is
management's opinion that the ultimate liability, if any, under these suits
will not have a material adverse affect on the financial position of the
Company.
S-23
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
Four lawsuits involving alleged fraud in the sale of interest sensitive
universal life and whole life insurance have been filed as class actions
against the Company, although the court has not certified a class in any of
these cases. Plaintiffs seek unspecified damages and penalties for
themselves and on behalf of the putative class. While the relief sought in
these cases is substantial, it is premature to make assessments about the
potential loss, if any, because the status of the cases ranges from the
early states of litigation to the dismissal and appeals stage. 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 at December 31, 1998 relate to mortgage loan
pass-through certificates. 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. The
outstanding guarantees as of December 31, 1998 and 1997 were $30,900,000 and
$41,600,000, respectively. It is management's opinion that the value of the
properties underlying these commitments is sufficient that in the event of
default the impact would not be material to the Company. Accordingly, both
the carrying value and fair value of these guarantees is zero at December
31, 1998 and 1997.
The Company's wholly owned subsidiary, LNH&C, accepts personal accident
reinsurance programs from other insurance companies. Most of these programs
are presented to LNH&C by independent brokers who represent the ceding
companies. Certain excess of loss personal accident reinsurance programs
created in the London market during 1993 through 1996 have produced and have
potential to produce significant losses. At December 31, 1998 and 1997,
liabilities of $177,400,000 and $186,300,000, respectively, have been
established for such programs. These reserves are based on various estimates
that are subject to considerable uncertainty. Accordingly, this reserve 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 and LNH&C continue to investigate the personal accident
reinsurance programs to determine if there are additional programs including
certain workers compensation programs, which may produce losses. At this
time, the Company and LNH&C do not have sufficient information to determine
whether or not it is probable that additional losses have been incurred nor
can the Company and LNH&C accurately estimate the ultimate cost or timing of
the outcome on these programs.
DERIVATIVES
The Company has derivatives with off-balance-sheet risks whose notional or
contract amounts exceed the credit exposure. The Company has entered into
derivative transactions to reduce its exposure to fluctuations in interest
rates, the widening of bond yield spreads over comparable maturity U.S.
government obligations, commodity risk, credit risk, 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
S-24
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
being hedged by such contracts. Outstanding derivatives with
off-balance-sheet risks, shown in notional or contract amounts along with
their carrying value and estimated fair values, are as follows:
<TABLE>
<CAPTION>
NOTIONAL OR ASSETS (LIABILITIES)
CONTRACT AMOUNTS -----------------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------------------------------------------------------
DECEMBER 31 DECEMBER 31 DECEMBER 31
1998 1997 1998 1998 1997 1997
-------------------------------------------------------
(IN MILLIONS)
-------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest rate derivatives:
Interest rate cap agreements $4,108.8 $4,900.0 $ 9.3 $ .9 $13.9 $ .9
---------------------------------
Swaptions 1,899.5 1,752.0 16.2 2.5 6.9 6.9
---------------------------------
Interest rate swaps 258.3 10.0 -- 9.9 -- (1.8)
---------------------------------
Put options 21.3 -- -- 2.2 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
6,287.9 6,662.0 25.5 15.5 20.8 6.0
Foreign currency derivatives:
Forward contracts 1.5 163.1 -- -- 5.4 5.4
---------------------------------
Foreign currency swaps 47.2 15.0 -- .3 -- (2.1)
--------------------------------- -------- -------- -------- ----- -------- ------
48.7 178.1 -- .3 5.4 3.3
Commodity derivatives:
Commodity swaps 8.1 -- -- 2.4 -- --
--------------------------------- -------- -------- -------- ----- -------- ------
$6,344.7 $6,840.1 $25.5 $18.2 $26.2 $ 9.3
-------- -------- -------- ----- -------- ------
-------- -------- -------- ----- -------- ------
</TABLE>
A reconciliation of the notional or contract amounts for the significant
programs using derivative agreements and contracts at December 31 is as
follows:
<TABLE>
<CAPTION>
------------------------------------------------------------------
INTEREST RATE CAPS SPREAD LOCKS SWAPTIONS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 4,900.0 $ 5,500.0 $ -- $ -- $ 1,752.0 $ 672.0
- ------------------------------------
New contracts 708.8 -- -- 50.0 218.3 1,080.0
- ------------------------------------
Terminations and maturities (1,500.0) (600.0) -- (50.0) (70.8) --
- ------------------------------------ --------- --------- --- --------- --------- ---------
Balance at end of year $ 4,108.8 $ 4,900.0 $ -- $ -- $ 1,899.5 $ 1,752.0
- ------------------------------------ --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
FINANCIAL FUTURES
CONTRACTS INTEREST RATE SWAPS
--------------------------------------------
1998 1997 1998 1997
--------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ 147.7 $ 10.0 $ --
- -------------------------------------------------------------
New contracts -- 88.3 2,226.6 10.0
- -------------------------------------------------------------
Terminations and maturities -- (236.0) (1,978.3) --
- ------------------------------------------------------------- --- --------- --------- ---------
Balance at end of year $ -- $ -- $ 258.3 $ 10.0
- ------------------------------------------------------------- --- --------- --------- ---------
--- --------- --------- ---------
</TABLE>
S-25
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
<TABLE>
<CAPTION>
PUT OPTIONS COMMODITY SWAPS
------------------------------------------------
1998 1997 1998 1997
------------------------------------------------
<S> <C> <C> <C> <C>
Balance at beginning of year $ -- $ -- $ -- $ --
- --------------------------------------------------------------------
New contracts 21.3 -- 8.1 --
- --------------------------------------------------------------------
Terminations and maturities -- -- -- --
- -------------------------------------------------------------------- --------- --- --- ---
Balance at end of year $ 21.3 $ -- $ 8.1 $ --
- -------------------------------------------------------------------- --------- --- --- ---
--------- --- --- ---
</TABLE>
<TABLE>
<CAPTION>
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
------------------------------------------------------------------
FOREIGN EXCHANGE FOREIGN CURRENCY FOREIGN CURRENCY
FORWARD CONTRACTS OPTIONS SWAPS
1998 1997 1998 1997 1998 1997
------------------------------------------------------------------
(IN MILLIONS)
------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Balance at beginning of year $ 163.1 $ 251.5 $ -- $ 43.9 $ 15.0 $ 15.0
- -------------------------------------------
New contracts 419.8 833.1 -- -- 39.2 --
- -------------------------------------------
Terminations and maturities (581.4) (921.6) -- (43.9) (7.0) --
- ------------------------------------------- --------- --------- --- --------- --------- ---------
Balance at end of year $ 1.5 $ 163.0 $ -- $ -- $ 47.2 $ 15.0
- ------------------------------------------- --------- --------- --- --------- --------- ---------
--------- --------- --- --------- --------- ---------
</TABLE>
INTEREST RATE CAP AGREEMENTS
The interest rate cap agreements, which expire in 1999 through 2006, entitle
the Company to receive quarterly payments from the counterparties on
specified future reset dates, contingent on future interest rates. For each
cap, the amount of such payments, if any, is determined by the excess of a
market interest rate over a specified cap rate multiplied by the notional
amount divided by four. The purpose of the Company's interest rate cap
agreement program is to protect its annuity line of business from the effect
of rising interest rates. The premium paid for the interest rate caps is
included in other assets ($9,300,000 as of December 31, 1998) and is being
amortized over the terms of the agreements. This amortization is included in
net investment income.
SWAPTIONS
Swaptions, which expire in 1999 through 2003, entitle the Company to receive
settlement payments from the counterparties on specified expiration dates,
contingent on future interest rates. For each swaption, the amount of such
settlement payments, if any, is determined by the present value of the
difference between the fixed rate on a market rate swap and the strike rate
multiplied by the notional amount. The purpose of the Company's swaption
program is to protect its annuity line of business from the effect of rising
interest rates. The premium paid for the swaptions is included in other
assets ($16,200,000 as of December 31, 1998) and is being amortized over the
terms of the agreements. This amortization is included in net investment
income.
SPREAD LOCK AGREEMENTS
Spread-lock agreements provide for a lump sum payment to or by the Company,
depending on whether the spread between the swap rate and a specified
government 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 FUTURE CONTRACTS
The Company uses exchange-traded financial futures contracts to hedge
against interest rate risks and to manage duration of a portion of its
S-26
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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 SWAP AGREEMENTS
The Company uses interest rate swap agreements to hedge its exposure to
floating rate bond coupon payments, replicating a fixed rate bond. An
interest rate swap is a contractual agreement to exchange payments at one or
more times based on the actual or expected price, level, performance or
value of one or more underlying interest rates. The Company is required to
pay the counterparty to the 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.
The Company also uses interest rate swap agreements to hedge its exposure to
interest rate fluctuations related to the anticipated purchase of assets to
support newly acquired or assumed blocks of business. Once the assets are
purchased, the gains resulting from the termination of the swap agreements
are applied to the basis of the assets purchased. The gains are recognized
in earnings over the life of the assets.
PUT OPTION
The Company uses put options, combined with various perpetual fixed income
securities, and interest rate swaps to replicate a fixed income, fixed
maturity investment. The put options give the Company the right, but not the
obligation, to sell to the counterparty of the agreement the specified
securities on a specified date at a fixed price.
FOREIGN CURRENCY DERIVATIVES (FOREIGN INVESTMENTS)
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.
COMMODITY SWAP
The Company uses a commodity swap to hedge its exposure to fluctuations in
the price of gold, which is the underlying variable in determining the
periodic interest payments associated with a fixed income security. A
commodity swap is a contractual agreement to exchange a certain amount of a
particular commodity for a fixed amount of cash. The Company owns a fixed
income security that meets its coupon payment obligations in gold bullion.
The Company is obligated to pay to the counterparty the gold bullion, and in
return, receives from the counterparty a stream of fixed income payments.
The fixed income payments are the product of the swap notional multiplied by
the fixed rate stated in the swap agreement. The net receipts/payments from
commodity swaps are recorded in net investment income.
ADDITIONAL DERIVATIVE INFORMATION
Expenses for the agreements and contracts described above amounted to
$10,000,000, $7,000,000 and $6,900,000 in 1998, 1997 and 1996, respectively.
Deferred losses of $48,200,000 as of December 31, 1998, were the result of:
1) terminated and expired spread-lock agreements and; 2) terminated interest
rate swaps. 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, financial futures, interest rate swaps, put options and foreign
currency derivatives. However, the Company does not anticipate
nonperformance
S-27
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
10. RESTRICTIONS, COMMITMENTS AND CONTINGENCIES (CONTINUED)
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, 1998, the exposure was $21,100,000.
11. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following discussion outlines the methodologies and assumptions used to
determine the estimated fair values of the Company's financial instruments.
Considerable judgment is required to develop these fair values. Accordingly,
the estimates shown are not necessarily indicative of the amounts that would
be realized in a one-time, current market exchange of all of the Company's
financial instruments.
BONDS AND UNAFFILIATED COMMON STOCK
Fair values of bonds are based on quoted market prices, where available. For
bonds not actively traded, fair values are estimated using values obtained
from independent pricing services. In the case of private placements, fair
values are estimated by discounting expected future cash flows using a
current market rate applicable to the coupon rate, credit quality and
maturity of the investments. The fair values of unaffiliated common stocks
are based on quoted market prices.
PREFERRED STOCK
Fair values of preferred stock are based on quoted market prices, where
available. For preferred stock not actively traded, fair values are based on
values of issues of comparable yield and quality.
MORTGAGE LOANS ON REAL ESTATE
The estimated fair value of mortgage loans on real estate was established
using a discounted cash flow method based on credit rating, maturity and
future income. The ratings for mortgages in good standing are based on
property type, location, market conditions, occupancy, debt service
coverage, loan to value, caliber of tenancy, borrower and payment record.
Fair values for impaired mortgage loans are based on: 1) the present value
of expected future cash flows discounted at the loan's effective interest
rate; 2) the loan's market price; or 3) the fair value of the collateral if
the loan is collateral dependent.
POLICY LOANS
The estimated fair values of investments in policy loans are calculated on a
composite discounted cash flow basis using Treasury interest rates
consistent with the maturity durations assumed. These durations are based on
historical experience.
OTHER INVESTMENTS AND CASH AND SHORT-TERM INVESTMENTS
The carrying values for assets classified as other investments and cash and
short-term investments in the accompanying statutory-basis balance sheets
approximate their fair value.
INVESTMENT-TYPE INSURANCE CONTRACTS
The balance sheet captions, "Future policy benefits and claims" and "Other
policyholder funds," include investment type insurance contracts (i.e.,
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
S-28
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
11. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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
For short-term debt, the carrying value approximates fair value.
SURPLUS NOTES DUE TO LNC
Fair values for surplus notes are estimated using discounted cash flow
analysis based on the Company's current incremental borrowing rate for
similar types of borrowing arrangements.
GUARANTEES
The Company's guarantees include guarantees related to mortgage loan
pass-through certificates. Based on historical performance where repurchases
have been negligible and the current status, which indicates none of the
loans are delinquent, the fair value liability for the guarantees related to
the mortgage loan pass-through certificates is zero.
DERIVATIVES
The Company employs several different methods for determining the fair value
of its derivative instruments. Fair values for these contracts are based on
current settlement values. These values are based on quoted market prices
for the foreign currency exchange contracts and financial future contracts
and; 2) industry standard models that are commercially available for
interest rate cap agreements, swaptions, spread lock agreements, interest
rate swaps, commodity swaps and put options.
INVESTMENT COMMITMENTS
Fair values for commitments to make investment in fixed maturity securities
(primarily private placements), mortgage loans on real estate and real
estate are based on the difference between the value of the committed
investments as of the date of the accompanying balance sheets and the
commitment date. These estimates would take into account changes in interest
rates, the counterparties' credit standing and the remaining terms of the
commitments.
SEPARATE ACCOUNTS
Assets held in separate accounts are reported in the accompanying
statutory-basis balance sheets at fair value. The related liabilities are
also reported at fair value in amounts equal to the separate account assets.
S-29
<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
----------------------------------------------
1998 1997
----------------------------------------------
CARRYING CARRYING
ASSETS (LIABILITIES) VALUE FAIR VALUE VALUE FAIR VALUE
- -----------------------------------------------------------------------------------------------
(IN MILLIONS)
----------------------------------------------
<S> <C> <C> <C> <C>
Bonds $ 23,830.9 $ 25,065.5 $ 18,560.7 $ 19,798.6
- -----------------------------------------------
Preferred stocks 236.0 242.5 257.3 268.7
- -----------------------------------------------
Unaffiliated common stocks 259.3 259.3 436.0 436.0
- -----------------------------------------------
Mortgage loans on real estate 3,932.9 4,100.1 3,012.7 3,179.2
- -----------------------------------------------
Policy loans 1,606.0 1,685.9 660.5 648.3
- -----------------------------------------------
Other investments 434.4 434.4 335.5 335.5
- -----------------------------------------------
Cash and short-term investments 1,725.4 1,725.4 2,133.0 2,133.0
- -----------------------------------------------
Investment-type insurance contracts:
Deposit contracts and certain guaranteed
interest contracts (17,845.8) (17,486.4) (17,324.2) (16,887.6)
--------------------------------------------
Remaining guaranteed interest and similar
contracts (714.4) (738.2) (1,267.0) (1,294.6)
--------------------------------------------
Short-term debt (140.0) (140.0) (120.0) (120.0)
- -----------------------------------------------
Surplus notes due to LNC (1,250.0) (1,335.1) -- --
- -----------------------------------------------
Derivatives 25.5 18.2 26.2 9.3
- -----------------------------------------------
Investment commitments -- (0.6) -- (0.5)
- -----------------------------------------------
Separate account assets 36,907.0 36,907.0 31,330.9 31,330.9
- -----------------------------------------------
Separate account liabilities (36,907.0) (36,907.0) (31,330.9) (31,330.9)
- -----------------------------------------------
</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 affiliates. The bulk of
the transaction was completed in the form of an assumption reinsurance
transaction, which resulted in a ceding commission of $71,800,000. The
ceding commission resulted in admissible goodwill of $62,300,000, which is
being 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 to the Company. American States is a property casualty insurance
holding company of which LNC owned 83.3%. The contributed common stock was
accounted for as a capital contribution equal to the fair value of the
common stock received by the Company. Subsequently, the American States
common stock owned by the Company, along with all other American States
common stock owned by LNC and its affiliates, was sold. The Company received
proceeds from the sale in the amount of $1,175,000,000. The Company
recognized no gain or loss on the sale of its portion of the common stock
due to the receipt of the stock at fair value. The proceeds from this sale
of stock were used to partially finance the CIGNA indemnity reinsurance
transaction.
S-30
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
13. TRANSACTIONS WITH AFFILIATES
A wholly owned subsidiary of LNC, Lincoln Life and Annuity Distributors,
Inc. ("LLAD"), has a nearly exclusive general agent's contract with the
Company under which it sells the Company's products and provides the service
that otherwise would be provided by a home office marketing department and
regional offices. For providing these selling and marketing services, the
Company paid LLAD override commissions of $76,700,000 in 1998 and override
commissions and operating expense allowances of $61,600,000 and $56,300,000
in 1997 and 1996, respectively. LLAD incurred expenses of $102,400,000,
$5,500,000 and $15,700,000 in 1998, 1997 and 1996, respectively, in excess
of the override commissions and operating expense allowances received from
the Company, which the Company is not required to reimburse. Effective in
January 1998, the Company and LLAD agreed to increase the override
commission expense and eliminate the operating expense allowance.
Cash and short-term investments at December 31, 1998 and 1997 include the
Company's participation in a short-term investment pool with LNC of
$383,600,000 and $325,600,000, respectively. Related investment income
amounted to $16,800,000, $15,500,000 and $15,300,000 in 1998, 1997 and 1996,
respectively. Short-term loan payable to parent company at December 31, 1998
and 1997 represent notes payable to LNC.
The Company provides services to and receives services from affiliated
companies which resulted in a net payment of $92,100,000, $48,500,000 and
$34,100,000 in 1998, 1997 and 1996, 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
1998 1997 1996
-------------------------------
(IN MILLIONS)
-------------------------------
<S> <C> <C> <C>
Insurance assumed $ 13.7 $ 11.9 $ 17.9
- ----------------------
Insurance ceded 290.1 100.3 302.8
- ----------------------
</TABLE>
The balance sheets include reinsurance balances with affiliated companies as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
1998 1997
--------------------
(IN MILLIONS)
--------------------
<S> <C> <C>
Future policy benefits
and claims assumed $ 197.3 $ 245.5
- ------------------------
Future policy benefits
and claims ceded 1,125.0 997.2
- ------------------------
Amounts recoverable on
paid and unpaid losses 84.2 30.4
- ------------------------
Reinsurance payable on
paid losses 6.0 5.3
- ------------------------
Funds held under
reinsurance treaties --
net liability 1,375.4 1,115.4
- ------------------------
</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 $318,300,000 and $280,900,000 at December 31, 1998 and 1997,
respectively. The letters of credit are issued by banks and represent
guarantees of performance under the reinsurance agreement. At December 31,
1998 and 1997, LNC had guaranteed $237,000,000 and $229,100,000,
respectively, of these letters of credit. At December 31, 1998, the Company
has a receivable (included in the foregoing amounts) from affiliated
insurance companies in the amount of $122,400,000 for statutory surplus
relief received under financial reinsurance ceded agreements.
14. SEPARATE ACCOUNTS
Separate account assets held by the Company consist primarily of long-term
bonds, common stocks, short-term investments and mutual funds and are
carried at market value. Substantially all of the separate accounts do not
have any minimum guarantees and the investment risks associated with market
value changes are borne entirely by the policyholder.
Separate account premiums, deposits and other considerations amounted to
$3,953,300,000, $4,821,800,000 and $4,148,700,000 in 1998, 1997
S-31
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
14. SEPARATE ACCOUNTS (CONTINUED)
and 1996, respectively. Reserves for separate accounts with assets at fair
value were $36,145,900,000 and $30,560,700,000 at
December 31, 1998 and 1997, respectively. All reserves are subject to
discretionary withdrawal at market value.
A reconciliation of transfers to (from) separate accounts is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997
------------------------
(IN MILLIONS)
------------------------
<S> <C> <C>
Transfers as reported in the Summary of Operations of the
various separate accounts:
Transfers to separate accounts $ 3,954.9 $ 4,824.0
- ------------------------------------------------------------
Transfers from separate accounts (4,069.8) (2,943.8)
- ------------------------------------------------------------ --------- ---------
Net transfers to (from) separate accounts as reported in the
Summary of Operations $ (114.9) $ 1,880.2
- ------------------------------------------------------------ --------- ---------
--------- ---------
</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 $1,962.6
- ----------------------------------------
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>
S-32
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (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 Company has been
redirecting a large portion of internal Information Technology efforts and
contracting with outside consultants to update systems to address Year 2000
issues. Experts have been engaged to assist in developing work plans and
cost estimates and to complete remediation activities.
For the year ended December 31, 1998, the Company identified expenditures of
$26,300,000 to address this issue. This brings the expenditures for 1996
through 1998 to $34,200,000 million. The Company's financial plans for 1999
and 2000 include expected expenditures of an additional $38,300,000 bringing
estimated overall Year 2000 expenditures to $72,500,000. Because updating
systems and procedures is an integral part of the Company's on-going
operations, approximately 50% of expenditures shown above are expected to
continue after all Year 2000 issues have been resolved. Actual Year 2000
expenditures through December 31, 1998 and future Year 2000 expenditures are
expected to be funded from operating cash flows. The anticipated cost of
addressing Year 2000 issues is based on management'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. Such costs will be closely monitored
by management. Nevertheless, there can be no guarantee that actual costs
will not be higher than these estimated costs. 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. The total
expenditures identified represent only the Company's portion of LNC's larger
expenditures to address the Year 2000 issue.
The current scope of the overall Year 2000 program includes the following
four major project areas: 1) addressing the readiness of business
applications, operating systems and hardware on mainframe, personal computer
and Local Area Network platforms (IT); 2) addressing the readiness of non-IT
embedded software and equipment (non-IT); 3) addressing the readiness of key
business partners and 4) establishing Year 2000 contingency plans.
The projects to address IT and non-IT readiness have four major phases.
Phase one involves raising awareness and creating an inventory of all IT and
non-IT assets. The second phase consists of assessing all items inventoried
to initially determine whether they are affected by the Year 2000 issue and
preparing general plans and strategies. The third phase entails the detailed
planning and remediation of affected systems and equipment. The last phase
consists of testing to verify Year 2000 readiness.
The Company has completed those four phases for over two-thirds of its high
priority IT systems, including those provided by software vendors. While the
Company's year 2000 program for nearly all high priority IT systems is
expected to be completed in the first quarter 1999, phase four, for a small
but important subset of these systems, will continue through the end of the
second quarter 1999. As of December 31, 1998, the status of projects
addressing readiness of IT assets is: 100% of IT assets have been
inventoried (Phase 1) and assessed (Phase 2); 94% of IT projects have been
through the remediation phase (Phase 3) with the last project scheduled for
completion by the end of March 1999; and 69% of IT projects have completed
the testing phase (Phase 4) with the last project scheduled to finish
testing by the end of June 1999. A portion of the effort that extends into
1999 is dependent on outside third parties and is behind the original
schedule. The Company is working with these parties to modify the completion
schedule.
As of December 31, 1998, the status of projects that address readiness of
high priority non-IT assets is: 100% of non-IT assets have been inventoried
(Phase 1) and assessed (Phase 2); 79% of non-IT projects addressing
remediation (Phase 3) have been completed and 21% of non-IT projects have
completed the testing phase (Phase 4). The Company expects to have all
phases related to high priority non-IT completed by the end of October 1999.
S-33
<PAGE>
THE LINCOLN NATIONAL LIFE INSURANCE COMPANY
NOTES TO STATUTORY-BASIS FINANCIAL STATEMENTS (CONTINUED)
16. CENTURY COMPLIANCE (UNAUDITED) (CONTINUED)
Concurrent with the IT and non-IT projects, the readiness of key business
partners is being reviewed and Year 2000 contingency plans are being
developed. The most significant categories of key business partners are
financial institutions, software vendors and utility providers (gas,
electric and telecommunications). Surveys have been mailed to these key
business partners. Based on responses received, current levels of readiness
are being assessed, follow-up contacts are underway, alternative strategies
are being developed and testing is being scheduled where feasible. This
effort is expected to continue well into 1999. As noted above, software
vendor assessments are considered part of the IT projects and, therefore,
would follow the schedule shown above for such projects.
While the Company is working to meet the schedules outlined above, some
uncertainty remains. Specific factors that give rise to this uncertainty
include a possible loss of technical resources to perform the work, failure
to identify all susceptible systems, non-compliance by third parties whose
systems and operations impact the Company and other similar uncertainties.
A worst case scenario might include the Company's inability to achieve Year
2000 readiness with respect to one or more of the Company's significant
policyholder systems resulting in a material disruption to the Company's
operations. Specifically, the Company could experience an interruption in
its ability to collect and process premiums or deposits, process claim
payments, accurately maintain policyholder information, accurately maintain
accounting records and/or perform adequate customer service. Should the
worst case scenario occur, it could, depending on its duration, have a
material impact on the Company's results of operations and financial
position. Simple failures can be repaired and returned to production within
a matter of hours with no material impact. Unanticipated failures with a
longer service disruption period would have a more serious impact. For this
reason, the Company is placing significant emphasis on risk management and
Year 2000 contingency planning. The Company is in the process of modifying
its contingency plans to address potential Year 2000 issues. Where these
efforts identify high risks due either to unacceptable work around
procedures or significant readiness risks, appropriate risk management
techniques are being developed. These techniques, such as resource shifting
or use of alternate providers, will be employed to provide stronger
assurances of readiness. The Company has gone through exercises to identify
worst case scenario failures. At this time, the Company believes its plans
are sufficient to mitigate identified worst case scenarios.
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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,
1998 and 1997, and the related statutory-basis statements of
operations, changes in capital and surplus and cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and
1997, or the results of its operations or its cash flows for
each of the three years in the period ended December 31, 1998.
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, 1998 and 1997, and the results of its operations
and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with accounting practices
prescribed or permitted by the Indiana Department of Insurance.
/s/ Ernst & Young LLP
February 1, 1999
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